Houston Industrial Building Boom: Q&A with Robert Clay of Clay Development
Robert Clay
HOUSTON – (Realty News Report) – Houston’s industrial market has evolved into a critical hub for large distribution users, and activity in the sector remains intense. According to NAI Partners, the city’s industrial development pipeline has climbed to levels not seen in over two years — roughly 12.4 million square feet compared with the all-time high of 15 million square feet recorded in the second quarter of 2015. Realty News Report spoke with Robert Clay, president of Clay Development & Construction, to explore what’s driving demand in industrial real estate and where the market is headed. Over nearly two decades, Clay has overseen projects ranging from a 10,000-square-foot office building to a 900,000-square-foot distribution center. Since founding the company in 1998, Clay has developed more than 230 industrial and office buildings totaling about 13.2 million square feet with an estimated value of $750 million. Robert and his wife, Emily, have also become notable philanthropists, contributing significantly to the Memorial Park redevelopment.
Realty News Report: Your firm recently began construction on a 350,000-square-foot speculative distribution building in the Cedar Port business park, near the Port of Houston on the east side. What is the strategy behind this development?
Robert Clay: Our strategy is consistent with what we’ve done before: respond to strong demand in and around the Port. Vacancy in the area remains very low while demand is high. We’re particularly enthusiastic about this project because we can bring rail service to the building. Several nearby options don’t have rail access, and offering rail service gives this building an important competitive edge.
Realty News Report: Cedar Port has service from two rail companies. How important is rail access for an industrial park?
Robert Clay: Rail service isn’t essential for every park, but it’s a valuable amenity for roughly 25 percent of deals in this area. Being rail-served differentiates our park from many others and expands the range of tenants who can operate efficiently there.
Realty News Report: How has the industrial real estate market shifted over the past five years?
Robert Clay: Several important shifts have taken place. First, demand for dock-high, institutional-grade buildings has surged — I’d estimate that volume has tripled over the last five years. Second, demand for traditional manufacturing space has declined markedly. In 2013 we were building 20–30 manufacturing facilities a year; today we build perhaps five. Overall sales volume is similar to five years ago, but tenant demand has shifted from manufacturing to logistics-focused, dock-high product. Third, cap rates have compressed. In 2013 comparable buildings traded around a 7.5 percent cap rate; today those same assets often trade near 5.5 percent and can go as low as 5 percent for top product in prime locations. While lower cap rates might look like a developer win, rental rates have also adjusted, so developers are generally maintaining their margin relative to costs. Finally, land prices have risen sharply: shovel-ready sites that cost roughly $3.50 per square foot in 2013 now trade in the $5.50–$6.00 per square foot range. I don’t expect land prices to decline in the near term.
Realty News Report: Higher land costs appear to be pushing industrial development farther into suburban areas. Do you expect that trend to continue?
Robert Clay: Yes, although the driver isn’t just rising land prices. Inside Beltway 8 there’s very little land left for development, which has forced projects outward into suburban zones. That scarcity inside the Beltway has also pushed up land values in the suburbs, so overall land costs have increased across the region.
Realty News Report: You and your wife recently made a generous donation to the Memorial Park redevelopment. Can you describe the vision for the park’s future?
Robert Clay: Emily and I feel fortunate to be able to give back to the city that has given us so much. We’re proud of our contribution and hope others in the real estate community will support the effort as well. The Memorial Park Conservancy’s master plan is ambitious: the goal is to open and improve all 1,500 acres of the park so Houstonians can enjoy the entire space, not just a small portion. The project is projected to cost more than $200 million, and the Conservancy has already raised the majority of the funds, with about $30 million still needed.
Realty News Report: Why are parks and green space important to a city?
Robert Clay: Parks are vital to every city, and perhaps especially to Houston. Our metropolitan area spans more than 627 square miles and is heavily developed; green spaces give residents essential access to nature, outdoor recreation, and opportunities to spend time with family and neighbors. More parks mean more places for everyone to enjoy the outdoors.
