HOUSTON – (Realty News Report) – As Houston’s industrial market transforms into a major player for larger distribution users, the sector remains a hotbed of activity. According to NAI Partners, the Houston industrial development pipeline is reaching levels not seen in over two years – some 12.4 million SF compared to the all-time recorded high of 15 million SF reached in the 2015 second quarter. Realty News Report contacted Robert Clay, president of Clay Development & Construction, to find out why the industrial real estate market is so hot and where it’s headed. Over nearly two decades, Clay has developed projects that range from a 10,000 square foot office building to a 900,000 square foot distribution facility. Since opening for business in 1998, Clay has developed over 230 industrial and office buildings comprising approximately 13.2 million square feet valued at $750 million. Robert and his wife, Emily, have also become major philanthropists, donating generously to the redevelopment of Memorial Park.
Realty News Report: Your firm recently started construction on a 350,000 SF spec distribution building in the Cedar Port business park near the Port of Houston on the east side. What’s your strategy behind this development?
Robert Clay: It’s the same strategy as before: we continue to see high demand for all types of businesses in the Port area. The area’s vacancy rate continues to be very low and demand high. We are especially excited for this project because of our ability to bring rail service to the building. The area has several non-rail served options, but no other rail served options.
Realty News Report: Cedar Port has service from two rail companies. How important is it for an industrial park to be rail served?
Robert Clay: Not all parks NEED to be served, but it is a very good amenity for about 25% of the deals in that area. It is definitely a differentiator for our park over others.
Realty News Report: How has the industrial real estate market changed in the last five years?
Robert Clay: It’s changed in several ways. First is the demand for dock high, institutional buildings. I would say that volume has tripled in the last five years. Second is the lack of demand for manufacturing. We used to build 20-30 manufacturing buildings a year in 2013. Today we are building five. Our sales are still where they were five years ago, but the demand has switched from manufacturing to dock high. Third is cap rate compression. Sales cap’s used to be in the 7.5 percent range in 2013; today, for the same product, the rates are 5.5 percent, maybe even 5 percent for the right product in the right location. While this may seem like a win for the developer, the reality is, it is a win for the tenant because the rental rates for these buildings has gone down with the cap rate, so the developer is still making the same spread on costs. And finally, the price of land has sky-rocketed. Shovel-ready land was $3.50/per SF in 2013, today it is $5.50-$6.00 per SF. I don’t see the price of land going down anytime soon.
Realty News Report: Higher land costs seem to be driving industrial development farther into suburbs. Will that trend continue?
Robert Clay: Yes. Although I would submit that high land costs haven’t moved development to the suburbs, but that there is no more land available inside Beltway 8 and that has pushed developments out to the suburbs. An effect of no inter-Belt land has pushed the prices for all land up in the suburbs.
Realty News Report: You and your wife recently made a generous donation for the redevelopment of Memorial Park. Can you tell us about the vision for the future of this park?
Robert Clay: Emily and I are lucky enough to have the ability to give back to the city that has given us so much. It is a donation that we are both very proud of and hope to see others in the real estate community do the same. The vision of the new Memorial Park is a grand one. The overarching goal, though, is for Houstonians to be able to use and enjoy ALL 1,500 acres of the Park, not just 150 or so. The Memorial Park Conservancy has devised a master plan that allows this to happen. It’s a $200 plus million project and they have raised all but $30 million so far!
Realty News Report: Why are parks and green space so important to a city?
Robert Clay: We believe parks are important to all cities, but maybe in Houston it’s even more important. Our city is huge, covering over 627 square miles – and most of that is concrete! We need as many green spaces as possible to allow EVERY citizen to get out into nature and enjoy time with their family and each other.