COVER STORY, NOVEMBER 2009

INDUSTRIAL UPDATE
Houston and Dallas/Fort Worth prepare for market recovery.
By Lindsey W. Marcec

Lack of absorption has plagued the industrial markets in Texas this year as many corporate users downsized or consolidated their operations. Instead of letting these newly abandoned spaces stay dark, landlords are being proactive and are offering enticing deals to tenants in order to fill space. As we move closer to 2010, vacancies are slowly coming down, aided by the lack of new development on the market. Does this mean a recovery is on the horizon? Texas Real Estate Business spoke with three industrial experts to get their pulse on the state’s two largest markets, Houston and Dallas/Fort Worth.

All 13 DFW Metroplex industrial markets in which Bradford CORFAC International works are experiencing flat to negative absorption, according to Kevin Santaularia, the firm’s CEO.

The biggest change this year has been the lack of absorption, he says, which was a result of corporate users minimizing inventory and reducing or regulating their space needs. However, leasing now appears to be improving in the Metroplex, and Santaularia preaches the importance of continued deal generation to his staff.

“Your best prospect is your current client, and your next prospect is a cold call away,” Santaularia says. “I have offered to re-sole my agents shoes as a cold-calling incentive.”

In order to close deals, he also stresses managing expectations during the marketing process.

“Be sure to relate to your clients that the negative information does not always extend to all asset classes or submarkets. Most times, the only deals that get press are the deals where assets are challenged, and that doesn’t always make the market,” he says.

As for those looking to dispose of their industrial properties in this economic climate, Santaularia simply says, “Be patient.”

“For Dallas/Fort Worth, we will see the turn more quickly and more robustly than most, but I don’t anticipate solid rebound until 2011,” he says. 

Houston is also in a great position to rebound, according to Brian Corriston, vice president with Caldwell Companies in Houston.

“We are confident our market will rebound quickly when financial institutions regain confidence and loosen their lending restrictions,” Corriston says.

Corriston notes that there have been a number of recent aggressive deals done by landlords in Houston’s industrial market, due to a lack of activity within the marketplace and a greater chance of space staying dark for longer periods of time. Even with this push, industrial vacancy has increased through the second quarter, though rates are still below 10 percent city wide.

“The most active market seems to be the renewing or restructuring of leases, regardless of the market area,” he says. “Companies are willing to extend leases now in return for rent relief. As owners are concerned about refinancing challenges over the next few years, keeping tenants in place becomes even more critical.”

Due to the tightening of the credit markets, Corriston does not expect to see much new product built in Houston for several years.

“Compared to the 8 million square feet of industrial space on the market a year ago, Houston now has just over 2 million square feet,” he says.

Though development will be down, it doesn’t mean there aren’t projects in the pipeline throughout the state. One project that is planned for Houston is Phase II of Ellington Trade Center. KDC, formerly Koll Development Company, is developing the project, which is planned to begin construction in 2011. KDC completed shell construction of Phase I in July.

“We continue to have interest in both industrial developments,” says Randy Touchstone, vice president/partner with KDC in Dallas.

Though KDC historically is a leader in the corporate office and industrial build-to-suit markets, the company has shifted its focus to speculative development in the recent past. As a result, the firm is facing the leasing difficulties that many of the state’s landlords face, where potential tenants have too many suitable options and are slow to commit.

“While our marketing strategy has generally stayed the same, we are more aggressively pursuing tenants and their brokers to make deals,” Touchstone says.

He adds, “We are monitoring the industry and will adjust our plans to fit the current economic outlook.”

With signs of decreasing vacancy and little-to-no development coming on line, the outlook appears to be a good one for Houston and Dallas/Fort Worth. It is only a matter of time until the markets rebound; but, in the meantime, the words of Santaularia ring true: “Be patient.”

©2009 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.