As another summer comes to end, everyone in industrial real estate in Dallas ask the question, “Where the heck did our summer go?” This summer was the most active that I can remember since the last development cycle peaked in 2007. Leases were signed, ground was broken, and if you did not make keeping up with the market a primary goal, it likely passed you by.
Demand: The acceleration in demand that began last year picked up steam and continued through 2013. Tenants continue to grow and expand into space in order to accommodate their current needs. During the recession, tenants did whatever they could to operate out of the space they had or expanded only with a flexible, short-term lease. Talking to tenants today, you can definitely see that most feel like the recession is behind us and are focusing more on growing the top line rather than squeezing the bottom line.
We continue to see third party logistics providers out evaluating space. Large users, when considering consolidations or national distribution hubs, continue to consider Dallas-Fort Worth as an ideal location with a business-friendly environment. This is evident as we are currently seeing multiple requirements in the market for north of 1,000,000 square feet of warehouse space.
Moving Dirt: Developers during this development cycle, mainly due to the constrained capital markets, have been slower to start speculative projects as compared to past cycles. This has allowed vacancy rates to decrease below our 15-year average in some submarkets. Our group at Stream Realty is currently tracking 13.5 million square feet under construction consisting of 5.6 million square feet of speculative development and 7.9 million square feet of build-to-suit development.
The speculative projects are all located within the DFW Airport, Great Southwest, Alliance, and South Dallas submarkets. DFW Airport is the only submarket that has multiple product types, including bulk warehouse and shallow-bay distribution under construction. All of the development within Great Southwest, Alliance, and South Dallas is bulk warehouse. As we move toward the end of 2013, developers continue to compete for land sites and work through new developments. We will definitely see several more speculative projects get announced prior to the year’s end.
Rental Rates: We all know that increased demand and limited supply are the key factors when discussing rental rates. Rental rates continue to vary between submarkets and product type across North Texas. We have seen rates around DFW Airport recover and push higher than historical norms setting new peak rates for speculative new construction. Land prices and the cost of construction have increased, requiring many developers to raise rates in order to build new product. DFW Airport, Northwest Dallas, Alliance, and Great Southwest are leading the way in rental rate growth.
Vacancy rates within all of the mentioned submarkets are substantially lower than in years past, where development would had already commenced. These submarkets are also leading the city in leasing activity. We expect rental rates to continue increasing in the submarkets mentioned above, as landlords and developers come to terms with the lack of supply and the cost of new development.
Blake Kendrick serves as managing director of Stream Realty Partners’ Dallas industrial team and is a partner in the firm’s Dallas office. Contact him at [email protected].
