| COVER STORY, AUGUST 2008
LONE STAR STILL RUNNING
Despite turmoil, Texas’ industrial market remains strong.
Coleman Wood
With a state the size of Texas, it is important to remember that what is true for the commercial real estate market of one city may not be true for others. The industrial sector of Texas is no exception, responding to the lagging economy in different ways, depending on the city and its main tenants. This month, Texas Real Estate Business sat down with industrial brokers from Dallas, Houston and Austin for a Q&A that paints a detailed picture of the current industrial sector.
Dallas-Fort Worth
Responding: Ken Wesson, managing principal of the Dallas office of Lee & Associates; and Dave Richards, managing director of the industrial practice for the Dallas office of Jones Lang LaSalle.
TREB: What is the current state of the Dallas-Fort Worth industrial market?
Wesson: By most of the national standards, the market is holding up great. We’re a 700 million-square-foot market, and vacancy rates are somewhere in the 9.5 to 10 percent range, depending on whose numbers you believe. We’ve had positive net absorption year-to-date.
I think in the last couple of years we may have gotten spoiled and keep expecting to see 15 to 17 million square feet of annual absorption, and that doesn’t always happen.
Richards: We didn’t absorb as many square feet in the first quarter of this year as we did in previous years, nor did we in the third or fourth quarters of 2007. So, we’re seeing a little but of softness in the market, and I attribute that to something that we’re seeing across the commercial real estate industry, and that is corporate America having a difficult time pulling the trigger on facility plans right now. We’re just not seeing a lot of decisions being made. I feel that in the second quarter we could have some increased rent activity. From a development standpoint, the developers are full steam ahead. We have a lot of square footage in the pipeline, mostly in warehousing.
TREB: Are there any development trends that you are noticing?
Wesson: New construction is slowing down considerably or being put off to the side for now. We’ve got somewhere in the neighborhood of 6 million square feet that were delivered in the first quarter, and I think 14 million square feet were under construction during the first part of this year. So a lot of activity is still going on. Most of that industrial development has centered either around DFW International Airport or down south in what people are referring to as the Dallas Logistics Hub. I think from a macro view, warehouses are clustering near ports, whether it’s an airport or an inland port, as a way to speed up the logistics cycle.
TREB: How are things on the brokerage side of the industry?
Richards: The irrational exuberance in the market is gone. You’re not seeing inexperienced buyers with cheap debt or credit lines running around and gobbling up everything at 20 or 30 percent above price. That never really happened in Texas or Dallas anyway. It happened in other markets like Arizona, California and Florida. You saw a lot of exuberance that was driven by cheap money and credit.
From our perspective, right now we just want to see the market moving. We just want to see velocity, because we’re mostly transactional based. I think that as we move through this credit crunch and the consolidation of the financial companies, some of these properties are going to come back to the market for sale at below-cost. There are so many opportunities for a value-add or opportunistic buyer to come in and buy these things.
TREB: Are there any notable projects currently underway?
Wesson: Duke Realty Corp. has a 1 million-square-foot spec building that’s complete off of Interstate 30, and that’s noteworthy only because of the sheer size of it. Not to detract from other developers and their projects, but we’ve got a bunch of really good developers and there’s a bunch of really good projects that have been built or are being built right now.
Richards: We’ve had two 1 million-square-foot buildings come out of the ground in the last year. We have a million square feet that came up down in Grand Prairie, and Majestic opened up their airport distribution center, which is another million-square-foot building. And both of those are just huge buildings.
TREB: How does the present industrial market in Dallas-Fort Worth compare to this time last year?
Wesson: We’ve definitely slowed down. While it’s true that summer is the traditional slow-down period, we’re slower than we were last year. People can only take so much bad news; I think people get pessimistic twice as fast as they get optimistic. Everybody is feeling the energy prices and, of course, the other facets of real estate, primarily steel and concrete, are expensive. Money has gotten a lot more expensive from a year ago and it’s harder to come by. Generally, deals are not getting done or getting pushed back. The ones that are getting done tend to be much smaller in size. Last year we were tracking 30 deals that were over 100,000 square feet, and right now it would probably be hard to find more than 10 legitimate deals that are over 100,000 square feet and are going make it by the end of the year.
