Texas Industrial Owners Adopt Short-Term Solutions for COVID-19
In response to the outbreak of COVID-19, the disease caused by the novel coronavirus, industrial landlords in Dallas-Fort Worth (DFW) are demonstrating greater flexibility on short-term lease structures in order to keep deals moving forward.
With most of the nation sheltering in place to stem the spread of the virus, e-commerce activity is accelerating, leading to greater demand for distribution and logistics services. In addition, supply chain operators that service essential industries — such as grocery, healthcare, construction and infrastructure — are working overtime to store and ship the necessary product to end users.
In addition, many of these suppliers are also carrying more inventory. This is because are at interest rates are at historic lows, making it cheaper to stockpile goods and equipment, and because the global healthcare crisis has caused demand for certain foods, household products and consumer goods to skyrocket.
All of this activity translates to short-term disruption in industrial real estate. Some deals are on hold, and the market is now seeing more unforeseen requirements from firms that need additional space for inventory storage, as well as from distribution and logistics users that are hiring more workers and shipping more product.
“Several larger distribution companies are still extremely busy getting product out the door, and we’re seeing a number of companies with larger requirements for six to 12 months and 200,000 square feet to accommodate an overflow of product,” says Matt Dornak, managing director of the industrial division at Stream Realty Partners’ Dallas office.
“Larger-term requirements with late 2020 or early 2021 commencements also continue to be active,” he adds. Where touring may be challenging for many tenants, due diligence continues for these requirements.
To keep these short-term deals alive, owners of warehouse and distribution properties in DFW are responding positively to the bigger picture and showing flexibility.
A Tight Market Already
Demand for warehouse and distribution space has surged in the metroplex during this cycle. The market’s vacancy stood at 5.8 percent at the end of the fourth quarter, according to CBRE. First-quarter 2020 data was not available at the time of this writing.
Huntley Luna, vice president of the office and industrial division at Henry S. Miller, notes that throughout the metroplex, there is still not enough quality industrial product to meet demand — as was the case before the outbreak of COVID-19.
“While landlords are undoubtedly more receptive to shorter-term deals right now, it’s such a tight market that we don’t always have the available product, especially in larger sizes,” he says. “In general, there just isn’t a ton of quality, turnkey space, and that’s a big reason that a lot of the new construction projects are still moving forward, especially more specialized facilities.”
Luna, whose background also includes investment sales, notes that the overall tightness of the DFW industrial market will also help keep these deals moving forward during the outbreak. The combination of sustained demand backed by exceptional population growth and capital that is historically plentiful and cheap bodes well for the long-term health of the DFW industrial investment market.
“Investors still need to place capital, and they still largely view DFW as a strong market with a stable economy and labor pool,” says Luna. In addition, he notes that recent volatility in the stock market, the typical long-term investment alternative to real estate, should keep capital sources flocking to well-located real estate opportunities in high-growth markets like DFW.
Supply-side concerns in DFW about meeting these new requirements are real, but are being mitigated by many landlords’ willingness to be flexible, says Dornak of Stream.
“Before COVID-19, finding space in DFW for a lot of these smaller requirements would have been next to impossible,” he says. “Fast forward a few weeks, and many landlords are looking at this as an opportunity to fill space immediately where able, given market uncertainty. With space that is vacant and flexible in the short-term, owners are more willing to look at those deals today than they were a few weeks ago.”
“Historically, when there’s major supply chain disruption, users end up increasing their inventory and potentially needing more space,” says Sharon Morrison, CEO of Frisco-based brokerage firm ESRP. “If they have space available, landlords would rather get users in there and start generating income. We’ve already seen landlords show more flexibility with rates, free rent concessions and commencement dates.”
Any short-term dips in occupancy will likely be felt in smaller, older product, as most newer, larger industrial spaces have tenants locked up for the foreseeable future, adds Morrison.
Kicking the Can
Short-term requests for additional space are also supplanting existing deals that centered on renewals or expansions as more companies look to kick the can down the road to gain a better sense of when the crisis will subside.
“We’ve had a lot of short-term requests for more space in response to COVID-19, and I’m sure there are more coming,” says Trey Fricke, managing director at Lee & Associates’ DFW office. “Many companies that haven’t signed a lease or were coming up for renewal are now asking for short-term extensions, usually between six to 18 months because they need to buy time.”
Requests for short-term extensions in lieu of long-term renewals make sense in a time of uncertainty, says Fricke, but they also serve as means of postponing rate increases that would likely have been written into the new lease.
“There’s an anticipation of a short-term drop in prices before we get back up and running,” he says. “So these requests are short-term hedges and opportunities to lock in lower rates for the long term if they can buy time.”
The spread of COVID-19 has brought about some changes in the manner in which these deals are executed. For example, representatives of industrial users are no longer flying in to the metroplex to tour spaces personally, but are moving ahead with their due diligence in site selection in expectation of doing more business later in 2020 or in early 2021. In other words, they’re positioning themselves for the rebound.
At the time of this writing, Dallas County had reported about 550 positive cases and 11 deaths.
Timing remains one of the biggest unknown variables that companies must grapple with during this healthcare crisis. But while nobody knows for certain when the rate of new cases will slow and businesses will be permitted to return to normal operations, there is comfort in knowing that many owners and operators are adjusting their short-term strategies in the name of a greater good.
In this case, the greater good involves maintaining adequate storage and distribution of critical products for essential industries to continue to provide their services. Industrial operations are the backbone through which that activity is made possible, and in DFW, landlords are doing their part to see it through.
“This crisis is bigger than any one company, and there’s obviously a lot of uncertainty about how long it will last,” says Dornak. “But right now, everyone is sort of playing on the same team.”
— By Taylor Williams. This article first appeared in the April 2020 issue of Texas Real Estate Business magazine.