The State of Texas has fared far better than many of its neighbors in the current economy. Few areas of the country have remained immune to the near-collapse of the financial markets and the resulting impact on commercial real estate. Developers have curtained new development in favor of marketing and leasing available space within existing portfolios. The occasional industrial build-to-suit surfaced sporadically in 2009, but represented more of the exception than the norm.
Houston, however, finds itself in a better position than most cities, offering a wide range of business types, a solid infrastructure system to support large transportation needs and distribution activities, a local government that embraces a pro-business stance and an active energy market, all of which sustain the health and future growth of the industrial segment of Houston’s market.
The above attributes supported the interest of the industrial development alliance between McShane Development Company and MetLife Real Estate Investments to move forward with an industrial development project in one of the highly-popular industrial submarkets in Houston known as the northwest corridor.
In the Beginning
When the McShane/MetLife industrial development alliance set its sights on completing a state-of-the-art industrial property in the Houston market, the economy failed to reveal signs of the financial turmoil that lay ahead. The lack of available modern distribution product in the northwest industrial submarket – the largest submarket within Houston – demonstrated an unfulfilled business need and an opportunity for development. When the McShane/ MetLife partnership identified the appropriate parcel, plans were quickly set into motion to complete the Guhn Road Distribution Center, a 253,838-square-foot single- or multi-tenant warehouse/distribution building. The site provided convenient access to the City of Houston, the Port of Houston and destinations throughout Texas, via direct access to Houston’s Beltway 8 and Highway 290.
Property features include 30’ clear height, a 68’ staging bay, 52 external truck docks and four drive-in dock doors.
Munson Kennedy Partnership and the Houston office of Cadence McShane Construction were hired to provide the design/build services for this industrial assignment. The building offers many of the modern features that today’s industrial users require. The 30’ clear height, 68’ staging bays, 53’ x 50’ bays provide convenience for sophisticated inventory and distribution operations. Guhn Road includes 52 external truck docks and four drive-in truck dock doors to accommodate the high velocity of product a tenant could potentially move through the building.
The Guhn Road Distribution Center also boasts 2,500 AMP/277/480 electrical service, an ESFR fire sprinkler system and gas unit heaters for freeze protection - all "must-have" amenities for a new industrial building. The 14-acre site features 135’ trailer courts facilitating convenient ingress and egress and provides direct access to additional on-site trailer storage, a feature that many competitive properties lack.
Pulling the Trigger
As plans for the Guhn Road Distribution Center came to fruition, oil prices were at an all time high. The State of Texas was benefiting from a pro-business environment, an influx of new population and abundant natural resources that contribute to the state’s economy. Houston in particular was enjoying high energy prices, and the market was experiencing positive absorption. As other developers struggled to finance deals, McShane’s strong banking relationships proved to be fruitful.
"We had the good fortune of acquiring financing at the right time in the market," said Vicki L. Mutchler, vice president of capital transactions for McShane Development Company. "We secured very attractive loan terms from Northern Trust, and Northern has remained financially solid throughout this current credit crisis."
As the economic slowdown trickles into Texas markets that had successfully dodged the recession in its early stage, the effect is not expected to reach the profound levels that the rest of the country has grappled with over the past 18-plus months. However, leasing velocity within Houston’s industrial market has slowed from the rapid pace witnessed in 2008.
"Leasing was slower in 2009 than in the last few years in Houston, but we’ve seen encouraging signs in 2010. First of all, we haven’t really gone backwards. Many industrial markets across the country have seen negative absorption. Houston users haven’t given space back to the market," remarked Kyle Valentine of Stream Realty, exclusive marketing agent of the Guhn Road Distribution Center along with partner, Justin Robinson.
But many Houston businesses, like the rest of the country, are waiting for strong leading indicators of stability before making capital and space planning decisions. Corporate objectives have been realigned to weather the storm, which often means implementing a "wait and see" approach. "Most companies have stabilized but are reluctant to make any decision in this uncertain economy," observed Valentine. "We hope to see this pent up demand come to fruition in the next few months." However, businesses with the confidence and balance sheet to make a choice stand to benefit. Demand is low and supply is steady, creating the perfect recipe for advantageous real estate opportunities.