In terms of vacancy we’ve probably creeped up around a percentage point. Some of that is new construction, and some of that is weaker net positive absorption.
Richards: It’s too early to call it at this point, but things are taking a break from a demand standpoint. I think we need another two quarters to really know whether or not the market is taking a rest or if it’s changing its direction. There’s a little bit of apprehension right now in looking at where the velocity is going to be in the market. I think we’re at a little bit of a rest, and I think we need to get through this political cycle and resolve what I think is becoming a commodity crisis driven by the devaluation of the dollar.
TREB: What are your predictions for the rest of the year?
Wesson: I think the summer’s going to be dead. We might get a little activity around late September, and then it’s going to slow down. I think everybody’s going to use the election as an excuse to do nothing. And I think there’s probably going to be some activity that runs from right after the elections up until mid-December. I don’t think we’re going to end the year with a bang; I think we’re going to end it with a whimper.
Richards: I kind of have high hopes for the fourth quarter of this year. All of the current manufacturers and retailers in the United States are going to look at their logistics chains, and they’re going to reevaluate it. Dallas has definitely become a larger player from a warehouse and logistics standpoint. I have high hopes for the fourth quarter, but I’m not holding my breath.
TREB: Any final thoughts?
Wesson: We’ve got 700 million square feet here in Dallas; that’s just a monster market. I absolutely do not believe that 700 million square feet worth of tenants are going to go out of business. There are still deals to be made, money to be made, tenants that need help, and landlords that need help. You just have to work a little harder, that’s all.
We all need to remember to be cautiously optimistic. I don’t think 2009 is going to be as bad as it was in 2002. I think we’ve got to remember that the markets always cycle, and to hang in there and stick with basic fundamentals, and a few years from now this will all be behind us.
Richards: If I could make a prediction, I think the foreign manufacturers are now looking to the U.S. as a cheap investment to open manufacturing facilities, especially if it’s highly technical manufacturing. I think there’s going to be a lot of foreign manufacturers looking at the weak dollar as an entry point to manufacturing in the U.S.
Austin
Responding: David Barber, industrial specialist for NAI Austin.
TREB: What is the current state of the industrial market in Austin?
Barber: After 1.7 million square feet of positive absorption in 2007, new construction outpaced absorption in the first half of 2008. As a result of this imbalance and two large relocations by Dell Computer to other parts of the United States, industrial vacancy increased 3 percentage points to 14 percent.
TREB: Are there any development trends that you are noticing?
Barber: Recently, there have been significantly more new construction deliveries in warehouse product versus flex. It is worth noting that new projects in close proximity to Austin’s new toll roads are currently experiencing better lease-up than their “in-field” counterparts. It will be interesting to see if this continues.
TREB: How are things on the brokerage side of the industry?
Barber: Positive. In general, call activity is up according to the brokers we spoke with during our mid-year Source report. The Austin MSA is still experiencing heavy interest from investors, and new companies are actively looking to locate to our market.
TREB: Are there any notable projects currently underway?
Barber: There is 1.2 million square feet of new construction ready for delivery between now and the end of 2008; roughly 60 percent of which is warehouse and 40 percent flex.
TREB: How does the present industrial market in Austin compare to this time last year?
Barber: Vacancy has increased in the warehouse segment due to new construction outpacing absorption, and vacancy for flex product has remained stable. Asking rental rates did not change in most cases during the first two quarters; however, a slight increase in concessions on new deals and renewals has been witnessed.
TREB: What are your predictions for the rest of the year?
Barber: NAI Austin has noticed that industrial absorption has been substantially higher in the second half of the year going back 6 years. Therefore, we’re inclined to predict this will happen in 2008, as well. However, uncertain financial times amidst a presidential election tend to suggest a more prudent approach; one where observation and time are perhaps the best tools for corporate decision-makers and their real estate professionals to lean on.
