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Case Study: Dallas vs. Houston Industrial

The metroplex continues to see record volumes of new construction. DFW Airfield Logistics Center, a project in Euless by Seefried Industrial Partners and Clarion Partners, is one of the more recent examples of the lengthy runway for new development.

The Dallas-Fort Worth (DFW) and Houston metro areas have vastly different opportunities and challenges in terms of commercial real estate. Yet this year both have both landed in the top five in the nation for industrial development. Driven by strong population and job growth, DFW and Houston don’t expect their industrial expansions to slow down any time soon.

At the end of the second quarter, DFW was No. 2 in the country in industrial development behind California’s Inland Empire, with 30.3 million square feet of space under construction, according to Cushman & Wakefield research. Houston ranked fourth with 18.1 million square feet.

Record Construction in Dallas

Dallas’ industrial market has enjoyed strong positive momentum throughout 2019, thanks in large part to a steady stream of new residents and job opportunities. DFW’s population grew by 128,500 people year-over-year, an average of 350 new residents every day. The metroplex also gained 97,000 jobs over the previous year. Moody’s Analytics reported that 25 percent of those new positions were in the industrial market.

Kelley Parker, Cushman & Wakefield

The leading indicators of industrial demand are trade, transportation and utilities jobs, which account for nearly 75 percent of all industrial jobs in DFW. Unemployment has edged downward to 3.4 percent — a figure below the national average that proves that the local job market is resilient and growing.

Despite record-setting construction, overbuilding is not a major concern. The market continues to post strong absorption and leasing activity, absorbing more than 11 million square feet in the first half of 2019. That rate puts DFW on pace to top 20 million square feet in absorption for the fifth straight year.

Leasing activity has been strongest in the South Dallas, Pinnacle/Turnpike and Alliance submarkets. These areas have existing spec product that accommodates near-term requirements. They also tend to have larger buildings, so the bigger deals gravitate there.

As we move into 2020, construction  should slow due to lack of developable infill sites. Developers are increasingly looking at perimeter sites, but regardless of where they locate, businesses are demanding more warehouse and distribution space than ever before. Since DFW is a regional distribution hub servicing a multi-state region, we expect the local industrial market to continue to perform very well.

High Demand in Houston

Houston is having another year of strong industrial activity, having rebounded from a challenging stretch that included the recession, falling oil prices and 2017’s Hurricane Harvey.

Kurt Griffin, Cushman & Wakefield

Today, the economy is buoyed by above-average job growth and an influx of new residents. In the 12-month period ending in May 2019, the metro area added nearly 80,000 jobs, a 2.6 percent year-over-year increase. Growth was most pronounced in the professional, scientific and technical services sector, as well as in durable goods manufacturing and healthcare.

Houston’s growing durable goods manufacturing market directly benefits the industrial market, while continued job growth keeps commercial real estate demand on the upswing. This year, economists expect the local job market to grow by up to 73,000 new jobs.

This growth has led to a flurry of new development. In the second quarter, 95 properties totaling nearly 18.1 million square feet were under construction — including 17 million square feet of warehouse or distribution facilities.

Although Dallas has always been a key distribution hub for Texas, today Houston is coming into its own with distribution and warehousing. Houston may hit a record in 2019 for warehouse development, thanks to the growth of e-commerce and port-related activity, most notably the growing demand for petrochemical and plastics.

Nathan Orbin, Cushman & Wakefield

E-commerce is growing here because the population base — nearly 7 million in the metro area — is large enough to incentivize big distribution centers to be located here as well as Dallas. We’re seeing a lot of projects coming in that service Houston, the Gulf Coast, San Antonio and Austin.

Development is happening all over the city but is strongest in the Southeast, Port Houston and North/Northwest submarkets. Growth in the Southeast and Port submarkets, where land for large new projects can still be found,  is typically tied to port and petrochemical activity. In the North/Northwest submarkets, e-commerce users that want proximity to Interstate 45 to appeal to DFW and the rest of the state are driving growth.

We’re starting to see much larger industrial projects throughout Houston. In the past, a 500,000-square-foot deal was very large; now we’re seeing deals that are over 1 million square feet, many of which are build-to-suit. E-commerce has also created more demand for 36- or even 40-foot clear buildings, instead of  the old norm of 32-foot clear.

Unsurprisingly, the uptick in development has helped lead to an increase in vacancy, which landed at 7.3 percent in the second quarter, above the historical average of 6.3 percent. As we move into 2020, even more space will be delivered, which will edge vacancy up a bit more. But we expect space to be absorbed fairly quickly, giving investors reason to feel good about Houston.

DFW has long dominated Texas’ e-commerce market, but Houston is rapidly emerging as a worthwhile competitor. For now, the sheer size of the industrial market in Dallas remains dominant. But opportunities abound in Houston, making both metros key areas to watch in the coming years.

By Kelley Parker, vice chairman; Kurt Griffin, executive managing director; and Nathan Orbin, executive managing director, Cushman & Wakefield. This article first appeared in the September 2019 issue of Texas Real Estate Business magazine. 

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