Supporting Big Business
Texas always thinks big, especially when it comes to its business environment. The state does not collect income tax, allowing workers to keep more of their paychecks to fuel consumer spending. The state and city also establish a pro-business stance with a variety of tax incentives for companies, including Texas’ Triple Freeport Exemption. This unique tax break allows local authorities to exempt certain taxes on goods that have been acquired in or imported into Texas and then forwarded out of state within 175 days. The Guhn Road Distribution Center falls within a Triple Freeport zone, providing businesses that assemble, manufacture, process, store, maintain, fabricate or distribute their products in Texas an exclusion from paying city, county and school district taxes.
The 14-acre site features 135’ trailer courts facilitating convenient ingress and egress and provides direct access to additional on-site trailer storage.
It is up to local jurisdictions if they wish to adopt the Triple Freeport tax exemption. The State of Texas allows cities, counties and schools to separately adopt a Freeport exemption. If only two taxing bodies accept the tax break, the designation is called Double Freeport; if all three allow the exemption, it becomes Triple Freeport. The ability to capitalize on this tax exemption is a critical component of decision making for many business space users.
"This tax exemption is extremely beneficial for users with high inventory values. Many times this type of tenant will place as much value on available tax abatements as they do on the real estate deal itself when making a decision," says Valentine.
Hedging Your Bets
The favorable tax environment is just one of the advantages of Houston’s northwest submarket. The area is well established, offering employers and employees a wide array of amenities, such as banks, restaurants and retail. Infill sites are located in mature areas and well situated to transportation, a rich supply of labor and convenient access to customers, suppliers and interstate arteries.
This popular northwest corridor offers a direct route to Beltway 8 and Highway 290, in addition to Central Business District access. It is home to the largest industrial employment base in Houston and companies such as The Home Depot, Toshiba Corporation, Goodman Manufacturing Company and National Oilwell Varco are among the hundreds of users that occupy space in the submarket.
Infill sites in Houston offer a strategic advantage because it is the only major U.S. city with the absence of a formal zoning code. The relaxed zoning regulations in Houston may cause two unlikely building uses to be situated adjacent to one another, and developers often fret about just who their neighbors may be.
"There are very few sites available as infill because this area is highly populated with existing developments. Since the sites around Guhn Road Distribution Center are completed at this time, the investment is well protected," remarks Valentine.
Hurricane Ike Pays a Visit
The Guhn Road Distribution Center is currently a user-ready building; however, projects sometimes encounter obstacles before reaching completion. Guhn Road faced a major hurdle in September 2008 when Hurricane Ike made landfall in the U.S. This storm hit Houston with a vengeance and made history as the country’s third most destructive hurricane. Damages from Hurricane Ike in U.S. coastal and inland areas were estimated at $24 billion.
The partially completed Guhn Road was not able to avoid the impact of Hurricane Ike’s wrath. Power and telephone connection at the site was lost, and the construction trailer was blown across the street onto another site. Guhn Road was in a relatively good situation because the walls had not yet been tilted. The site sustained minimal construction damage, but basic infrastructure work to the project was lost.
But the McShane/MetLife alliance was not the only developer experiencing the fallout from the hurricane. A shortage of construction trailers quickly hit the market.
"Once the jobsite construction trailer was blown over and severely damaged, it was difficult to obtain a replacement. We ended up working out of the back of a truck and couldn’t get phone or power restored to the job site, so we relied on mobile devices. All equipment that needed to remain available onsite was stored in a shipping container," said Chuck White, vice president/division manager of Cadence McShane Construction Company.
Despite Hurricane Ike’s impact, the Guhn Road Distribution Center was completed in 2009. The Guhn Road Distribution Center has been expertly positioned to meet the diverse needs of today’s tenant. Selecting the perfect location is critical to any profitable operation. The right decision can positively impact a company’s business objectives. Navigating these challenging times takes additional effort, organization and thoughtfulness. Houston’s Northwest Corridor offers the right combination of infrastructure, economic diversity, geographical advantage and pro-business stance to meet the needs of a variety of industrial space users.