| COVER STORY, AUGUST 2010
AN INDUSTRIAL-STRENGTH RENEWAL
Brokers throughout the state comment on the rising tide of the industrial market.
Compiled by Jon Ross
For the August issue of Texas Real Estate Business, brokers in key cities around the state responded to a seemingly-simple task: write 500 words about the current state of the industrial market in your area. The results are as different as the cities themselves. But the one thing that is certain is that industrial commercial real estate in Texas is on the up swing.
Dallas
From most indications, the Dallas industrial market seems to be turning the corner. Overall vacancy dropped from 12 percent to 11.9 percent with positive net absorption of 656,990 square feet. However, this optimistic news is a function of the lack of development in the metroplex during the past quarter. During the past 5 years, developers built almost 64 million square feet of industrial product, but only one building (9,960 square feet) delivered in the second quarter. Very little product is under construction or is expected to be developed in the near future.
Although the aera seems to be coming back around, certain submarkets are being hit harder than others. These are typically the newer submarkets where landlords have a difficult time competing on price with landlords in the older submarkets. Tenants have become wise to owner’s rental incentives, shying away from free rent and instead seeking reductions in the face rental rate. Because there is a glut of product available throughout the market, those submarkets that traditionally do not compete against each other for tenants are now finding themselves reducing rates to attract tenants from other submarkets.
Whereas the leasing activity appears to be improving, the sales picture for the aera is another story. Prior to the first quarter of 2008, approximately 25 million square feet of industrial product was consistently for sale at any time. In the second quarter of 2008, those numbers began to increase every quarter, and today, nearly 55 million square feet of industrial product is on the market for sale. During that same period, sales volume decreased from a high of $170 million to less than $10 million. At present, if you are a tenant looking for a building to buy, or an owner occupier that would like to get into a larger building in an ideal market – your choices are almost unlimited.
A majority of the industrial product on the market today is being marketed to these owner occupiers in order to extract the highest price, or more likely, to avoid a loss. Very little product is priced for the investor. Although companies have numerous choices today, they are not purchasing buildings because they either are not expanding, or they do not want to assume the risk. Consequently, the product is not being absorbed, and with the enormous amount of product available, we do not anticipate a sales velocity increase until the economy begins to turn around and we see job growth.
As mentioned above, speculative development has finally ground to a halt. The big question around Dallas is when, not if, development will start again. Lenders are hesitant to speculate on new development, however, as product is slowly absorbed, land prices continue to fall, and the construction business languishes with nothing to do, it will probably only take a few quarters of positive news to push developers to begin dusting off old plans. We await the positive news!
— Phillip Rosenfeld in a member of the Colliers Ownership Advisory Group in Dallas.
Lubbock
The good news for the Lubbock’s industrial market is that the city’s primarily agricultural-based economy is somewhat insulated from the problems of the national economy, and the city remains healthier than most areas of the country. However, unemployment is still running a little less than 7 percent, and industrial property occupancies are in the 80 to 85 percent range with occupancy trending up, mostly from business expansions.
The market is stable, but there is not enough new demand to justify speculative development. Concerns about the national economy, national government, healthcare costs and pending tax increases have most developers and property owners on the sidelines. New construction has been limited to mostly owner/user properties, and very few sales have been reported during the past year. Appraisers are having to go to larger Texas markets to find recent comparable sales.
Most of the vacancy is in older, functionally obsolete properties with lower ceiling heights or limited land area. Rents for existing industrial lease space (10 percent office and the balance metal building warehouse) are holding steady in the $2.75- to $3.25-per-square-foot range on a NNN basis; older properties have to cover base-year tax and insurance expenses to achieve those lease rates. Otherwise, tenant lease concessions are practically non-existent.
The one hot spot in the industrial market is the relatively new Lubbock Business Park and the Lubbock Rail Port, which have been developed during the past 4 years by the Lubbock Economic Development Alliance, the city’s business attraction and retention arm. The business park consists of 586 acres of land just off Interstate 27, south of the Lubbock International Airport. The Rail Port is situated on 526 acres of land just north of the airport on I-27. In the past 3 years, the alliance has attracted a 225,000-square-foot O’Reilly Auto Parts distribution center, a 75,000-square-foot West Texas Packaging plant, a 112,000-square-foot distribution center for Standard Sales (a Budweiser distributor), a new State of Texas Department of Public Safety regional office and forensics lab and a new 60,000-square-foot Monsanto plant, among other tenants. The alliance reportedly has two other big box users on the back burner that will take up the balance of the currently developed phase of the park; it has invested approximately $20 million in land and infrastructure that, in turn, has stimulated $124 million in private investment in the park and rail port.
