TEXAS SNAPSHOT, APRIL 2011

Dallas/Fort Worth Industrial Market

The Dallas/Fort Worth industrial market appears to be getting stronger because the business environment is treading carefully along a soft bottom rather than continuing to fall; and new construction largely ceased in 2009, forcing property owners to concentrate on leasing existing product.

Statistically, the vacancy rate was 13.5 percent at the end of 2010, a slight increase from 12.5 percent a year earlier. While absorption remains negative and vacant space is increasing, it is at a slower pace in 2010 than in 2009: Negative absorption was 1.8 million square feet for 2009 but dropped to 474,000 square feet in 2010.

In 2009, tenants largely stopped making long-term decisions, but early 2010 saw tenants become more pro-active, implementing blend-and-extend strategies to gain short-term savings in exchange for early lease renewals at lower rates. As 2010 progressed, tenants became more confident and began taking advantage of lower rents available in the market, locking in longer lease terms.

Those lower rents are tied to landlords becoming more realistic about what it takes to compete in this economy; i.e., dropping rates to capture business. REITs in particular have been aggressive in capturing deals to stabilize their portfolios, and some fund advisors have also become aggressive. Merchant developers with construction loans, however, have been somewhat constrained, unable to compete in most cases, because they have to make deals that actually generate a profit so they can either sell or refinance.

Competition for tenants remains the issue. With developers challenged to get their buildings leased, competition from other developers has caused lower rental rates and higher concessions. Thus, tenants are looking for greater flexibility and are either negotiating shorter-term leases or long-term leases with early termination options. Low rents, high concessions and a short lease commitment is a difficult business plan for any developer.

For property sales, occupier transactions have been slow because financing remains tight. That will be the case until the federal government makes it less attractive for banks to loan money to the government and begins encouraging lending to business. Investment sales did pick up through 2010, and investment returns are beginning to drop as capital competes for quality product. This trend will likely continue because real estate remains a safer choice than the stock market.

One trend we expect to see will be ownership changes, with major properties changing hands as lenders enforce some of their lending requirements. A lot of that will apply to land. For example, the Dallas Logistics Hub  in Wilmer-Hutchins has been in bankruptcy, and we will have to see how that situation plays out. We believe lenders will start to be more proactive in dealing with some of these portfolios.

For new construction, the recession largely halted speculative development for the past 2 years and build-to-suit activity has been limited. The long-term effect may be increased rents as capital requires the market to improve, so that sound, profitable development fundamentals are in place before capital is released for spec development. Vacancy rates will have to drop well below 10 percent before rents increase enough to justify new development.

Duke Realty is developing the 1 million-square-foot Whirlpool distribution center at First Park DalPort in Wilmer, Texas. Rendering courtesy of Duke Realty via Cushman & Wakefield of Texas.

The 1.02 million-square-foot, build-to-suit Whirlpool distribution center in Wilmer is the biggest project in the works right now. Duke Realty is developing the distribution center for Whirlpool as a consolidation of several smaller warehouses in North Texas. Other than that, the pipeline is a bit empty for big-box distribution centers.

Existing product will be difficult to lease up, particularly with rising fuel prices. Looking ahead, those rising fuel prices will have a major impact. As transportation and power costs rise, shippers and manufacturers will struggle to adjust. With disposable income increasingly absorbed by fuel costs, retailers will be impacted, causing a ripple effect along the entire supply chain. Whatever can be done to keep fuel costs down will be good for the overall economy, and as the economy strengthens, that will be good for activity in this market.

The area surrounding the Dallas-Fort Worth International Airport, historically one of the strongest, has been the most active. It's safe, people like it, it's close to transportation,  and it's where decision-makers land when they arrive to make a real estate transaction. Another historically strong area that should rebound well is Alliance, which is also in close proximity to the Airport as well as the BNSF intermodal terminal. The southern market, encompassing the Wilmer-Hutchins region along Interstates 20, 35 and 45, near the Union Pacific intermodal terminal, is also emerging.

— Daniel Cook is senior director of Cushman & Wakefield of Texas, Inc.

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