Spec Industrial Development Accelerates Throughout Texas
Industrial developers throughout the major markets of Texas are hustling to acquire and entitle land, arrange construction financing and break ground on projects to meet ever-growing requests for an increasingly diverse group of users.
Accelerated demand for e-commerce and logistics services and sustained population growth ensure that new, well-located industrial spaces will be absorbed as soon as they come on line — if not before then. Developers are increasing the proportion of spec projects within their portfolios in response to this.
A recent example of such a project is the 1.3 million-square-foot Fort Worth Logistics Hub, a spec project by locally based developer VanTrust Real Estate that is designed to meet rising demand from logistics users. The developer broke ground on Phase I of the project, which is located in South Fort Worth, in late October and expects to deliver a 670,941-square-foot building in July 2021.
“Right now, nearly all of our projects across 10 major markets, including Dallas-Fort Worth (DFW) are being developed on speculative basis,” says Rob Huthnance, partner at California-based investment and development firm CT Realty. “As long as the level of tenant demand remains at or near where it is now, there will continue to be a need for new inventory.”
“Companies across all industries are constantly looking to make their supply chains more efficient,” he adds. “They’re doing that by occupying larger regional warehouses and distribution centers that have the features and technology necessary to get their goods to market quickly.”
In September, CT Realty acquired land in the South Stemmons submarket of Dallas for the development of Stadium Logistics Center. Valued at $40 million, the project will feature a 330,000-square-foot warehouse and distribution building with 36-foot clear heights and a front-park/rear-load configuration. Completion is slated for September 2021.
That project will be developed on an 18.4-acre infill site. Such tracts are in short supply these days, but in some cases the savings on transportation costs on the back end make the prices for infill sites well-worth the premiums.
“Real estate costs typically only make up approximately 10 percent of the supply chain expenses,” explains Bill Burton, executive vice president at Hillwood. “The rest is primarily in transportation and labor. So to the extent you can offset or mitigate some of the transportation and labor costs, you create a more appealing operation within a high-quality, flexible building, which also adds value at the end of the day. That is the
Sources agree that labor remains a top priority for industrial users. But even with the unemployment rate more than double what is was pre-pandemic, qualified industrial workers are still in short supply relative to the number of job openings.
Burton says that Hillwood, along with Workforce Solutions for Tarrant County and North Central Texas, hosted a virtual job fair this year for 33 of its users in which 1,700 prospective employees attended in hopes of landing one of more than 2,000 open jobs.
Spotlight on DFW
Unsurprisingly, the DFW metroplex is the epitomizing example of a market where industrial rents have quickly recovered from any short-term declines brought on by the tabling or disintegration of deals in March and April.
According to a recent report from Newmark, the metroplex closed the third quarter with a 6.5 percent industrial vacancy rate, with 604 leases transacted in that period, compared to 486 in the second quarter. The average asking rent stood at $6.99 per square foot at the end of the most recent quarter, up from $6.19 per square foot a year ago.
“If you woke up in June or July of this year and looked at DFW industrial market activity, you wouldn’t have known COVID-19 existed,” says Seth Koschak, partner at Stream Realty Partner’s Fort Worth office.
“As of today, activity levels for inquiries, tours, requests for proposals, etc. are at or above
pre-COVID-19 numbers, except for signed new deals. Given this demand, we witnessed strong new transaction activity during the third quarter and expect the fourth quarter of this year and the first half of next year to be robust.”
Koschak adds that on the supply side of the equation, construction for all major industrial projects continued unabated as an essential activity or service during COVID. While there was a 90-day period where new construction starts were essentially paused, relatively few of the land deals that were under contract when COVID-19 hit fell apart, he says.
Newmark’s report also shows that at 5.8 million and 3.6 million square feet, respectively, the quarterly paces of new deliveries and absorption are not quite as close as they were pre-pandemic, which should be expected. Nonetheless, it remains clear that new space is being absorbed. As a result, the only real constraints to growth are supplies of land and labor — and perhaps a dash of anxiety about the future of the economy.
Other Sources of Demand
While deals for e-commerce and third-party logistics (3PL) users continue to be the biggest drivers of net absorption of speculative space, certain types of manufacturers are also contributing, says Koschak.
“Manufacturing requirements are increasing in DFW, but that’s not a process that happens overnight,” he says. “Manufacturing facilities require more infrastructure, design and sophisticated buildings, but we are encouraged by the fact that inquiries are increasing and the local municipalities and economic development groups are fielding more requests as well for manufacturing space.“
“Some of that manufacturer demand is users, including government contracts, to produce personal protective equipment,” he continues. “Several of these requirements are looking for term leases to manufacture and house PPE equipment, even if they don’t know when it will be used, because they want to avoid getting caught in the same situation they were in when COVID-19 hit with a lack of safety equipment.”