For companies willing to commit to certain levels of new jobs created at certain salary ranges, they are able to get free, fully developed, site-ready land for their new facility and, in some instances, get work force training grants. It’s hard to compete with free, but perhaps enough trickle-down demand from suppliers and service providers will increase private sector demand in the future.
— Wes Hallmark is the owner of Sperry Van Ness-Hallmark & Associates.
Amarillo
Amarillo’s overall economy has remained fairly stable compared to the rest of the country. According to the Texas A&M Real Estate Center, the city has one of the state’s lowest unemployment rates at 5.4 percent. Amarillo has continued to grow at a steady pace with a metro-area population approaching 250,000 people. That being said, we are seeing more “For Lease” and “For Sale” signs popping up on area industrial properties. While most of the available industrial space lies in the north central portions of the city and tends to be older facilities, there are a few exceptions. These exceptions include the 254,000-square-foot former Backyard Adventures facility south of Amarillo on Interstate 27 and another 69,000-square-foot facility on Loop 335.
The industrial activity in northeast Amarillo has picked up in recent years, especially when taking into consideration Bell Helicopter’s 1.04-million-square-foot facility. Bell is in the process of adding an additional 160,000 square feet, with a planned completion for the fourth quarter of next year. The Amarillo Economic Development Corporation has played a major role in spurring this activity by providing incentives. AEDC has also seen some success with their CenterPort Business Park. CenterPort is the home of Ben E. Keith Company and Pacific Cheese, with new locations for Zarges Tubesca and Alstom Power Incorporated currently under construction. Zarges and Alstom are significant in that they represent a major push for wind energy in the area. AEDC’S assistance programs have provided the necessary financial incentives needed to bring these companies to Amarillo and helped to maintain Amarillo’s low unemployment rate.
There have been some other noteworthy developments. Federal Express Ground has completed its new terminal on I-40 East. In doing so, utilities were run along the adjacent I-40 frontage that has led to further construction, including WesTex Document’s 19,250-square-foot facility. There are still 99 acres available that should be developed as the economy continues to recover.
While brokers and developers in the area continue to be optimistic, a conservative lending environment has made it difficult for firms to finance projects, especially those that don’t have tenants in place. Although speculative construction is on hold, the sale velocity has maintained its vitality for user-occupied properties. In June, Toot’n Totum, a local convenience store chain with 60-plus area locations, purchased a 75,000-square-foot distribution and warehousing facility. Industrial leasing has cooled off a bit with several facilities available for lease. Although we haven’t seen a dramatic drop in occupancy rates, landlords have been forced to make some concessions in rental rates, free rent or provide tenant improvement allowance in order to secure or renew tenants.
All things considered, Amarillo’s industrial market has remained stable. While it has fallen off a bit since 2007, the decline has been measured. With our low employment rate, business friendly community, and central location, the mood continues to be optimistic.
— Ben Whittenburg is an associate with J. Gaut & Associates in Amarillo.
Houston
Texas Real Estate Business sat down with Pat Duffy, president of Colliers International’s Houston office, and Michael Scheurich, president and CEO of Arch-Con Corp., to talk about the market.
TREB: Where is the most industrial space available?
Duffy: As an absolute number, the Northwest Industrial market has the most vacant square footage, with approximately 8.1 million feet vacant, but that number only represents 6.1 percent of the overall NW market. Nearly half of that available space is in the NW Inner Loop area, but again, the vacancy rate in the Inner loop is only 5.9 percent.
On a percentage basis, the Southeast Industrial market has more than 8.2 percent vacancy, driven primarily by new construction, which brought more than 5 million feet on line in the past 3 years. Most of that space was pipelined when the economy was still expanding and was based on a belief that the expansion of the port would continue at the current pace of the previous several years and accelerate with the opening of the new Panama Canal expansion.
Scheurich: Our inventory is stable, but what is available is still relatively new and is expensive or is low-cost but functionally obsolete. They may not be high-pile or they may have issues that need to be resolved before they can be utilized as they need to be, so people don’t really want to touch them.
TREB: What submarket or area is a hotspot for activity?
