The industrial market nationwide is strong, and Dallas-Fort Worth is near the top of the heap. In 2016, the market set new records for net absorption and delivered construction, and submarkets like South Dallas saw continued remarkable activity. Though there are some long-range concerns that could give way to changes, overall, 2017 looks to be a year of continued success with strong demand for users at a range of size requirements.
Impact of Construction Pricing
We are fortunate to be in a market with an abundance of construction projects underway. However, one byproduct of that market is escalating construction costs due to high demand for quality contractors. Construction costs are rising faster than rents. As a result, construction starts could fall due to delays caused by thinning margins. On the flip side, land pricing is likely to stay flat to accommodate for the added expenses on the construction side.
With just over 25 million square feet of positive net absorption, 2016 was a record year. Demand remains high – market vacancy is at 6.1 percent – and will continue to keep up with supply as users flock to DFW for its central location, growing population and steady job growth. At this rate, the 19 million or so square feet currently under construction isn’t enough to flood the market with enough product to significantly impact the vacancy rate in the next year.
Continued Demand for Large Facilities
Demand will also continue to increase for users seeking large e-commerce distribution facilities. In 2016, five 1-million-square-foot speculative buildings were leased. Yet, in 2017, only two 1-million-square-foot facilities will be delivered. From a leasing perspective, that means if the market experiences half the volume this year as we did last, we’ll lease up all the new space at this size category on the market. From a user’s perspective, that means the only way to get into a new 1-million-square-foot building in 2017 is to lease one of these two or contract for a build-to-suit.
Port Logistics Realty’s Southport Logistics Park is the largest of its kind under construction with two buildings totaling just under 1.5 million square feet complete and another 7.5 million square feet to come in future phases. So, we’re believers that users will continue to want this kind of space.
Large, regional distribution centers and projects on the fringes aren’t the only facilities in demand. There is also a call for smaller product with the modern amenities of new construction in a proven industrial market, especially as e-commerce users prepare for same-day or even one-hour delivery.
However, these infill sites are a fleeting opportunity – there are only so many left. And, because the market is so well leased, demand is high. As tenants continue to be attracted to smaller, state-of-the-art buildings for its lower operating costs and prime logistics location, developers will be required more and more to utilize relationships to secure sites.
Rob Huthnance is president of Port Logistics Realty Development.