In the greater Fort Worth commercial real estate market, there was a scarcity of industrial speculative development until 2007-2008. A number of submarkets saw projects go vertical at this time, including Alliance, North Fort Worth and South Fort Worth.
The results were mixed. While there were some successes, a number of developers found themselves at the mercy of unfortunate timing. Deal velocity slowed, leaving well-positioned buildings competing for the same tenants. This resulted in unanticipated, extended vacancy time frames and generous tenant concessions.
Fast forward to 2017 — 10 years after the last cycle — and we are in the midst of an even more ambitious round of speculative development. Although many would say we are in the late innings of this real estate upswing, the number of new starts under construction or announced across Fort Worth paints a different picture.
Todd Hubbard, NAI Robert Lynn
Is the continued construction justified, or is this another example of developers falling in love with the market fundamentals and not paying enough attention to market-specific deal velocity?
According to the U.S. Census Bureau, Fort Worth’s population has grown 60 percent since 2000, making it the 16th-largest city in the country and the fastest-growing among the 20 largest cities in the country.
These rankings do not take into account the populations of neighboring suburban cities and their tremendous growth, which contributes to the greater Fort Worth industrial real estate market. Consequently, this area is often an afterthought when the greater Dallas-Fort Worth deal activity is discussed.
However, there have been numerous headline deals throughout the Fort Worth area in this industrial cycle, including the relocation of Farmer Brothers coffee company from California to Northlake, along with the major expansion of Wesco Aircraft on the city’s south side.
Fort Worth also won a Facebook data center project, as well as industrial leases for big box retailers like S&S Activewear, Walmart, Camping World and Dematic, to name a few. The market has also benefitted from the activity of third-party logistics providers, which has led to large industrial footprints in Fort Worth for the likes of Lego Systems and Campbell’s Soup.
This run of speculative property development started around 2014 and has included projects in virtually all areas of the greater Fort Worth industrial market.
The natural tendency is to compare cycles, and that comparison creates a cynical view that past mistakes are being repeated. Those cynics will say that there are too many buildings going up at one time and that inevitable market correction is upon us. Once that correction hits, there will be a bloodbath for the few tenants that are in the market.
The flaw in this line of thinking lies in the fact that absorption of industrial properties has been at historically high levels for some time, and the city has never seen the rate of population growth currently in place.
The shift to e-commerce cannot be disputed; more and more products are being delivered to consumers’ homes, and speed of delivery is the name of the game. Inevitably, more people leads to a greater need for distribution centers to be able to service those households.
We also have a strong initiative from the current administration to bring jobs back to the U.S. We have seen Texas’ business-friendly environment thrive during this real estate cycle, which has played a major role in the migration of businesses from other parts of the country to Texas. In addition to the headliners, the relocations of many small businesses cumulatively make a large impact.
Dallas/Fort Worth has been a major player in this. Leaders of Fort Worth and the surrounding communities have embraced relocations and have been very proactive and creative in selling what the area has to offer: a diverse population base with a strong labor pool, affordable housing, close proximities to interstates and excellent infrastructure for business growth. These are some of the main reasons that developers have been so ambitious.
Many of these players are new to the market, but we also see developers that have long-term land holdings taking part in this cycle. Buying existing modern warehouses is almost impossible and with cap rates at historic lows, these developers from outside of the market understand that the most realistic point of entry involves building from the ground up. The market lease comps are currently showing that rates are up, and that annual rental bumps have become a market standard.
Key players in the Greater Fort Worth industrial speculative game include Hillwood, IDI Gazeley, TCRG, Majestic Realty, Johnson Development, Crow Holdings, Trammell Crow, Scannell, Hunt Southwest and Ridge Development. Facilities generally range from 200,000 to upwards of 1 million square feet — building anything smaller does not result in the economies of scale required to make the required returns.
For buildings constructed during this cycle, the emphasis is on features like higher ceilings, more trailer parking, increased employee parking, better natural lighting and infrastructure to support the increased demand for HVAC warehouses. With a competitive labor market, tenants are trying to create an environment that allows for them to recruit.
E-commerce facilities also have a set of unique requirements that encompass many of those listed above. Developers remain keenly aware of those needs as they plan.
Time will tell as to whether the continued speculative construction in the perceived late stages of this cycle was overly ambitious or if the cynics underestimated the factors of unprecedented population growth and the new realities of e-commerce.
Regardless, this cycle has spotlighted many success stories and new fundamentals that have changed the game. As we head into 2018, we remain fortunate to live in the great state of Texas and to be a part of the greater Fort Worth industrial market.
— By Todd Hubbard, Fort Worth President, NAI Robert Lynn. This article first appeared in the October 2017 issue of Texas Real Estate Business magazine.