Pre-leased. Historic rents. E-commerce. Record absorption. These are words that most would associate with Dallas-Fort Worth’s booming industrial market. With 12.3 million square feet in absorption through the second quarter and a market-wide vacancy rate of 6.9 percent (including available subleases), why aren’t we talking more about redevelopment?
In recently representing Dynamic Glass in its search for a DFW fabrication facility, it was evident that in-fill, shallow-bay space is becoming a premium. Conversely, land for bulk distribution is in no short supply (24 percent vacancy in South Dallas and 13.2 percent vacancy in Alliance). However, finding functional, smaller spaces in the 10,000- to 75,000-square-foot range in submarkets like Richardson/Plano (4.3 percent vacant) and Valwood (3.9 percent vacant) is quite the challenge.
Additionally, labor supply and transportation/logistics costs are becoming the pillars upon which industrial real estate decisions are made. So, why haven’t we started tearing down old malls and dormant manufacturing buildings?
The reality is…we have.
Risks and Rewards
Redevelopment plays can be high-risk and require a substantial amount of underwriting and analysis. It’s easier for developers to focus on vacant land tracts than to take on an immense redevelopment project. But as available land sites become increasingly rare, particularly within in-fill submarkets, now is a good time to consider redevelopment opportunities.
One of the most successful such projects is Prologis’ Valwood Corporate Center. The former STMicroelectronics plant was purchased, scraped, and transformed into a modern industrial park. Prologis pre-leased two of the buildings (totaling 338,355 square feet) and is currently constructing Building 3 (285,000 sf) on a speculative basis, due to deliver in the fourth quarter 2017. Additionally, Building 4 (235,000 sf) is fully designed and ready for construction. With substantial leasing activity on both, I won’t be surprised if they’re fully leased before construction is finished.
To learn more about this emerging trend, I reached out to Jon Sorg, vice president and market officer at Prologis. Our conversation can be summed up in the old real estate adage, “Location, location, location!”
As population density increases, location is becoming more and more important for final-mile delivery users, Sorg said. “The Dallas-Fort Worth industrial market is hitting a different maturation point, and redevelopment must be considered as an alternate route forward.
“Valwood is one of the unique, infill locations in the market, Sorg said. “Replicating that accessibility to population, labor, and transportation arteries is a challenge for the emerging submarkets. That’s what we love about Valwood Corporate Center; it meets our customers’ needs with a product they want in an area they want.”
When Does Redevelopment Make Sense?
When assessing possibilities, look for these key components of an ideal redevelopment site:
- Properties with limited building coverage or an underutilized site
- Infill locations that are not easily replicated
- Properties that have valuable recyclable material (e.g., copper)
Although rental rates and construction costs may hinder widespread redevelopment, property owners and developers should open their minds to the possibility. They may find it to be the best option in creating functional space for tenants in desirable geographies.
David Eseke is a director within Cushman & Wakefield’s Industrial Brokerage Group in Dallas.
