Throughout North Texas, about 766 million square feet of industrial space exists, according to fourth quarter research from CBRE Research. Of that, about 69 million square feet sits in South Dallas. And though the vacancy average across the region is 6.4 percent, it’s 14.6 percent in South Dallas, far higher than any other submarket. Despite the higher-than-average vacancy, developments keep heading to the area. Most recently, a 1-million-square-foot distribution center by First Industrial Realty Trust. To an untrained eye, it seems counterintuitive to keep building new projects when existing supply isn’t full. The reality, local brokers say, is more complex. To explain the submarket’s allure, we turned to the experts to ask one question.
Why are we still building spec space in South Dallas?
“The reason developers are still considering spec in South Dallas is due to the amount of tenant demand in the pipeline. We are nearing an all-time high for tenant demand with regard to bulk distribution space throughout the market, and many of these groups will target south Dallas due to availability of product and potential [build to suit] sites,” CBRE Senior Vice President Nathan Lawrence says.
“With strong fundamentals and land constraints in the infill submarkets, pressure to invest capital, and the availability of efficient land, a substantial new inventory has been created in [South] Dallas. While vacancy is north of 8 million square feet, there are multiple 1-million-square-foot deals in the market, along with numerous others in the 200,000- to 500,000-square-foot range. As a result, high vacancy rates can change quickly. The yield-on-cost versus traditional speculative venture continues to be a tricky situation in this submarket, thus it is the most risky area to develop speculatively in DFW,” Stream Realty Partners Managing Director and Partner Cannon Green says.
“Spec space continues to be constructed in the South Dallas marketplace due to the following:
1) This is where the largest and most affordable tracts of land are located.
2) [The area has] access to three major arteries (Interstate 35, Interstate 20, and Interstate 45).
3) Investors and capital want to [invest in] industrial [properties]—including foreign capital. These investors and owners believe in the long-term prospects of DFW as a viable and diversified business climate. There are still opportunities to develop into a better return on cost or create a better spread over the exit cap than acquisitions allow, thus you are going to go where the herd is with development momentum. And that is South Dallas,” Majestic Realty Co. Senior Vice President Al Sorrels says.
“Speculative construction is still being built in South Dallas simply because demand warrants it. The days when we focused solely on individual submarket statistics and built to replenish that submarket’s needs are in the rearview mirror. During this cycle, we have depleted the land in many of those submarkets and others will be depleted within two years. … We are rapidly becoming a metropolitan area with just two viable submarkets for new development: South Dallas and North Fort Worth. … Dallas will continue to grow. For the past five years we have absorbed on average 18 million square feet a year. As our regional population continues to grow and e-commerce sales shipped direct from distribution centers play an even larger role, we will need to provide speculative space to accommodate that growth. We are tracking the largest number of active deals in the market than any time in recent history. The demand is there. Development will have to go where there is available land. Developers, lenders, and even brokers for that matter will need to look at our statistics a bit differently. They will need to consider the macro-statistics of the DFW area rather than the micro-statistics of a single submarket in underwriting. Throughout history those submarkets experiencing high speculative construction have always had the highest vacancy rate. That’s not a sign of weakness, just the opposite, it’s a sign of strength,” CBRE Vice Chairman Dave Anderson says.