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Houston industrial leases surge as abundant space attracts out-of-state tenants

September 9, 2022

Developers are breaking ground on several industrial projects in Houston amid record demand for space as an influx of out-of-state industrial tenants seek a Texas hub for retail, e-commerce and logistics operations.

Leasing activity by companies locating to Houston for the first time has more than tripled in the last 18 months, totaling 11.1 million square feet during 2021 and the first half of 2022, according to commercial real estate firm JLL. That compares 3.4 million square feet during 2018 and the first half of 2019, prior to the pandemic.

Similar to trends that drove the local housing boom, much of the migration to Houston is coming from California, where ports at Los Angeles and the Inland Empire, a region of southern California, are less than 1 percent vacant, land is scarce and industrial rents are zooming 50 to 80 percent.

Tenants from California accounted for 27 percent of the new-to-Houston leasing activity in the last 18 months, according to JLL. “Due to the significant occupancy in other markets, (companies) are coming here because there’s availability of industrial buildings and good labor,” said Jeff Venghaus, executive managing director, industrial brokerage lead at JLL in Houston. There’s also plenty of land with fewer regulations for development, he said.

The incoming companies represent a range of industries, with a heavy emphasis on consumer goods. Among the biggest leases signed over the last 18 months were newcomers Custom Goods, a logistics company based in Carson, Calif. (701,500 square feet in two buildings in the southeast submarket);, an online pet supplies retailer based in Dania Beach, Fla. (688,000 square feet in the northeast submarket); Living Spaces, a home furnishings retailer based in La Mirada, Calif. (685,000 square feet in the northeast submarket); Broadrange Logistics, a third-party logistics company based in Atlanta (649,000 square feet in the northeast submarket); WebstaurantStore, an online restaurant supplies and equipment store based in Lancaster, Pa. (644,000 square feet in the southeast submarket); and Snow Joe, a garden tools and equipment company based in Hoboken, N.J. (525,000 square feet in the southeast submarket).

The combined square footage of nearly 3.2 million square feet for these six companies alone is equivalent to 55 football fields.

The new-to-market tenants accounted for 17 percent of the leasing activity in the Houston area in the last 18 months, according to JLL. Tenants already in the market also are adding facilities and relocating to new buildings, contributing to the growth, according to JLL. Among the top leases, Macy’s is relocating its Houston distribution hub to a 900,000-square-foot center in Tomball in Interchange 249, a new development by Houston-based Lovett Industrial and New York-based Clarion Partners.

Houston-based Packwell signed a lease for an 800,000-square-foot resin packaging facility at the Port of Houston’s Bayport Industrial Complex. Ferguson, a plumbing supply company based in Newport News, Va., leased 751,000 square feet for a new facility in Empire West, a development of Stream Realty Partners in Brookshire west of Houston.

Walmart is among the many companies expanding in Baytown’s Cedar Port Industrial Park where it will occupy a new 1 million-square-foot distribution center near its longtime operations. Amazon, the Seattle-based online retailer, has grown to 20 facilities in Greater Houston after opening two massive fulfillment centers and four delivery stations over the past two years.

Online shift

As consumers shifted to buying online, the Houston industrial market reached record levels of leasing activity and demand. Over the past 12 months, companies increased their industrial space by 32 million square feet, according to Rachel Alexander, research director at JLL. Normal levels of demand for space, even in strong years, has averaged 8 million to 10 million square feet.

“It’s not a pace that’s sustainable,” Alexander said. A slowdown to 20 million square feet would still be twice the pre-COVID levels.

Record containers shipments through the Port of Houston, which grew 18 percent increase in volume in the first half of the year, are helping to drive the demand for warehousing space. A resurgence in the energy and manufacturing side is also driving gains, Alexander said. Utility, battery storage and solar companies also are in the market for space.Market wide, demand pushed up asking rents 10 percent in the second quarter compared to the same period a year earlier, according to JLL. For new construction, asking rents are up 15 percent.

The demand is so strong that developers are launching speculative projects — meaning they are building without tenants lined up. Several speculative industrial projects broke ground in August.

Some 18.3 million square feet of industrial space is under construction. Centris Industrial, a newly formed real estate investment trust based in Chicago, broke ground on a speculative development in Generation Park in northeast Houston on August 15. The two-building project will add more than 1.25 million square feet to the market.

Centris selected the location inside the northeast corner of Beltway 8 for its ease of access to Interstate 10 and Interstate 45 and proximity to George Bush Intercontinental Airport and the Port of Houston. The development will add another option to what’s available in the Baytown and Katy areas for companies looking for “big box” spaces when demand for industrial real estate is outstripping supply, according to Joe Trinkle, chief operating officer and Southwest market officer for Centris. The tenants could include flooring, auto parts and third-party logistics providers.

“We are at a time period where big box user activity is unprecedented,” Trinkle said. “It’s more than we’ve ever seen in this market.”

The Port of Houston kicked off a $1 billion expansion to deepen and widen the Houston Ship Channel in partnership with the U.S. Army Corps of Engineers in May. The work will make it easier for large ships to navigate the 52-mile waterway and position Houston, with its central Gulf Coast location, for further growth as a global distribution center.

One of the Centris buildings will contain just over 1 million square feet and have 40-foot clear heights, Trinkle said. Completion is planned in the third quarter for the larger building and in the second quarter for the smaller one.

Two other spec projects just got underway as Houston’s industrial vacancy rate fell to 6.2 percent in the second quarter from its 2020 high of 9.4 percent, according to JLL.

EastGroup Properties, an industrial real estate company based in Jackson, Miss., broke ground on Springwood Business Park about a month ago. The project will have two distribution buildings totaling 292,000 square feet at the southeast corner of Interstate 45 North and the Grand Parkway in Spring.

In close-in northwest Houston, a joint venture of Dallas-based Urban Logistics Realty and Crow Holdings Capital broke ground on Urban District 290, a 238,200-square-foot urban infill project in an area that is mostly developed at the northeast corner of Grovecrest and Bingle near U.S. 290.

Set for completion in the second quarter of 2023, the project represents Urban Logistics Realty’s first foray into the Houston market.

“With absorption levels hitting record highs this year, the market is ready to take on additional warehouse space,” said Jason Dillee, senior vice president at CBRE in Houston. “Vacancies continue to trend downward and many companies are actively looking for space in and around Houston. We don’t expect this demand to let up anytime soon.”

By Katherine Feser, Houston Chronicle