InterFace Panel: Deal Size, Institutional Capital, Infrastructure Have Fueled DFW Industrial Growth
DALLAS — Over the last decade, the Dallas-Fort Worth (DFW) industrial market has transitioned from the middle of the pack of major U.S. industrial markets to Tier-1 status in terms of leasing and development, and the drivers extend beyond job and population growth.
So went the opening conversation of the development panel of the InterFace DFW Industrial conference, held Sept. 4 at the Westin Galleria hotel and attended by more than 200 industry professionals in its first year of existence. Moderated by Keith Holley, partner at Method Architecture, the panel wasted no time in providing quantitative evidence of DFW’s emergence as a leading industrial market.
Panelist Tony Creme, senior vice president at Hillwood, backed this assertion by pointing out that since the recession, the market has averaged about 25 million square feet of new deliveries per year. That rate of development puts DFW on pace to exceed 1 billion square feet by 2021, joining Chicago, Philadelphia and Los Angeles as the only U.S. markets with that much inventory.
“We’ve got about 36 million square feet of product under construction, which is about 40 percent preleased,” said Creme, citing numbers from CoStar Group. “That’s helping to temper development a little bit. But still, when you take a look back at how far we’ve come over the last 10 years, it’s pretty impressive.”
“We’ve added about 850,000 jobs in the last 10 years and experienced 158 million square feet of industrial absorption during that time,” said panelist Al Sorrels, senior vice president of California-based Majestic Realty. “Dallas has long been on the bubble of being a top five market, but now, if you’re going to have three distribution centers in the United States, you’re going to have one in the metroplex.”
According to CoStar, the DFW industrial market’s vacancy rate currently sits at 6.1 percent, indicating a healthy balance between new deliveries and leasing velocity. Annual job and population growth, the latter of which has exceeded 100,000 annually in recent years, have been critical to the absorption of new space.
But other factors have quietly contributed to the sustained state of equilibrium. Panelist Rob Huthnance, executive vice president at California-based CT Realty, cited deal size as one such factor.
“The number of transactions that it takes to fill this large amount of product that is under construction represents a big change for this cycle,” said Huthnance. “It’s much easier than it used to be. In the past, if you built a 200,000-square-foot building, you’d think about demising it to three or four tenants. Today you’re building 1 million square feet and looking to fill it with one transaction.”
Jeff Thornton, regional senior vice president of Indianapolis-based Duke Realty, touched on the growth of institutional capital as a boon to both industrial development and investment in DFW. In doing so, he drew distinctions between industrial building booms of the past, which he said were generally devoid of checks and balances from either lenders or developers.
“For a long time, institutional capital stayed away from Dallas because those sources thought we were a bunch of cowboys down here,” said Thornton. “As this business has become sophisticated and developers have become more regulated, [institutional capital has] really benefitted the market and has led to growth.”
Panelist Don Lipscomb, CEO of Port of Dallas Authority, pointed to the metroplex’s infrastructure as a key factor that sets it apart from industrial markets of comparable size. The biggest cluster of major interstates and thoroughfares lies in South Dallas, which has long been one of DFW’s preferred industrial submarkets.
“We have exceptional transportation assets in this market,” said Lipscomb. “We have five different interstates in South Dallas, which no other market in the United States can claim. The inland port is in the southern sector, where you also have the Union-Pacific Railroad. We could also become the one of the only inland ports to have two major railroads with intermodal ports.”
For all the positives, DFW’s thriving industrial market is still troubled by a handful of market factors, some of which are longstanding and some of which are recent. Land availability, for example, long considered an advantage to being in the metroplex, is beginning to morph into a barrier to entry.
“The DFW industrial market has become a true infill market,” said Thornton. “When you look at GSW, Northwest Dallas, the airport — you can’t find land there anymore. Developers have built out everything they can in those infill markets, and the supply squeeze has pushed developers to South Dallas or North Fort Worth.”
The northern side of Fort Worth houses AllianceTexas, Hillwood’s 26,000-acre master-planned community. Panelist Creme of Hillwood concurred with the notion that there’s still land for new development to be had in this area, but that there is significantly more competition for sites. Until this development cycle, Hillwood had much less competition to contend with in its own backyard.
“About 30 percent of the product under construction is in Alliance,” said Creme. “And the reason there’s so much going up there is because it’s where you could still find land a couple years ago. Hillwood dominated the region for a very long time, but now we’ve got about a dozen new players that have showed up in the last 24 months, so now you’ve got developers looking as far north as Denton to find sites.”
Sorrels of Majestic echoed the other panelists’ views on land pricing constraints as an emerging barrier to entry.
“For the majority of my career, land in DFW was $1.50 to $2 per square foot,” he said. “Now you see companies paying anywhere from $6 to $7 per foot. We all tilt panels and pour concrete for about the same price, but land is truly a variable cost. That’s the biggest shift that we’ve seen in this cycle, and it suggests that upward pressure on rates is here to stay.”
Other panelists then chimed in on what forces are beginning to inhibit industrial growth at this point in the cycle. Huthnance of CT Realty noted that the entitlement process has gotten considerably longer, while panelist Cary Hutchings, director of economic development of BNSF Railway Co., posited that the metroplex is underserved with regard to rail-served industrial product.
“We’re looking to buy and develop our own rail-served industrial sites because we see that as a gap in this region,” said Hutchings. “The market isn’t necessarily at risk because of this, but it’s hard to find sites with direct rail service, so we’re taking on some of those challenges ourselves to locate our customers in the best places.”