Few industrial real estate markets are as battle-tested as Dallas-Fort Worth.
That is why, despite economic turbulence that has slowed the region’s breakneck speed, developers and investors remain confident the market will keep a steady pace through the storm.
DFW industrial real estate continues to command record-high rents amid a slowdown in leasing and rising vacancies. Asking rates grew 12% year-over-year in the third quarter, indicating strong demand for space even as the market cools.
M2G Ventures' Jessica Miller Essl, The Conlan Co.'s Justin Swaim, Lovett Industrial's Charlie Meyer, Holt Lunsford Commercial's Hutton Lunsford, Prologis' Heath Johnson and Lathram Pou & Associates' Lathram Pou
“Things are slowing down a little bit, but at the same time, we are delivering a record amount of supply,” Heath Johnson, senior vice president and market officer at Prologis, said during a Bisnow event Tuesday at Century Park in Irving.
“Over the next few quarters, we will see vacancies rise and rent growth moderate, but in the long term, we are super bullish about the fundamentals of our business.”
DFW is one of the fastest-growing regions in the U.S., with 170,000 new residents added between 2021 and 2022. This makes the Metroplex an ideal location for logistics, e-commerce and manufacturing, said Reid Goetz, senior vice president at Hillwood Properties.
“We’ve got the golden goose of population growth,” he said. “That alone drives demand.”
Ryan Cos.' Jeff Thornton, CapRock Partners' Jon Pharris, Constellation Real Estate Partners' Jeremy Giles, Newmark's Chris McColpin and Newmark's Jack Fraker
The continued growth of e-commerce is causing tenants to clamor for warehouse space.
Businesses now prefer to stockpile inventory for a rainy day, a complete shift from the mentality that used to rule the sector, Johnson said. Prior to the pandemic, companies would hold as little inventory as possible and only acquire more once a customer placed an order, he said.
“It used to be ‘just in time.’ Now it’s ‘just in case,’” he said. “Our customers don’t want to be caught short-stocked like they were a couple years ago.”
The rise in online grocery shopping is continuing to pay off for industrial. Over the next five years, online grocery sales are expected to see a compound annual growth rate of about 12%, which will increase the segment’s e-commerce penetration from 11.2% in 2022 to 13.6% in 2027, according to research by Brick Meets Click and Mercatus.
Gordon Highlander's Greg Gordon, Stream's Sarah Ozanne, Catamount Constructors' Rick Rodman, Method Architecture's Jake Donaldson, Merriman Anderson Architects' Patrick Hazard and Lee & Associates' George Tanghongs
More cold storage will be needed to accommodate that growth, said Trevor Heaney, director of ARCO/Murray Design Build. Only 1% of development is being geared toward the niche segment, but that will likely change in the coming years.
“Fifteen percent of industrial construction over the next five years should be tailored toward cold [storage] to keep up with the demand of our population,” he said.
Despite all of the tailwinds propelling industrial, capital markets challenges are keeping construction at bay. Loans are in short supply, especially for spec development, said Eric Beichler, managing partner and shareholder at Mohr Partners.
“There are spec deals being done in the right markets,” he said. “You just have to have the equity to do them.”
Kensington Vanguard National Title's Zach Sams, CanTex Capital's Romit Cheema, Faropoint's Jacob Rich, Timber Hill's Martin Siegel, Westmount Realty Capital's Kyle Russell and KE Andrews' Tony Trahan
The majority of bank lenders have been sidelined by economic uncertainty, prompting developers to tap alternative funding sources, said Hutton Lunsford, chief investment officer at Holt Lunsford Commercial.
“New construction starts — you can count them on two hands,” he said. “People are leaning on debt funds or capitalizing their deals all equity.”
There is more than 58M SF of new supply coming down the pike, but much of it is spoken for. Once it runs out, new space, especially in highly desirable infill locations, will be hard to come by.
As a result, some companies are now eyeing defunct office buildings as a possible solution.
Goree's Stefano Poisl, Hillwood Properties' Reid Goetz, Constellation Real Estate Partners' Scott Ellerman, Billingsley Co.'s George Billingsley, ARCO/Murray Design Build's Trevor Heaney, Stillwater Capital's Stephen Holley and Colliers' Allyson Yost
Prologis purchased an office building in Plano for that exact purpose, Johnson said. Once the tenant’s lease is up in a few years, the company plans to repurpose the building as industrial.
Not all office buildings are good candidates for repurposing based on location and zoning, but in areas where it is doable, industrial conversions could be a win-win for both the public and private sectors, said Charlie Meyer, president of Lovett Industrial.
“For the first time in history, rents are finally justifying scraping an obsolete office building to build industrial, and your numbers work,” he said. “Lots of cities would rather have income-producing Class-A industrial than obsolete office that’s a money-suck and an eyesore.”
The last couple of years have been so profitable for industrial that some landlords turned away creditworthy tenants looking to do 10-year leases in favor of deals where they could renew in a shorter time frame at a higher rate, said Jeff Thornton, president of the South Central region for Ryan Cos.
Terrell Economic Development Corp.'s Ray Dunlap, HFA Architecture + Engineering's Marc Jennings, Link Logistics' Brian Strohl, Mohr Partners' Eric Beichler, FCL Builders' Brandon Perdue and Paladin Partners' Conrad Madsen
Those dynamics are unsustainable, he said, and while today’s capital markets environment is challenging, it is forcing an adjustment that will be more viable in the long run.
“[Today’s challenges] are going to move the development community back to executing deals with solid fundamentals, whether that’s on the financial side or the design side,” Thornton said. “Our business will be better off for it.”
Those who jumped into the space during the red-hot days of the early pandemic may not survive the downturn, but investors with strong relationships and years of experience under their belts are positioned to make it through.
“The last 10 to 12 years, absent a few weeks at the beginning of 2020, have been incredibly easy,” he said. “This is a great opportunity for people that have been through cycles to perform and stand out.”