HOUSTON—There are continuing signs of recovery, with an oil and gas market on the mend, as evidenced during fourth quarter 2017. Although oil is currently far from its peak in 2014, key highlights of a recent Lee & Associates report show that a barrel of oil is in the low $60s, Baker Hughes' North American rig count is at 929 (an increase of 259 total year-over-year growth), and onshore exploration continues to put employment numbers in the positive column with seven months of job growth in manufacturing (as of October 2017).
In this exclusive, Robert McGee, principal at Lee & Associates, recently discussed the improving market, stabilizing oil prices and the state of the market at year-end, given the new tax code and job growth.
GlobeSt.com: Houston's growth in the non-distribution industrial market is increasing. One could argue this has always been the backbone of the Houston economy despite its diversification for many years, and the rise of big distribution centers. Can you expand on this?
McGee: The growth in Houston's manufacturing sector has been somewhat stagnate for the last few years but we are seeing a noticeable increase in activity in that market, and yes, I believe Houston has more manufacturing facilities than most other major markets. Local developers have been very successful with grade level, crane served, metal or tilt-wall facilities that don't necessarily meet the institutional standards. A majority of the users who occupy these types of buildings cater to the oil and gas industry in some form, whether it's a precision machine shop making a small specific part or an API licensed manufacturer that certifies valves and other equipment. This is because Houston is home to most of the major oil companies. To clarify, not all manufacturing is related to oil and gas sectors either. There are plenty of steel companies that manufacture parts for forklifts or heavy machinery, coil tubing companies and many others. While Houston has become a more institutionalized market, you must not forget that we are heavily weighted in the manufacturing sector and a large majority of that is due to oil and gas.
GlobeSt.com: Will we see this trend continue with oil prices stabilizing above $60/barrel?
McGee: Yes, however, growth in this market will be much slower than the last upswing. There is still a great deal of supply and even if oil gets to $80/barrel, most companies are going to remain cautious. When we came out of the last downturn, the upswing was much more rapid and noticeable. This one is much different, but it's undeniable. In the last six to eight months, we are starting to close on leases and sales of manufacturing facilities that have had only a little activity in the previous two years. For example, in the last six months, we have closed four deals totaling almost 300,000 square feet, with many more currently in the works. Vacancy in this product type is starting to tighten.
GlobeSt.com: What could Houston's non-distribution industrial market look like by the end of 2018 given the new tax code and job growth?
McGee: Vacancy will continue to tighten until we see rents begin to increase. I don't see a big increase in rents this year that would justify speculative construction. We will need to return to previous rent levels before we see more new construction. The new tax code will definitely help, but what we really need is higher oil prices. Interestingly enough, we are seeing more activity from large foreign manufacturers looking to avoid tariffs on imports.
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Lisa Brown
Lisa Brown is an editor for the south and west regions of GlobeSt.com. She has 25-plus years of real estate experience, with a regional PR role at Grubb & Ellis and a national communications position at MMI. Brown also spent 10 years as executive director at NAIOP San Francisco Bay Area chapter, where she led the organization to achieving its first national award honors and recognition on Capitol Hill. She has written extensively on commercial real estate topics and edited numerous pieces on the subject.
