COVER STORY, NOVEMBER 2007

TEXAS INDUSTRIAL IS ALIVE AND WELL
Texas’ industrial market continues to grow with a solid economy to support it.
Stephen O’Kane

According to experts active in the area, the industrial market in the Lone Star State is alive and well. Occupancies are up, companies are expanding and developments are taking root to create new opportunities for business. Key markets and submarkets continue to see space developed, making Texas one of the top industrial locations in the country.

Houston is one area of the state that is outperforming the national industrial market. As a response to a strong local economy and the continued job growth, the city and surrounding areas are making room for new industrial developments. And with single-digit vacancy and solid absorption levels, this is a no-brainer for those involved in the Houston market.

“Supporting the industrial market’s growth is Houston’s strong local economy and expanding primary industries,” says Gary Mabray, principal for Colliers International. “In stark contrast to the slowing national economy, Houston’s strong economic outlook is highlighted by expanding primary industries and robust job growth. As the fifth strongest job market in the U.S., Houston gained 64,400 new jobs, representing a 2.6 percent growth rate, compared to the 2.2 percent and 1.1 percent job growth for Texas and U.S., respectively.”

Third quarter vacancy in Houston settled at 6.3 percent, which is 70 basis points lower than the 7 percent vacancy that was recorded at the start of the year. The third quarter closed with 27.3 million square feet of available space for lease and, in a market that houses 432.9 million square feet of industrial space, that is quite the impressive number.

Industrial developers are taking note of these figures and are attempting to develop projects that will give companies the distribution space they need, while offering top-notch amenities and location. One emerging trend in Houston, and elsewhere, is excess land. Developers are allowing extra space for the continued growth they expect.

“With distribution activity driving much of Houston’s industrial market growth, many developers have begun to plan projects with more land than usual,” says Mabray. “The excess land is allowing for several adjunct facilities, including trailer parking and outside storage facilities, also known as lay-down yards. These types of on-site facilities are more than just a convenience to industrial tenants, they represent a significant savings and more efficient way of doing business.”

Mabray notes that key submarkets in the Houston area are drawing attention. The Southeast Corridor features a total of 2.8 million square feet of space under construction, leading the market’s numbers. Following closely behind are the North Corridor, which houses 1.7 million square feet, and the Northwest Corridor with 1.5 million square feet. Verde Corporate Realty’s Verde Central Green Corporate Center, which spans 931,200 square feet, accounts for more than two-thirds of the North Corridor’s 1.2 million square feet completed in the second quarter.

Transwestern is active in the Southeast Corridor with its Port 225. The development is currently under construction and Phase I is set to be delivered by year-end. Upon completion, Phase I will develop 700,000 square feet of the 1.2 million planned for the project.

“Texas is a cost effective place to do business and a right-to-work state,” says Brian Gammill, managing director for the Houston industrial division of Transwestern. “And Texas will continue to be an economic leader for the years to come based on a strong diversified economy and a strategic location. Texas will continue to be a leader in population and job growth and that translates into demand for space.”

Clay Development has added three buildings spanning a total of 931,200 square feet to Underwood Business Park located in the Southeast Corridor of Houston.

The Southeast Corridor also saw Clay Development’s new additions to Underwood Business Park earlier this year. The company’s project included three buildings that spanned a combined 931,200 square feet in the park. Also being developed in the Southeast Corridor is ML Realty Partners’ and National Property Holdings’ joint venture in Port Crossing Commerce Center. The venture added 250,000 square feet to the development.

ProLogis is present in the Houston area as well with its ProLogis North Park. The development has three buildings currently under construction that will span more than 414,000 square feet upon completion. Plans include 10 buildings in the park, which will comprise more than 1.24 million feet at final build out.

Another trend that is gaining some momentum is that more tenants are requesting to be positioned near railroads, giving them easy access to that amenity. But even as those types of properties are becoming more difficult to come by, developers are still looking for opportunities to create projects with this convenience, even if that means some sort of compromise.

“With no sign of tenant demand diminishing for rail-served properties any time soon, developers wanting to capitalize are having to creatively find a solution or replacement plan to the current limited supply of these facilities,” says Mabray.

As of mid-year 2007, developers have added approximately 5 million square feet of industrial space, easily passing the 3.1 million square feet of space that was developed throughout the entire year of 2006.