Houston
Responding: Jeff Lindenberger, associate with Houston-based McDade, Smith, Gould, Johnston, Mason + Company; Doug Nicholson, senior vice president of the Houston Investment/Industrial Services Group for Grubb & Ellis
TREB: What is the current state of the industrial market in Houston?
Lindenberger: Very Solid. Houston’s strong job growth, (over 90,000 jobs in 2007), oil prices north of $130 per barrel and natural gas trading above $12 MMbtu are major contributors to the strength of Houston’s industrial market.
Nicholson: Despite the slowing national economy, Houston’s industrial leasing market has remained active in 2008. During the second quarter, the industrial market posted nearly 1.6 million square feet of positive net absorption, as the mid-year absorption total grew to nearly 2.3 million square feet. Houston’s industrial market is on pace to have another solid year in 2008, as the local economy continues to be driven by the oil and gas boom, causing demand to remain strong.
TREB: Are there any development trends that you are noticing?
Lindenberger: Many national developers have entered the Houston market with their first projects and many other are circling, looking for the opportunity to do so. In the very recent past, there might have been five or six industrial developers building most of the bulk distribution product in Houston, and now that number is probably pushing 15 to 20. Houston is now on everyone’s radar.
Nicholson: New space deliveries totaled an astounding 4.6 million square feet during the second quarter of 2008, the majority being warehouse/distribution-type product. As a result, the warehouse/distribution sector saw vacancy increase by 80 basis points to 6.5 percent during the quarter as new construction deliveries outpaced quarterly demand. With the majority of new development built on a spec basis, developers are banking on strong user demand for industrial space continuing throughout 2008.
TREB: How are things on the brokerage side of the industry?
Lindenberger: Industrial leasing and sales are very strong through the halfway point in 2008. Many companies are expanding and there have recently been some very large leases executed, especially in the Southeast submarket.
Nicholson: Obviously, the financial condition of the economy is not helping the rest of the market, especially in the industrial investment and user sales side. But leasing activity is still robust and overall occupancy is still hovering at 93 to 94 percent.
TREB: Are there any notable projects currently underway?
Nicholson: Space under construction currently stands at nearly 7.5 million square feet, with over 4.5 million square feet of warehouse/distribution product underway.
The following are a few noteworthy projects underway:
• Bay Area Business Park, a 140-acre industrial project on Red Bluff Road & Bay Area Boulevard in Pasadena.
• Koll Development Company and Herbert Management Corporation have joined forces to launch a $120 million industrial development program. The first project will go vertical on 50 acres in far southeast Houston.
• Johnson Development Associates Inc. will begin construction during the third quarter on phase two of its 190-acre Republic Distribution Center.
• First Industrial Realty Trust has purchased 16 acres in the Far Southeast submarket and will begin construction soon on a 120,000 square foot spec building on eight acres, with delivery expected in the fourth quarter.
TREB: How does the present industrial market in Houston compare to this time last year?
Lindenberger: There is definitely more product in the pipeline and currently available. Rental rates are higher, due to increases in land and construction prices.
Nicholson: Despite positive tenant demand, overall vacancy has increased by 120 basis points to 6.7 percent, as new construction deliveries have outpaced demand. Within the past 12 months, Houston’s industrial market has added 10.8 million square feet of new industrial space, more than one-third of which has been fully leased. Also worth noting is that mid-year absorption in 2008 is nearly 2 million square feet below the 4.2 million square feet posted during the first half of 2007.
TREB: What are your predictions for the rest of the year?
Lindenberger: The strong local manufacturing sector that services the expanding energy and chemical industries, along with the increase in container traffic at both the Port of Houston and the airport, should lead to a strong second half of 2008.
Nicholson: Strong growth at the Port of Houston is expected to continue driving new industrial development. However, expect vacancy to rise due to the sheer amount of speculative product expected to come online during the next 12 to 18 months.
TREB: Any final thoughts?
Nicholson: A considerable amount of new space has hit the market within the past year. However, only a third of the new space has been leased thus far, a cause of concern to some landlords. If these new buildings sit dark for an extended period of time, landlords will be forced to become more aggressive, causing rents to decline and tenant concessions to increase.
