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Houston Growing in Prominence as a Distribution Hub: Q&A with Mike Spears of Lee & Associates

Mike Spears

Houston is growing in prominence as a distribution hub. Massive new industrial buildings are being constructed. E-commerce alters the landscape for retailers while creating demand for distribution warehouses. What is happening with the once resilient industrial market in Houston? To find out, Realty News Report talked to Mike Spears,  managing principal at Lee & Associates Houston office who oversees the daily operations and supervises a team of 35 brokers and 12 supporting staff. Prior to joining Lee & Associates, Mike spent 15 years with TNRG, serving as the company’s president for seven years, before it merged with Lee & Associates.

Realty News Report: As managing principal of Lee & Associates, you get a glimpse into Houston’s future as you see companies buying land and planning moves for 2018 and beyond. What are your thoughts about the Houston economy as we near midyear 2017?

Mike Spears: Economically, Houston is relatively healthy and strong. The world has witnessed a downturn in oil and gas prices over the past 18 months, but Houston wasn’t significantly impacted like the news portrayed. The upstream sector of the energy industry was hit very hard, but the downstream side (plastics/petrochemical) – primarily located on the east side of Houston – did very well. Houston did experience a rise in unemployment as oil prices declined, but the city’s population steadily increased because unemployment did not deter people from migrating to the city. This is one example of how Houston proved its resilience during the downturn and continued to thrive despite low oil prices. I feel like we have emerged from a difficult time.

Is the industrial sector of Houston overbuilt? No, I don’t think it is. We were heading in that direction, but most developers recognized the trend and “turned off the spigot.” Over the past 18 months, there has been very little spec development in the north and northwest area. We haven’t seen the level of construction in the industrial sector like we experienced in the office market, but developers are beginning to undertake new projects and appear to be re-entering the marketplace in search for land. This should cause an uptick in construction, but we probably won’t see anything major for another 12 to 18 months.

Realty News Report: We recently learned Amazon is building a 1 million SF facility in the Katy area. What do you think about e-commerce and its impact on commercial real estate?

Mike Spears: Amazon spurred the e-commerce movement and is establishing its presence in the greater Houston area. Amazon has an 800,000 SF building in northwest Houston, a 500,000 SF facility in Sugar Land, and like you’ve mentioned, 1 million SF in Katy. All this new construction is tremendously helping the CRE market: we are seeing space on the market being absorbed, and when large facilities, such as Amazon’s, are built, jobs are supplied to for those in construction, facility workers and other businesses wanting to locate nearby. The executives who run Amazon are highly intelligent, and created the new catch phrase, “the last mile.” They’ve studied economic and population trends, and aim to strategically place facilities within 20 miles of every major household in populated urban areas.

E-commerce does have its positive and negative impacts on Houston and other markets. Retail store locations are shrinking as more people turn to online retailers to purchase goods for convenience; however, this shift positively impacts the industrial market as more space is being leased. Another benefit to consider is that certain buildings deemed obsolete could be retrofitted to accommodate the growing demand created by e-commerce.

Realty News Report: What about the Houston industrial real estate market? Is it still healthy?

Mike Spears: Houston’s industrial market is still healthy but the industry is difficult to track. For instance, in the office sector, the total number of vacancies in all buildings can be divided by total square footage. On the other hand, the industrial sector has a huge discrepancy between manufacturing and distribution building space. A tenant could be searching for a 100,000 or 200,000 SF manufacturing facility, and even though there could be 2 million SF available in distribution space – the space simply will not work for them. The oil glut deeply impacted Houston’s manufacturing space and, over time, we witnessed the needle shift for vacancy rates. Distribution space was different.

Additionally, Houston is trending towards becoming a distribution hub. It’s not rivaling DFW yet, but it’s certainly heading towards that direction. Houston’s industrial market is providing plenty of opportunity – investment wise. For instance, if we look at the Dallas and California markets, developers are finding it difficult to create new projects due to the shortage of land. Houston has not encountered such issues. The city is in the early stages of what will be significant growth over the next few decades, which should catch the interest of domestic and foreign investors, who have begun to flock to Houston to cash in on the city’s growth potential. Overall, the industrial market remains healthy and is expected to robustly improve over the next two, five or 10 years.

Realty News Report: So there’s not much danger of Houston’s industrial market getting overbuilt?

Mike Spears: Like I said, we don’t appear to be overbuilt. Developers still recall the 1980s when the city became so overbuilt, hence they have done a great job of preventing history from repeating itself. When the industrial market was heading in that direction, developers slowed and/or completely shut down construction projects in the north, northwest and southwest markets. Now a lot of that space is getting absorbed. Population growth plays an integral role with the industrial market, and if we keep growing in Houston, as I expect we will, there will be an increased demand for space.

Realty News Report: What’s going on in the Port of Houston area?

Mike Spears: The Port of Houston is one of the most important ports in the U.S. and remains stronger than ever. Many downstream companies are expanding and new LNG refineries are being built. Cedar Port Industrial Park in Baytown – across the Houston Ship channel from the Barbours Cut and Bayport container terminals – is improving its infrastructure, which should open nearly 11,000 acres of industrial space. The Port is experiencing a significant amount of activity.

Realty News Report: Some people hoped the recent expansion and widening of the Panama Canal would be a catalyst of growth in the Port of Houston area. The impact has been rather mild. Your thoughts?

Mike Spears: The Panama Canal expansion is expected to generate additional business, but it’s a long-term play. It’s still relatively early to talk about its immediate success. However, with the current capacity of ships channeling through the canal per day, it will need to be greatly improved before we reap the benefits. This is something that will more than likely be completed over a long period of time. I anticipate the benefits to reveal itself over the next decade or two.

Realty News Report: Tell us about Lee & Associate Houston, which is a new brand here, but well known in other parts of the nation.

Mike Spears: Approximately 18 months ago, TNRG, a well-established local industrial brokerage firm, merged with Lee & Associates, a well-established local office brokerage firm, to become a dominant force within the Houston and international commercial real estate industry. The merger created one of the largest and most recognized broker-owned brokerage firms in the city. Both parties benefited from a strong market presence and a national reach compounded with local expertise. We have increased our bandwidth and are in rapid growth mode. We’re excited about our future and what the next few years will offer.

Realty News Report: Anything else you’d like to add?

Mike Spears: Coming from a small town, Jacksboro, Texas, I am constantly enamored by Houston its entrepreneurial spirit. Houston is business friendly – if you’re willing to do the work, you can make a heck of a good living. Other markets in other cities don’t offer the same business incentives. In Houston, it doesn’t matter where you came from or where you went to school – you just roll up your sleeves and go to work. It’s the people who make Houston great, and that’s what makes this city different from the rest. Houstonians always support and inspire each other to succeed. For example, I’ve come across many successful professionals, including billionaire businessmen, who gave their valuable time to those in need of advice. That’s almost like having access to 4 million mentors! Lastly, I was especially proud of Houston during the Super Bowl. It was a huge event and Houston handled it so well. It’s just a great place to live, work and play.

June 7, 2017 Realty News Report Copyright 2017

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