The growth is not just being seen in Houston. Although the town has certain advantages, such as its increased trade activity from Asia and South America through its port, other attractive reasons are drawing development into all parts of the state.

The same boost in job opportunities spreads to Texas’ major markets, including San Antonio, Dallas and Austin. Many of the same encouraging factors found in Houston also are found in these other parts of the state. Industrial development continues to grow in these markets and is giving companies the kind of projects they are expecting.

“The Texas economy is expanding faster than the national average,” says Cary Krier, senior vice president for Jones Lang LaSalle, a company that was responsible for more than $2 billion in industrial transactions last year. “We are experiencing very little headwind due to negative housing conditions. And combined with our ideal logistics location, this is an easy spot to invest.”

Rob Huthnance, first vice president and market officer for the Dallas office of ProLogis, shares a similar view. “Texas is an attractive place for distribution for several reasons,” he says. “The state offers a low cost of living, a large population, a strong economy and is in close proximity to Mexico, which continues to see strong growth in manufacturing and distribution. Texas is also a very business friendly environment.”

ProLogis has four existing buildings comprising 590,400 square feet in its ProLogis Park Eisenhauer in San Antonio. The company currently is constructing 244,800 square feet in three new buildings for the park, which will reach more than 835,000 total square feet at total build out.

ProLogis is developing is both the San Antonio and Dallas areas. In San Antonio, the company has four existing buildings comprising 590,400 square feet in its ProLogis Park Eisenhauer. The company currently is constructing 244,800 square feet in three new buildings for the park, which will reach more than 835,000 total square feet at total build out. In Lancaster, ProLogis is developing ProLogis Park 20/35, which is located approximately 15 miles south of downtown Dallas at the intersection of Interstates 20 and 35. One of the company’s largest planned industrial developments in the area, ProLogis Park 20/35 currently houses one 656,000-square-foot building, with another 585,000-square-foot facility being permitted. ProLogis plans to develop a total of 3.3 million square feet at this site.

“We believe the positive dynamics can be attributed to the strength of the overall economy in Texas; job creation remains strong and the housing market, although weakened, has not been impacted as severely as many other housing markets in the country have been,” says Huthnance. “Leasing activity remains strong in all the major markets; Dallas, Houston, San Antonio and Austin are all performing well.”

“Net absorption in Dallas/Fort Worth exceeded 12 million square feet in the first 9 months of 2007,” says Krier. “This will likely put this market above 17 million square feet for 2007. Vacancy rates have declined approximately 2.5 percent since the low point in 2001.“

The kind of economical growth Texas is experiencing is needed for the expansion of the industrial market. All signs point to a healthy, steady year for development in the Lone Star State, keeping industrial alive and well.

Vantage Companies Begins Phase II of Bayport North Distribution Center Vantage Companies recently broke ground on Phase II of Bayport North Distribution Center, a project that will add 772,500 square feet of warehouse/distribution space. Dallas-based Vantage Companies has broken ground on Phase II of its Bayport North Distribution Center in LaPorte, Texas. The project, which is positioned close to Sam Houston Tollway, provides convenient access to nearby highways 146 and 225 and Houston’s port facilities. The second phase of Bayport North Distribution Center will comprise 772,500 square feet of warehouse/distribution space on 41.7 acres located at the corner of Fairmont Parkway and Underwood Drive. Phase II will develop two buildings, spanning 600,000 square feet and 172,500 square feet, and will feature 50-foot by 50-foot column spacing, 24-foot and 30-foot clear heights and 130-foot to 190-foot truck courts. The buildings also will feature ESFR sprinkler systems and park zoning for haz-mat storage. Phase I of Bayport North Distribution Center developed approximately 563,500 square feet of space and is nearing 100 percent occupancy. “The Houston port area has experienced an escalating demand for warehouse and distribution space,” says Stephen H. Jaggard, president and chief executive officer of Vantage Companies’ Houston Division. According to Jaggard, the project will satisfy this need and will be successful due to its location, layout and timing, as well as the companies involved. Guaranty Bank is providing construction financing for Phase II and Architects Plus is handling the architectural and engineering services. Vantage Companies will lease the facility, which is being built by EE Reed Construction. — Stephen O’Kane

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