The Dallas-Fort Worth (DFW) real estate market is remarkable. In a recent meeting with a broker from another market, he made the observation: “You guys in Texas are like a country unto yourself. It’s not that you don’t know there are 49 other states, you just don’t care!”
While that was a bit of an exaggeration, the point was well taken. Certainly DFW is not immune to national affairs and recessions, but the market appears to have enough momentum to carry through 2020, though the uncertainty of the presidential election could cause a few users and buyers to pause before making decisions.
In 2016, as Global President for the Society of Industrial and Office Realtors (SIOR), I travelled throughout North America and Europe. Continually meeting with SIOR brokers in other markets gave me unique perspective on how DFW really does compare to the rest. The leasing and absorption activity far outweigh most other markets, making it an enviable location.
Allen Gump, Colliers International
Texas will always be a magnet for businesses as long as it retains a pro-business state of mind: Texas is a central part of the country and a right-to-work state with no state income tax, among other attractive incentives. Oftentimes, as larger companies evaluate their supply chains, they find consolidating from multiple distribution centers into one larger, more efficient distribution center makes the most economical and logical sense. DFW has been and will continue to be a beneficiary to these decisions.
Typically, consolidation and/or expansion deals do not feature incremental increases. For example, one client went from a few hundred thousand square feet to 1 million; another went from 300,000 square feet to 700,000 square feet and a third is in the process of going from 560,000 square feet to 850,000 square feet. All of these companies started with a top-to-bottom analysis of their supply chains to become as efficient as possible.
Ynon Kreiz, CEO of Mattel, was recently quoted in The Wall Street Journal regarding his “goal to improve operations and cut millions of dollars in costs by modernizing and ultimately tame a sprawling supply chain.” Mattel, like many other companies, has been criticized in the past for being, as Kreiz puts it, “too big, too slow, too heavy, too costly and not as efficient as it needs to be in this day and age.”
Allyson Gump Yost, Colliers International
Different companies do this in different ways. Some find using third-party logistics (3PL) companies allows them to focus on core business and let professional logistics firms handle the distribution. A 3PL can help with getting inventory to market faster and more efficiently.
What Users Want
The developments in South Dallas, DFW Airport and AllianceTexas submarkets have capitalized on much of the recent leasing activity. While those areas continue to thrive, South Fort Worth, McKinney and even Forney are all seeing an increase in activity. In particular, as competition for employees becomes a key factor, brokers are being asked to expand the search for locations where the ability to hire good labor is the top consideration.
Clear heights for these newer facilities have greatly changed, allowing buildings to become more efficient in cubic square footage. Most developers are building larger facilities now with 40-foot clear heights as the standard, though it was not that long ago 32-foot and 36-foot clear heights were
acceptable.
At 40-foot clear and even higher, racking systems are able to take advantage of a larger cube and even introduce robotic systems for vertical stacking and retrieving. Investors are purchasing large portfolios and seeking buildings with the greatest likelihood of success in the future that are the least likely to become obsolete in the minds of users.
However, not all users of these larger buildings will take advantage of the higher clear heights. Some will even floor stack fast-moving inventory, especially unrefrigerated packaged foods such as cereal and canned or jarred fruits and vegetables.
DFW has traditionally been a market where developers built speculatively regardless of the size, even up to 1 million square feet, and the market subsequently has rewarded them. Amazon has been one user to absorb a sizable portion of the larger spec product across DFW. However, as companies are becoming better at planning for their supply chains, build-to-suit projects have become more commonplace.
The largest users oftentimes want to design facilities to their own specifications. For example, many want more truck and car parking spaces than what is normally included in speculative construction, as well as onsite truck flow requirements including ring roads, queueing lanes for incoming trucks and security fencing, to name a few.
Older Product Has Its Day
Manufacturing has also contributed to DFW’s momentum. While manufacturing uses don’t generate nearly as much demand as distribution does, the growth of this segment indicates a healthy market.
As manufacturing grows though, so does the demand for rail service, which poses a challenge as choices are limited. Much of the new construction does not have rail service, mostly because intermodal facilities handle the majority of rail traffic.
We have seen a resurgence in demand for 1980s vintage buildings with working rail lines over the last several years. Though rental rates have increased everywhere, as a percentage increase these older buildings have commanded even greater rent bumps.
One of the most dramatic indications over the last several years of the strong DFW market lies in pricing of older, smaller, well-located warehouse buildings in industrial areas such as the Trinity, Love Field and Brookhollow.
The previously conventional wisdom about functional obsolescence in these older buildings has mostly gone out the window. With small truck courts, low ceilings and minimal parking, many of these buildings were thought to be outdated and at one time could be purchased for far below reproduction costs.
Their resurgence has been truly amazing, as pricing for these assets has doubled and tripled over a relatively short period of time. Their centralized locations have proven useful for small, successful businesses that want to own their buildings.
The growth of last-mile warehouses for major retailers and e-commerce delivery has also had a huge impact on valuations of these centrally located warehouse buildings. Annual double-digit rate increases on some of these buildings is not unheard of. But with speed-to-market delivery being a top priority for users, the rental cost is often less important.
In summary, the old saying that a rising tide lifts all boats has never been more true here in the DFW metroplex. Leasing activity was very strong in 2019, with over 20 million square feet of positive absorption. More than 90 percent of warehouse leasing activity involved buildings over 200,000 square feet, which speaks to the ever-increasing size of most deals.
The volume of construction currently stands at almost 28 million square feet. At that pace of absorption versus construction, we could find ourselves with an overbuilt market in 2020 or 2021. However, given the amount of product available, tenants seeking a large warehouse would be wise to strongly consider DFW.
— By Allen Gump, SIOR, CCIM, executive vice president, Colliers International; and Allyson Gump Yost, associate vice president, Colliers International. This article first appeared in the February 2020 issue of Texas Real Estate Business magazine.