Duffy: The Northwest market posted the best net absorption so far this year with just less than 750,000 square feet in the second quarter and more than 1.7 million square feet, year-to-date. The Southwest market is close behind with more than 1.6 million square feet of net absorption, year-to-date. These markets, obviously both on the west side of Houston, enjoy the benefit of the area’s economic growth. The majority of the new population growth and job growth in Houston is on the west side as are the majority of the arterial improvements.
TREB: What submarket is in need of activity?
Duffy: The east side is heavily dependent on the health and success of the port. The port is heavily dependent on the overall health of both the U.S. and Texas economies. Until consumption improves in the U.S. and Texas, this market will continue to struggle. The additional pressure of the current Gulf drilling moratorium is also a short-term (hopefully) drag on the east side market.
Scheurich: The port area still has opportunities. The port has the main distribution centers, and there is still a demand there, although it probably isn’t as big as it once was.
TREB: How is the sale velocity?
Duffy: The sale of industrial property, especially investment A-grade, is up substantially over the low we hit last year, but it is still well below the levels we saw from 2005-07. Lending for users seems to have eased quite a bit and investor/buyer yield expectations have declined given the lack of distressed asset availability. We believe that the improving trend will continue, but that lending will remain tight and will cause much more equity to be utilized in asset purchases.
TREB: What major trends are affecting the market?
Duffy: Jobs, jobs, jobs. Until the job market improves and consumption returns, including residential construction (think about the materials that go into a home or apartment that need to be manufactured, shipped and stored), the market will remain sluggish. The oil spill and the current moratorium have had a dampening effect, but hopefully that is not a trend.
TREB: What needs to be done to encourage activity in the market?
Scheurich: Until demand returns, activity is not going to change. Smaller companies need their working capital, so the lending has to ease up, which is less money down to start projects. We’re all concerned about how the disaster in the Gulf is going to affect us long term, so a lot of people are sitting on their hands, waiting to see the outcome.
Duffy: Cut taxes for business, stop government spending that has a 0 to 1 multiplier, give the consumer some hope, drop the drilling moratorium.
Fort Worth
The Fort Worth industrial base consists of two major markets, North and South, which are made up of nine submarkets consisting of approximately 154 million square feet. Of this space, 19 million is flex product, which has continued to lease slower since 2009. The overall vacancy rate for Fort Worth was 8.36 percent at the end of the second quarter. This resulted in overall positive net absorption and was a 75 percent decrease from the previous quarter’s rate. With virtually no new deliveries in sight, Fort Worth will start to see equilibrium by the start of 2011.
The big-box portion of the Fort Worth Alliance has managed to outperform the DFW market as a whole due to the infrastructure of bond packages and government funding that was put into place in the late 1980s. The key there has been tenant retention and expansions. Recent renewals include LG Electronics, ATL Logistics and Electronics, General Mills, S.C. Johnson, Excel Logistics, Texas Instruments and Coca-Cola. Alliance offers its tenant base a lower cost of operations from a logistics standpoint.
The other telling factor for Class A big-box space is that out of the 15 buildings in DFW that can accommodate a user of 450,000 square feet or greater, Fort Worth has only five buildings. As corporate America comes out of its 3-year comma, job growth continues locally and we get positive job growth on the national level, the above-Class-A industrial buildings will come off the market.
As for the rest of the market — which includes Mercantile, Rail Head by Republic Property & Zbeck and ING’s Northern Crossing, representing a total of 200,000 square feet — has seen some activity, and they have completed a few new deals to the market since the first of the year. Tenant expansion has taken place at both Mercantile and Northern Crossing. Some of the current deals looking in the marketplace have been manufacturing with higher-than-ordinary tenant improvement allowances. Many of these deals have been 70 to 100 percent air conditioned manufacturing space. The deals in the market between the 100,000- to 200,000-square-foot range have started looking to the GSW market to the East where vacancy is higher and competition is fierce. This is a new trend from the past two recessions.
The small user market seems to be picking up. Midway Industrial Park has done five good deals since the first of the year resulting in 51,000 square feet of leases. Riverbend Business Park has managed to retain its tenant base and has added new tenants since the first of the year. The same has held true for 820 Business Park and Village Creek.
Incentives are not as prevalent as they are to the East of Fort Worth. This is a huge economic lending indicator, at least for local job growth. Now we just need to get the rest of DFW and the country to follow the Fort Worth lead. We were last in and will be first out of the recovery mode, which, bearing any bad news, should be in 2011.
— Tyler Baucom and Nick Holbeck are associates in Lee & Associates’ Fort Worth office.
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