Tariffs, Election Impact Deal Velocity in DFW Industrial Market, Says InterFace Panel
DALLAS — The 2020 presidential election as well as tariffs, the primary economic weapon of the incumbent candidate, are weighing heavily on the decisions of industrial users and investors in Dallas-Fort Worth (DFW), according to a panel of experienced leasing and capital markets professionals at the InterFace DFW Industrial conference.
Moderated by Coni Hennersdorf, principal of CODA Consulting Group, the event was held Sept. 4 at the Westin Galleria Hotel and attended by more than 200 people in its first year of existence.
The panelists agreed that President Donald Trump’s tariffs, which at this point primarily target goods imported from China, have prompted some industrial users to stockpile inventories in advance of the tariffs going into effect. According to the Wall Street Journal, since July 2018, the administration has imposed tariffs on more than $250 billion worth of Chinese goods, not including the additional $150 billion in tariffs set to take effect in mid-December.
Other tenants have opted to wait out the election and see if the tariffs will be repealed, effectively delaying key decisions on capital expenditures like labor and materials. The former scenario creates more demand for industrial space, while the latter puts potential expansion deals on hold.
On the investment front, some industrial developers and owners are motivated to sell because tariffs on building materials like steel, aluminum, tile and concrete have driven up their costs on prospective new projects. Consequently, some of these firms are now looking to free up capital. Other landlords are also leaning toward the “kick the can down the road” approach and banking their sell-or-hold decisions on the outcome of the election.
DFW industrial leasing agents and investment sales brokers, which comprised the panel, are both enjoying the upticks and feeling the pain from the tariffs. Which side of the coin they fall on depends squarely on the types of clients they represent.
To Lease or Not to Lease
Rick Medinis, SIOR and president of industrial services of NAI Robert Lynn, was the first panelist to comment on how election expectations and taxes on imports are affecting industrial leasing activity in DFW. He immediately cited the contrasting nature of how these factors impact demand for space.
“We’ve had some clients ask for short-term renewals, which landlords aren’t interested in, in case their future costs go up,” Medinis said. “But we’ve also seen some decisions getting delayed until they see which way the tide is turning.”
Medinis noted that overall uncertainty within the global economy, fueled in part by a trade standoff between its two biggest players, is causing nervousness in the local market and will likely lead to lower deal velocity in 2020. At the same time, he said, many tenants are scrambling to lock in favorable rates right now should their future costs go up due to a prolonged trade war or a recession.
“We’re really seeing this push to get deals done in the core 60,000- to 180,000-square-foot leasing market, which is absolutely on fire right now,” he said.
Panelist Mark Graybill, SIOR and principal at Lee & Associates’ Dallas office, pointed out that GDP growth historically declines during the fourth quarters of election years, as many firms are inevitably awaiting election results before making key decisions.
“Usually pent-up demand for goods and services kicks in during the first quarter of the post-election year,” said Graybill. “So we may only be busy through the summer next year. And while we always believe any election will be telling, this year we have a president who likes his Twitter account and isn’t afraid to speak his mind, so there’ll be lots of fireworks.”
Panelist Blake Kendrick, principal and managing director of Stream Realty Partners’ Dallas office, concurred with this belief and posited that when combined with the trade war and tariffs, the president’s outspokenness could have an even more profound effect on the market. Kendrick also said that his firm has seen both positive and negative reactions to these factors with regard to leasing velocity.
“On the one hand, we saw some firms delay decisions because the tariffs really impacted their revenue,” he said. “Other tenants bought several months worth of additional inventory when the tariffs were announced. They knew that from the perspective of storage costs and the basic cost of capital that it would be cheaper to carry that extra inventory.”
Kendrick added that for firms that loaded up in advance of the tariffs, the kicker in this equation centers on whether or not the trade war will be resolved and the tariffs repealed by the time they’ve used that excess inventory. If the answers to those questions are “no,” the situation will be even more interesting to monitor, he said.
Adam Abushagur, first vice president of investments in Marcus & Millichap’s Dallas office, addressed the impacts of the trade dispute and the upcoming election on macroeconomic and geopolitical forces on investment sales in the local market.
Abushagur pointed out that uncertainty about the direction of interest rate movement prompted a slow start to the year, but that the rapidly approaching election and unresolved trade disputes have since rejuvenated deal velocity, particularly with regard to Class B industrial product under 100,000 square feet.
“We’ve had a huge influx of new inventory hit the market over the last 60 days, and the upcoming election is a big driver of that,” he said. “We’re seeing a lot of sellers that are ready to move, particularly if their strategy involved selling in the next two to three years. Plus a lot of buyers have year-end requirements to meet. So we should see more supply coming to market and softening prices a little bit.”
Referencing a study his firm conducted on how presidential elections impact deal volume, Abushagur pointed out that in both 2012 and 2016, national industrial transaction volume declined by 18 percent, compared to 2011 and 2015, respectively.
“In terms of buyer sentiment, there’s a lot of uncertainty of what’s on the horizon,” he said. “That, not pricing, has pushed buyers back. With deal velocity decreasing, cap rates are likely to go up.”
Underscoring the theme of the tariffs and election exerting different effects on different types of players, Abushagur noted that his team has seen more sale-leaseback deals this year. Although buyers may be feeling a bit gun-shy right now, owner-occupiers hit by tariffs need to free up additional capital, and sale-leasebacks provide the comfort of immediate cash flows after closing.
3PLs Stand to Gain
In addition to casting a wide range of impacts on leasing and investment sales activity, economic uncertainty created by the one-two punch of tariffs and the 2020 election is touching other facets of the DFW industrial market.
Panelist Brad Struck, SIOR and president of industrial services at brokerage firm ESRP, hypothesized a scenario with a retailer or industrial user looking for expanded distribution space to illustrate this notion.
“We’ve seen firms that want a new distribution center and need capital for the material handling equipment inside the facility, and when they go to the C-suite and ask for money, the executives would rather invest in something else,” said Struck. “So these companies end up going with third-party logistics firms (3PLs) instead of establishing a direct distribution operation.”
In this sense, the economic and geopolitical landscape is bound to foster growth in the 3PL space, even if the long-term costs of using those firms dwarfs that of leasing distribution space and keeping those operations in-house, Struck said.
Panelist Ward Richmond, SIOR and executive vice president at Colliers International’s Dallas office, echoed Struck’s belief in the growth potential of 3PLs. But even this rapidly growing segment of the industrial market is paying close attention to the tariffs and their impact on the supply chain, Richmond noted.
“We work with a lot of international 3PLs and we have seen multiple requests to expand certain market studies to include Canada that were initially solely focused on U.S. sites,” he said. “Our understanding is that this shift is due to the fact that shippers are evaluating the impact of new costs associated with these tariffs.”
— Taylor Williams