In Austin, manufacturers of specialized parts for the city’s vast base of tech industries are fueling demand for industrial space along with e-commerce and 3PL companies, says Brian Masterman, senior vice president at Majestic Realty Co.
“We have seen increased interest from manufacturers of technology components such as 5G equipment and electric car parts [for Tesla’s new $1 billion Gigafactory],” says Masterman. “We’ve also seen solid demand from companies that fabricate and assemble inputs for new construction, such as water lines, fire systems and precast concrete, as well as companies that distribute raw materials for home improvements.”
California-based Majestic is the developer behind Kyle Crossing Business Park in metro Austin, where Amazon recently signed a lease to open a 308,000-square-foot sortation center. Home improvement retailer Lowe’s also signed a lease to occupy a 120,000-square-foot distribution center at the 40-acre property in late September.
In addition, demand for industrial space from suppliers of construction materials and everyday soft goods for the home or business is still playing a part in both DFW and Austin. There is a direct correlation between population and industrial space needs. With both markets still seeing strong population growth, there is simply more product of an everyday consumable nature that needs to be stored and shipped.
“Food, pharmaceuticals, furniture, electronics — all of those categories are very active right now,” says Burton of Hillwood. He notes that his company, as of the end of the third quarter, had transacted over 4.5 million square feet of leasing this year in the AllianceTexas project alone, with about two-thirds of activity coming in the form of renewals and the remainder as new leasing.
“The activity we see is very focused and diligent. There’s less tire-kicking, and users are every focused on executing,” he says.
Lenders Stand Ready
Lenders’ appetites to finance spec industrial deals that can be marketed to e-commerce and third-party logistics users, as well as other supply chain operators across a range of industries, are at all-time highs.
In addition, with capital sources shying away from asset classes whose cash flows have been more acutely impacted by COVID-19 — namely retail, office and hospitality — lenders are in some cases competing with each other to finance new speculative industrial construction. And when lenders compete, borrowers win.
Preston Herold, president of Dallas-based Hunt Southwest, addressed the trend in the market by revealing that his firm recently put a site on the east side of the metroplex under contract.
“We’ve had crazy interest from lenders to finance this project due to the strength of the DFW industrial market and our sponsorship,” he says. “Interest from lenders is especially strong because this site can support a building larger than 500,000 square feet, and it’s in those buildings that are larger than 500,000 square feet that we see voracious tenant demand.”
Herold also says that with well-capitalized and experienced borrowers, lenders have generally been very accommodating and flexible with regard to projects that were already under construction but then paused by COVID-19.
When the pandemic took hold, Hunt Southwest decided to pause one projects on which it had already broken ground: a 500,000-square-foot building in Houston. That decision was based on conditions unique to that market, but the lender worked with the firm to modify the loan to the new construction schedule.
“Lenders have put a mild governor on lending for new construction as rates have increased slightly in the last six to eight months,” says Huthnance of CT Realty. “But all the lenders we work with still have fierce appetites for industrial and distribution product, so we haven’t seen much change in how those deals are approached.”
“Lenders vary from one to the next, but by and large, they’re still looking at quality of sponsorship and credit in their underwriting,” adds Burton. “When the pandemic began, most banks understandably reined it in. However, user and development activity has increased, and the banks have remained very competitive.”
As was the case before the pandemic, it’s a good time to be an industrial developer. The movements by consumers to increase online shopping and by producers to compress their supply chain costs have only gained momentum throughout the public health crisis.
The presence of modern industrial features, from higher clear heights for increased storage capacity and additional land for trailer parking to maximize distribution efforts, goes a long way in merging the logistical gap between how consumers demand products and how producers supply them.
It can be challenging to quantify just how important well-located, modern industrial spaces can be in streamlining supply chain efficiencies. But in high-growth markets like DFW, a healthy pace of absorption in the face of booming supply growth is a pretty strong indicator of the staying power of those properties.
“To look forward you have to look backward, and we never thought we’d hit 20 million square feet of net absorption through three quarters of the year,” says Herold. “If that’s what the market is doing during a pullback period, what’s it going to do when things begin to fully recover? We don’t know for sure, but if you think demand will accelerate beyond where it is now, you should be out securing as many sites as possible.”
— This article originally appeared in the October 2020 issue of Texas Real Estate Business magazine.