Lindenberger: Based on what is going on in other places, I would not want to be any other place than Houston right now.
Hines REIT Acquires Three Dallas Industrial Buildings
DCT Industrial Trust has sold three industrial buildings in Dallas to Hines REIT for $64.5 million. The properties total 1.1 million square feet of industrial space and represent a first for Hines REIT in the Dallas/Fort Worth market.
The first two buildings are located in the Dallas/Fort Worth Airport submarket at 4050 and 4055 Corporate Dr. and combined total 643,429 square feet. The third building is located in Pinnacle Park, near the Dallas Central Business District. All three buildings were 100 percent leased at the time of sale, and tenants include Verizon Wireless, Kay Chemical and Harland Clarke.
“We are extremely pleased with the level of interest our Dallas assets received,” says Teresa Corral, senior vice president of Fund Management and Dispositions with DCT. “The strategic sale of these three operating properties further strengthens the company’s financial position for redeployment into growth opportunities.”
CB Richard Ellis’ Dallas office of Jack Fraker, vice chairman; Josh McArtor, vice president; and Conor Feeney, associate, represented the seller. The buyer was represented in-house.
“This sale demonstrates the strength of the DFW Metroplex as an industrial investment market,” Fraker says. “Even during a somewhat volatile point in the capital markets, these core assets were hotly pursued.”
DCT Industrial Trust owns, operates and develops high-quality bulk distribution and light industrial properties in high-volume distribution markets throughout the United States and Mexico.
— Cara Aliek |
Logistics and the Industrial Market: A Look at the Growing Importance of the Bond Between the Two Industries
Stop into any industrial broker’s office these days and, in addition to building plans, financial models and contract documents, you’ll likely find a copy of the latest Traffic World magazine sitting on the desk. Why has the marriage between the logistics industry and commercial real estate becoming increasingly important over the past few years?
The combination of expensive fuel, increased traffic and congestion, and high labor costs at established ports like Long Beach and Los Angeles, California, is opening more port options and shipping routes than ever before. These and other factors have led to places like Jacksonville, Florida, and Houston becoming viable cargo port alternatives, and other cities like Dallas and San Antonio emerging as important inland ports in the supply chain.
All companies must think globally when it comes to the selection of warehouse locations and effective trade routes. Compared to trade 10 years ago, when a large majority of goods from Asia came through the L.A./Long Beach ports and then were shipped east on railways or by truck, companies now have additional and cost effective options when it comes to shipping routes.
Port development across the United States continues to increase even through the current economic downturn, according to the National Retail Federation and Global Insight. In addition to L.A./Long Beach, goods also enter the United States through traditional ports in Oakland, California; Seattle; Baltimore; Houston; and New York/New Jersey. The rapid increase in cargo volume (global containerized volume has grown from approximately 10, 20-foot equivalent units (TEUs) in 1980 to 125 TEUs in 2007) has led to the emergence of new ports in secondary areas like Jacksonville; Mobile, Alabama; Hampton Roads, Virginia; Charleston, South Carolina; and Savannah, Georgia.
Canada has experienced similar increases in traffic due to port congestion in L.A./Long Beach, and has been expanding existing ports to support traffic in Vancouver, Montreal, Halifax, Fraser River Port, Saint John, Toronto, and Prince Rupert Harbour in British Columbia. Prince Rupert authorities’ goal is to be the leading trade corridor gateway between North American (specifically Middle America) and Asian markets.
Ports in Mexico like Lazaro Cardenas have seen steep increases in the amount of goods coming in from Asia. These goods travel to Monterrey, Mexico, and continue to Texas cities, including San Antonio and Dallas, on to Kansas City and eventually to Chicago. And in a few years, an expanded Panama Canal will open up Gulf Coast ports like the Port of Houston for super-sized Asian container ships. The Port of Houston recently doubled its container capacity and is already the No. 1 port in the U.S. in foreign tonnage. Port traffic is up 4.6 percent year-to-date and up 19 percent over the past 5 years, according to the Houston Port Authority.
