When we look back at the last couple of years in the Dallas/Fort Worth industrial real estate sector, it is absolutely certain that it’s been great to be a tenant. Landlords have been fighting for new deals and trying to keep the ones they have. But is next year going to be better or worse than this year?
In the past year, there have been glimmers that the real estate market and the economy might be on the rebound. With a complete lack of any notable new speculative industrial construction in the past 3 years in DFW, we’ve all been working to fill up the existing vacant inventory. In the past 4 quarters, we’ve seen positive absorption of approximately 10 million square feet. We’ve moved the needle in DFW from 11.5 percent vacancy, to 10.5 percent in one year’s time. While that’s significant compared to where we’ve been, it’s approximately half of where we were in 2007 when we saw more than 20 million square feet of industrial absorption in 2007 in DFW alone.
While it seems that the market is positioning itself for some sustained growth, the flex sector of the industrial market still seems to be flagging. Vacancy rates have hovered around the 12 percent mark with rates slowly, but consistently, dropping. The crossover office/warehouse market tends to be occupied by smaller companies with about three-fourths of the market comprised of tenants under 10,000 square feet. While Texas in general has been the shining star of job creation compared to the rest of the United States, a large part of the small business sector has been hesitant to sign new leases and expand their real estate footprint. Anecdotal evidence from some of our conversations with groups who deal in office furniture and moves, show that they’ve been relatively busy. Job growth comes first, and with the amount of restructuring that has happened during the past few years, companies are finding themselves with plenty of elbow room and empty cubicles leftover from the boom of the mid 2000s. If job growth in north Texas continues, we are already on the brink of a recovery, and we’re going to see decreasing vacancy and developers “sniffing” at new construction very soon.
As far as speculative development goes, it’s been virtually non-existent. With the amount of volatility in the markets this year, no one has been able to satisfactorily answer the question ‘How long will it take you to lease it?’ There are still first generation spaces of over a half million square feet that have been vacant since 2007. With the amount of heartburn in the market over stories like this, our next cycle of growth will probably be more controlled, and more deliberate. We’ve already seen this with virtually all of this year’s new construction being 100 percent pre-leased. The money that’s been sitting on the sidelines is more than happy to oblige by doing build-to-suits. Returns for build-to-suits have been slimmer than in years past due to the competition of institutional money which can afford a much lower rate of return than most of what your speculative builders would be willing to pay.
Bank owned properties and the ‘avalanche’ of foreclosures that were supposedly coming, hasn’t quite materialized. Banks and their asset managers are realizing their bad assets sooner and are more willing to deal. But before properties even get back to the bank, most of the properties we see posted for foreclosure never make it to the trustee sale, and even fewer of them actually sell there on the courthouse steps. Banks are realizing the risk of taking the property back, and are having to make the hard choice in picking their poison — take the property back with all the risk it entails, or work out some sort of modified loan agreement if the owner can still afford to keep the asset afloat.
This year has been an odd year. None of the vacant space was flying off the shelves, but deals have been made. Most took longer to get to the finish line than anyone would have expected going in, and none of them were easy. Calvin Coolidge, a man known to be of few words once said, “Business will be better or worse.” He was right by process of elimination. The truth of the matter is that money has definitely been made in this market, but I think we’ve already begun the slow climb to recovery and are on to the ‘better’ part of business.
— John Bielamowicz, associate in the office/industrial division of Dallas-based Henry S. Miller Brokerage