As we start what already feels like the beginning of summer, we find ourselves in a very healthy industrial market across North Texas. Rental rates are at an all-time high, vacancy is right around 6.6 percent, 300 basis points below the trailing 15-year average, and all reports from the brokerage community are positive. As we enjoy the benefits of an extended positive cycle, let’s take some time to dissect and discuss several trends and predictions that we are experiencing or expecting.
How will the industrial market be affected by the headline office relocations?
This is what gets us most excited. Over the last three years, the news has been filled with headlines of massive corporate relocations and consolidations within North Texas, including Toyota, State Farm, Liberty Mutual, Fannie Mae, JP Morgan, and Kubota. The industrial market does not truly see the effects of these moves until the move is complete, employees have relocated to Dallas-Fort Worth, and their families start consuming products in their new neighborhoods. We have seen a lot of construction activity from businesses related to these large relocations, but we are just now starting to see the bulk of the population growth in Dallas, Fort Worth, Frisco, and the surrounding suburbs. This will increase the overall demand for industrial space. While it is hard to draw a straight line from an industrial lease to the end consumer, we know that each person who lives in DFW accounts for 105 square feet of occupied industrial warehouse space. So, for example, if 10,000 new jobs come to DFW, and bring around 25,000 new people with them, that accounts for 3,750,000 square feet of positive absorption within the industrial market.
The market is great; what do we have to worry about?
As you look at the overall vacancy and absorption across our 770 million-square-foot industrial market, all signs point to a tight, positive market. While this is true in the vast majority of product types and locations, there are a few submarkets that we’re keeping our eye on. At this very moment, leasing activity above 150,000 square feet on the north side of DFW Airport is slower than most would have expected or wished for. There is an abundance of activity up to 125,000 square feet, but the activity is much slower on larger blocks of space. Why is this? We believe several factors are at play. Most predominately, we see that the average tenant sizes in infill markets and in markets that are closest to the population has become smaller over time. Increased rental rates, scarcity of land, the requirement to maximize building values, the underwriting that is required to compete within the capital markets, and the overall congestion due to population growth are all factors that we feel contribute to this trend.
We also have our eye on the southern Dallas County market. The South Dallas market is by far the fastest growing with the most development activity. During calendar year 2016, we delivered or started construction on 10.5 million square feet of new product within this market, while absorbing about half of this number, at 5.8 million square feet. Given the amount of product that is available in this submarket, and the ongoing volume of new construction starts, we believe that this market will not experience the same rental rate growth as other markets within DFW during the next twelve months.
Looking ahead, another market that has our attention is South Fort Worth. While this area has not experienced much development during this cycle, there are many developers that have acquired sites or who are under contract on sites, with close to two million square feet of product planned. By comparison, South Fort Worth has only delivered 750,000 square feet of new product since the beginning of 2014. This is clearly the most logical next step as other submarkets have become developed, and we have no doubt that it is the next step in the continued build out of the North Texas industrial market, but it will be interesting to see how the new developments perform, and the depth of this submarket.
Our team of seventeen industrial specialists continue to be pleasantly surprised with the current market and are excited to see what the balance of 2017 brings. We are working hard and having fun. Here is to a busy summer!
Blake Kendrick is the managing director of Stream Realty Partners’ Dallas industrial team and a partner in the Dallas office.