With the flood of goods coming from the south, North Texas is adapting to meet these new demands with the continued evolution of intermodal facilities such as the Alliance Global Logistics Hub, located in north Fort Worth, and Dallas Logistics Hub, located in Southern Dallas County.
Most economists would agree that intermodal ports are key drivers of economic growth. They act as a means to increase coastal port capacities by freeing up space near the ports and moving goods inland. Most intermodals typically function as a goods clearinghouse. At intermodals, goods are sorted by destination and are redeployed on freight trains or trucks. Development of distribution facilities and other peripheral port services in and around these inland ports lead to significant job growth opportunities. The improved infrastructure needed to support these developments benefits the residents and other businesses in the area as well.
In north Fort Worth, just 15 miles from DFW International Airport, companies continue to locate their warehouses in proximity to the Alliance Global Logistics Hub, an inland port that offers multi-modal transportation options, including BNSF (Burlington Northern Santa Fe) Railway’s Alliance Intermodal Facility, two Class I rail lines, Fort Worth Alliance Airport — the world’s first 100 percent industrial airport, connecting state and interstate highways and the FedEx Southwest Regional Sort Hub. Another increasingly popular location for companies’ distribution hubs in North Texas is the Dallas Logistics Hub, an inland port located 12 miles south of downtown Dallas adjacent to four major highways.
The closer a company can be to one of these intermodal facilities, the more cost effective its supply chain economics will be. The more companies can rely on rail, as opposed to heavy truck transportation, the less they have to be concerned with high fuel cost and delays due to traffic on the roadways. In addition, many companies are finding that it is more cost effective to have numerous smaller satellite warehouses instead of large regional ones. The cost of trucking goods to local stores from a local site can save time and money compared to transporting goods from a more centralized site.
Logistics professionals also consider the smaller costs that add up over time when choosing locations for their warehouses. With the increase in gas prices, it has become increasingly important to study how many stop lights a truck has to go through after it collects the goods from the railway and delivers them to the warehouse. For example, if a truck has to wait at five to six stoplights before it arrives at the warehouse from the airport or railway, and there are 50 trucks making deliveries each day, the cost of gas becomes a very real issue.
Gone are the days when industrial real estate professionals only needed to know about clearance heights and the number of docking stations a warehouse can provide for the customer. In today’s competitive market, brokers need to be able to understand and analyze distribution patterns and requirements for goods movement in order to present a well-rounded cost analysis. Texas has successfully positioned itself to be an important part of the global supply chain through the promotion and expansion of its major coastal port (Houston) and its development of significant inland ports (Dallas/Fort Worth and San Antonio). The combination of transportation options, low costs of doing business and central location creates a win-win situation for corporate America and the state of Texas.
— Jack Fraker is vice chairman of CB Richard Ellis. |
Duke to Build 750,000-Square-Foot Distribution Center for Caterpillar
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Duke Realty Corporation is developing Caterpillar’s 750,000-square-foot industrial parts and distribution center in Waco, Texas. Completion is scheduled for early 2009.
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Construction has begun for Caterpillar’s 750,000-square-foot industrial parts and distribution center in Waco, Texas. Duke Realty Corp. is developing the project.
The build-to-suit project will be situated on a 77-acre site that Caterpillar owns between Bagby Road and Gateway Boulevard. Duke will incorporate sustainable elements into the construction of the building so that Leadership in Energy and Environmental Design (LEED) certification can be obtained from the U.S. Green Building Council.
The cross-docked building will measure 520 feet by 1,350 feet and will feature 32-foot ceiling heights, 35 dock doors, 50 feet by 50 feet bay spacing with 60 feet spacing at the dock doors and 15,725 square feet of office space.
“We are pleased to be selected by Caterpillar to construct this facility,” said Teddy Peinado, regional vice president of construction with Duke.
Dallas-based GSR Andrade is serving as architect. The project is scheduled for completion in early 2009.
— Cara Aliek |
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