DALLAS — The Dallas industrial market is on fire, as a number of industry professionals repeatedly pointed out during the InterFace DFW Industrial conference. Held on Sept. 4 at the Westin Galleria Hotel in Dallas, the event drew more than 200 people in its inaugural year.
Demand for industrial real estate from tenants, investors and lenders is strong enough to insulate the Dallas market from capitulation, even if the U.S. economy enters a recession, which some economists think may still be a ways off.
During the event’s lenders and investors panel, speakers credited strong job and population growth in Dallas for this market insulation. Annually, the metroplex has added roughly 100,000 people and 75,000 jobs for the past several years.
The market boasts a vacancy rate of 6 percent even with more than 30 million square feet of space under construction, according to CoStar Group. And tenant demand in Dallas continues to surge as well, fueling 12-month rent growth of 5.6 percent.
Nikki Gibson, senior counsel at Bell Nunnally, moderated the panel.
Market Evolution
Central to the panel’s discussion as to why the Dallas-Fort Worth (DFW) industrial market is likely to weather severe economic storms was the notion that the metroplex is simply a different market today than it was in the recent past.
“Even as recently as 2010, this was still considered a secondary market,” said panelist Bobby Weinberg, senior vice president at NorthMarq’s Dallas office. “International investors and big pension funds that got crushed buying in Dallas in the ‘80s or ‘90s still view the market similarly, but it’s different. Yields are lower because more investors are targeting this market, but it’s really an exciting time to be positioned where we are in DFW.”
Panelist Brant Brown, CFO and COO of locally based investment firm Westmount Realty Capital, concurred with this view.
“There’s been a change in the story,” said Brown. “People who have been in Dallas for 20 or 30 years see it differently from those who look at it from the last five years forward. The economics are greatly different today, and if you don’t adjust to where it is today from where it was in the past, you’re going to be chasing a lot of deals for a long time.”
Employing a commonly used baseball analogy, Brown stated that the industrial market is more likely in the 25th inning than the ninth, though he added that it’s anyone’s guess as to how much longer this rate of growth could continue. Brown also said that although investment demand remains strong, the market’s rapid ascension to Tier-1 status has some buyers, particularly institutional ones, still approaching DFW industrial deals with caution.
“The institutional investors aren’t exactly sure what’s happening in Dallas, so their return expectations haven’t adjusted to where assets are trading today,” said Brown. “Deals can be brought to market at 30 percent vacancy and be priced as if the property was full. Going to investors and explaining that that’s how this market works today and getting them comfortable with that can be a challenge, so you’re seeing smaller groups be disproportionate buyers in Dallas.”
A Complete Package
Multiple panelists noted that the market is clicking on virtually every front. The combined effects of such a complete performance on the leasing, development, investment and lending fronts provide cushion against recession harbingers like trade wars, stock market volatility and inverted yield curves.
“At this point, there’s nothing to indicate that things are going to slow down in the Dallas industrial market,” said Brown. “Lenders are throwing tons of capital into the system. Investors still have strong appetites. Tenants are still trying to take on space — all the fundamentals are there. But this is also where you need to be careful and not get ahead of your skis.”
Panelist Chris Powers, CEO of Fort Capital, a Fort Worth-based investment firm focused on Class B industrial product, pointed to fundamental aspects of consumer behavior as a key source of confidence in the performance of industrial properties, for both DFW and the country.
“Industrial has so many tailwinds at its back,” said Powers. “As several people in our industry have noted, for every billion-dollar increase in online sales, there’s more than 1 million square feet of industrial space needed to meet that demand. So many companies have direct-to-consumer delivery models, and all of that product is making its way through an industrial facility.”
Powers added that the positive effects of e-commerce are becoming increasingly exclusive to industrial properties.
“When you think about the way we shop and whether it will change or slow down anytime soon, you know that industrial tops of the list of impacted property types,” he said. “Anything can happen in the short run but in the long run, we just cannot find a reason as to why Texas industrial won’t be a very prosperous place to be.”
Investors on the panel shared arguments in favor of both holding and selling under current market conditions, ultimately acknowledging such decisions are ultimately factors of each firm’s long-term investment strategy. Although prices on industrial assets in major markets like DFW are hitting record highs, companies that don’t have an immediate need to free up capital could see those prices rise even higher over the next 10 years.
Lenders Can’t Get Enough Industrial
Lenders continue to compete among themselves to finance industrial deals because the cash flows for these properties, in the form of rising rents, continue to attract local banks, life companies, bridge lenders and CMBS firms alike.
“As a lender, we’re seeing a lot of deal flow,” said panelist Tim Madigan, commercial loan originator at Alliant Credit Union. “It’s a preferred asset class and one that’s considered to be more stable over the long run, so there’s a lot of competition for those assets.”
Weinberg of NorthMarq noted that the rapid decline in the 10-year Treasury yield — a 50 basis point drop in August alone — is also creating disruption and contributing to stronger demand from both lenders and borrowers for industrial product.
“The decline in the 10-year [bond yield] has caused some short-term volatility,” said Weinberg. “And while spreads have come down a little bit, all-in coupon rates are less than they were a few months ago for core product. And we’re hearing that lenders are still underallocated on industrial. Even in this market, they can’t find enough product to lend on.”
Madigan stated that his firm would also like to see more industrial loans in its portfolio. But he cautioned against being overly aggressive when dealing with a market that seemingly checks every box.
“We’re still seeing some great opportunities on the lending front,” said Madigan. “But it’s critical to maintain the basic blocking and tackling of lending and borrowing. If you do that, you’ll be able to weather any storm and take advantage of any future improvement in the market.”
— Taylor Williams