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East Houston Portfolio

Uncovering Opportunities In a Constrained Market with East Houston Portfolio

Executive Summary

A wave of industrial real estate development activity has engulfed markets across the U.S. in recent years. Construction is on the rise in coastal and inland port cities such as Atlanta, Chicago and Kansas City to accommodate growing demand from retail, logistics and manufacturing tenants.

Other major markets, however, are nearing their industrial space capacity, offering limited opportunities for new development while still providing the right location, economic climate and transportation infrastructure to warrant investment.

Exemplifying this trend is Houston: a supply-constrained industrial real estate market with little available land for new construction. Despite Houston’s vacancy rates hovering around five percent, the city boasts an ideal mix of port and rail transportation resources and a built-in user base in need of functional industrial space.

This case study discusses how CenterPoint – in an effort to expand its national presence – acquired a 27-building, 3.6 Million square foot portfolio in East Houston, which factors that motivated the investment, and the long-term value this extensive portfolio stands to create.

Investing in an On-strategy Portfolio

Since its initial founding, CenterPoint Properties has been widely noted as a leader in the Chicago industrial real estate market. To fulfill its strategy of developing, managing and investing in transportation-advantaged properties, the firm has been focused on extending its reach to key logistics markets across the country.

After entering the Houston market with acquisitions in 2013 and 2014, CenterPoint was looking to cement its status as an established provider of industrial facilities that would satisfy local tenants’ needs for accessibility and competitive rents. The East Houston submarket in particular, where the vacancy rate for rail-served facilities is less than one percent, proved to be an optimal fit. In April 2015, CenterPoint closed on a 27-building, 3.6 Million square foot portfolio east of the Houston Central Business District, with properties located across nine local industrial parks. The majority of the 30+ existing tenants in the portfolio includes transportation and third party logistics organizations, as well as resin supply chain firms.

Aligning with CenterPoint’s national investment and development strategies, almost all of the facilities in The Portfolio benefit from nearby port and dual rail infrastructure, including the Port of Houston and Houston Ship Channel, Union Pacific’s Settegast and Englewood intermodal yards, and Burlington Northern Santa Fe’s Mykawa Yards.

A Captive Industrial Audience

Far from an emerging logistics market, Houston is an established hub for domestic and international shipping. The area’s concentration of industrial business users and ample transportation assets signal sustained demand for highly functional, strategically located real estate. Due to a specific combination of factors, East Houston – and The Portfolio specifically – was a natural investment for CenterPoint. The region’s mix of established local industries and diverse transportation infrastructure fulfilled each of the firm’s acquisition criteria and long-term expansion goals.

  • Local resin production: Plummeting natural gas prices have triggered a boom in domestic resin production, with Houston at the center of the action. Houston is home to the largest population of resin manufacturing workers in Texas; in 2014, the state’s resin exports reached nearly $15 Billion.1 But as resin manufacturers’ and distributors’ operations expand, so does the need for adequate rail service and connectivity.
    Without direct (or proximate) rail access, organizations handling increased resin shipments threaten to congest local rail lines and, in worst-case scenarios, be placed under rail embargos. The majority of the facilities included in The Portfolio are located in rail-served industrial business parks, providing tenants with the infrastructure necessary to accommodate the in ux of resin activity.
  • Petrochemical refining complex proximity: Along the Houston Ship Channel, a 52-mile waterway extending from the center of the city east to the Trinity Bay, is the world’s second-largest petrochemical refining complex.2 A cluster of major energy corporations including Exxon Mobile, Shell and Valero operate refineries along this 25-mile corridor, which also serves as a nerve center for many of the country’s natural gas pipelines.
    Given the location of the Ship Channel and refining complex, East Houston has become the go-to destination for components suppliers and distributors that serve the gas and chemical industries. A number of tenants in The Portfolio – including a piping equipment distributor, gasket and bolt supplier, and drilling products provider – reap the benefits of a built-in client base right in their backyard.
  • Intermodal options: One of the main drivers behind the East Houston acquisition was the market’s extensive range of port and rail assets. The Port of Houston, first in the nation for foreign waterborne tonnage and responsible for handling 65 percent of all break bulk U.S. cargo, continues to be a vital resource to regional, national and global supply chains.3,4 Two Class I railroads service the city, and together operate three local intermodal yards including BNSF’s Mykawa Yards and Union Pacic’s Settegast and Englewood parks.
    More than 80 percent of The Portfolio facilities realize reduced drayage costs due to their positioning on the city’s east side, adjacent to the Houston Ship Channel for expedited transport to and from the port. In a market strapped for logistically advantaged industrial space, these 27 buildings are poised to generate tenant demand and value for years to come.

Creating Opportunity in a Crowded Market

The April 2015 acquisition expands CenterPoint’s total Houston portfolio to 6.2 Million SF across 45 buildings. Deals of this size and relevance to the Company’s national strategy exemplify its continued intent to pursue investments in the greater Houston region.

Houston already embodies many of the market attributes vital to supporting industrial tenants, but its long-term outlook is even brighter. The city’s population grew at a rate of nearly two percent in 2014, with a similar increase projected for 2015, signaling the area’s growing workforce.5 In spite of looming concerns about the regional impact of falling oil prices, Houston has successfully diversied its economy. Healthcare, technology and finance are just a few of the sectors thriving alongside the local oil and gas industry. Texas itself is widely noted as one of the most favorable states for businesses, based on its lack of corporate income tax and ample government-backed incentives. While industrial real estate firms throughout the country work to sustain their development streak, CenterPoint is devoting equal attention to investment opportunities in constrained markets. Beyond speculative construction and built-to-suits, there’s plenty of potential to be unlocked from existing properties that satisfy demands for logistics, labor and location. In low vacancy cities like Houston, a facility’s function often counts more than its form; acquisitions like this equip CenterPoint with the supply to meet these demands.