Rising Land Prices shift Houston Industrial Development away from Port

With information published by Kyle Hagerty


In Houston, finding land priced right for new industrial development is getting difficult and forcing companies and investors to look inland away from the Port of Houston, one of the world's largest commercial shipping hubs.

Land prices have caught up to the blazing pace of construction, which had a second-quarter peak over the last year of 10.6 million square feet begun across the metropolitan area, according to the latest data from real estate services firm Jones Lang LaSalle. 

Houston had "an influx of demand for large single-tenant buildings over 500,000 square feet," said John Talhelm, JLL Industrial Services group senior vice president. "There really wasn’t a lot of spec space in that size range, so they had to go out and find a site to accommodate a building that size, which got people looking for land." 

The Houston industrial market has expanded rapidly this cycle. In total, more than 75 million square feet has been delivered, which expanded inventory by about 14 percent, according to CoStar data. Of the more than 10 million square feet still in the pipeline, 35.4 percent is pre-leased, representing an uptick in speculative development, CoStar reports.

Land scarcity near the port, on the east side of the nation's fourth-largest city, has driven industrial development further west. Not long ago, Beltway 8, known as the Sam Houston Tollway, was the focal point of Houston's hot industrial sector, but as land prices have risen, Houston's sprawl has extended in search of cheaper acreage. 

State Highway 99, also known as the Grand Parkway, has now become a key area for land acquisition. 

Roughly 30 miles from Houston’s urban core, it's one of the country’s most ambitious roadway projects. It's getting built and financed in 11 different segments, and when all 170 miles are complete, it will be the longest beltway in the United States and the third loop within the Houston metropolitan area, circling Beltway 8 and Interstate 610 -- the oldest, inner loop.

The Grand Parkway is designed to connect far-flung suburbs to each other at 70 miles per hour. From a development perspective, each completed section has injected economic steroids into the surrounding area. For now, only the northern and western portions have been completed. Area developers have chased land around the entire proposed loop, eagerly awaiting the completion of each section. 

"The biggest challenge is when they opened up the west side of the Grand Parkway from I-10 going north," Talhelm said. "There was an immediate influx of acquisition from the single-family development community, buying large tracts, often 1,500-3,000 acres at a time. That was followed by retail, focused on the intersections. I think that caught the development community a little unaware."

The north and northwest submarkets near the Grand Parkway are still capturing most tenant demand, landing 66.7 percent of total deal volume in the third quarter, according to JLL. The area’s largest transactions included furniture retailer Conn’s for 656,658 square feet in the north and Goodman Manufacturing, maker of heating and air conditioning systems, for 411,442 square feet in the northwest.

Several million square feet of industrial demand is still searching for a home in Houston, according to industry brokers. Costco alone could account for as much as 1 million square feet of distribution space in Houston, sources with knowledge of the deal told the Houston Business Journal.

New trucking regulations have helped boost Houston as a distribution hub. With drivers limited to driving 11 hours a day, trucking companies and distribution operations are looking at drivetimes of 4 hours to 5 hours from potential hubs, providing the ability to make a round trip within a day. That drivetime in Houston reaches more Texans than any other major city in the state, according to Talhelm. Houston also is an easier connection to overseas transport with its connection to ports in the Gulf of Mexico. 

"One things consistent between all these distributors is that they're all looking at Houston," Talhelm said. 

To pencil out more expensive land closer to the city, some developers are finding partners to develop non-industrial space on portions of the land they bought for industrial, according to JLL. For example, West 10 Business Park just west of the Grand Parkway will feature corporate offices and a large gas station, Buc-ee's, alongside industrial space. 

Developers are also looking even further out of town, well past the Grand Parkway, where several million square feet of industrial space resides, including Rooms To Go's giant showroom-warehouse combo in Brookshire, Texas. About 70 miles from the Port of Houston in Waller, Japanese air conditioner company Daikin operates its 4-million-square-foot U.S. headquarters and manufacturing facility - just north of where one of our recent transactions closed earlier this year for a concrete plant.