Diverse Mix of Industries Propels Dallas Industrial Market to New Heights
Until about six years ago, the Dallas-Fort Worth (DFW) industrial market was considered a second-tier market, lagging behind the likes of New York-New Jersey, Chicago and Los Angeles in terms of investor interest and demand.
Today, the metroplex is not only holding its own with the traditional gateway markets, but in some cases surpassing them, thanks to growth from an exceptionally diverse group of tenants and industries.
Natural population growth throughout North Texas has prompted stronger demand for industrial space across a range of user bases: e-commerce, global logistics, consumer products, building materials, pharmaceuticals, food, furniture, aviation.
Some notable, six-figure leases that have been executed in the metroplex over the last 12 months and which reflect the diversity of tenant demand — as well as the geographic range of submarkets seeing strong activity — include the following:
Smuckers (1.1 million square feet in south Dallas), furniture provider Steelcase (618,000 square feet in Carrollton), marketing firm Taylor Communications (232,000 square feet in south Dallas), ITW Food Equipment (184,000 square feet in Fort Worth), Alliance Glazing (137,000 square feet in Garland), Panoramic Doors (127,500 square feet in Fort Worth) and CEVA Logistics U.S. (100,000 square feet in Coppell).
As these deals illustrate, it is truly a case of “no industry left behind.” And while the market has been slowly evolving into a major regional distribution hub over the last 20 years, the smattering of different types of users currently looking to either enter or expand in DFW has solidified the market’s role in that regard.
In addition to economic diversity and balance, Dallas boasts a strong supply of modernized product. And although it always seems as if we’re running out of land for new development, the reality is that DFW’s land availability is positioned to be a key factor in the market’s long-term growth and potential eclipsing of larger markets.
Encouraged by strong fundamentals, developers are making more aggressive pushes into submarkets further removed from the urban core. By and large, their efforts have been met with success.
Many submarkets that have traditionally fielded the strongest demand for industrial space have become saturated; there is simply no more land for new projects in areas like Valwood and the Stemmons Corridor. South Dallas still has land available for new development, but is still absorbing the high volume of inventory that has been delivered over the past two years.
Throughout the 1990s and 2000s, Hillwood retained something of a monopoly on industrial development in north Fort Worth. Today, there are at least a dozen developers either actively looking for sites of underway on construction of new projects in the north Fort Worth-Roanoke-Northgate area.
DFW International Airport is also contributing more supply to the market. The airport has opened up approximately 800 acres on the south side of its campus, creating more available space for lease in a centrally located area with proximity to key pieces of infrastructure.
The pace of rent growth has been robust throughout the past five years, typically clocking in somewhere between 3 and 4 percent on a year-over-year basis. We expect the pace of rent growth to begin to flatten over the next 12 months, although the development pipeline is keeping pace with demand and ensuring the market stays quite close to equilibrium.
In addition, building costs have begun to level off across the market, and whiles rates of rent growth should flatten, they almost certainly won’t pull back. Gone are the days of five-year, flat-rate leases — most all industrial leases across the metroplex are now executed with 2 to 3 percent rent growth built into them.
A strong supply of modernized product — another positive byproduct of the market’s exceptional growth over the last five years — also ensures that rental growth rates should stay positive over the next couple years.
In addition, construction costs have recently begun to pull back, suggesting that the pace of positive rent growth will be more modest in the coming months.
Healthier rents reflect healthier cash flows, which in turn translate to higher sales prices and greater investor demand. Much like the tenancy for industrial assets, the buyer pool is quite diverse, and properties that traded for $25 to $30 per square foot five years ago are now commanding double those amounts.
In summary, a strong availability of land and labor, paired with a low cost of doing business and explosive rates of job and population growth, all but guarantee the metroplex’s industrial sector is poised to continue growing and remain a critical distribution hub, regardless of what happens with the broader economy.
According to the latest data from CoStar Group, the Dallas industrial market has a healthy vacancy rate of 6.1 percent. The market has seen about 28 million square feet of new deliveries over the past 12 months and 23.4 million square feet of absorption. This level of balance indicates that the market is also poised to continue its expansion even if some of the key industries clamoring for space experience their own slowdowns.
— By Rick Medinis, SIOR, president of industrial division, NAI Robert Lynn. This article first appeared in the August 2019 issue of Texas Real Estate Business magazine.