While DFW’s office market struggles with the thorny issue of returning to the office and how much space tenants will need in a post-pandemic world, the region’s industrial market is booming.
Across North Texas, demand for industrial space is pushing vacancies lower and rents higher. That’s great news for owners who are enjoying higher property values. But at the same time, industrial tenants are grappling with fewer options and higher occupancy costs.
In an environment where demand exceeds supply, what can these companies do to ensure they have the industrial space they need, when they need it, and for a price, they can live with?
E-commerce drives demand
Throughout the pandemic, we’ve all heard about supply chain disruptions. First, it was toilet paper, then it was pork, and now it’s all kinds of materials, from semiconductor chips to steel.
The pandemic forced consumers to change the way they shop. Recent forecasts predict e-commerce sales will account for 30 percent of U.S. retail sales in the coming years. Amazon accounted for roughly one-third of all e-commerce sales and occupied 10 percent of all industrial space in the U.S. That translates into roughly 2 billion square feet.
Fewer visits to stores and more online shopping translate into more demand for warehouse and distribution space. In fact, experts estimate that e-commerce requires about three times the amount of warehouse space relative to physical retail space.
E-commerce only represents a portion of overall industrial demand. Other industries such as automotive, petrochemical, and technology are expanding too.
Again, this strong demand is good news for the overall economy. Yet, it also represents additional difficulties for companies seeking industrial space, either as part of an expansion or a new location.
For DFW specifically, it’s a perfect storm of low-interest rates, pent-up demand from the pandemic, e-commerce, population growth, global trade imbalance, and the growing need for backup/safety stock.
10-Plus Years of positive industrial absorption
Dallas-Fort Worth is considered one of the “elite” industrial markets, ranking alongside Northern New Jersey, Long Beach, Chicago, and Atlanta. Industrial users are attracted to North Texas for several reasons, including its central location, two airports, expansive rail infrastructure, the intersection of several major interstates, and deep labor pool. All these attributes make it a super-regional distribution hub.
The total industrial market in DFW consists of just over 832 million square feet, and at the end of 1Q21, the vacancy rate was 5.4 percent, according to CBRE. The decrease can mostly be attributed to occupiers taking vacant existing buildings and strong pre-leasing for product delivered over the quarter.
Furthermore, the first quarter marked the 42nd consecutive quarter of positive industrial absorption in DFW, following five years of demand surpassing 20 million square feet from 2016 to 2020. The trailing 12-month absorption was 27.4 million square feet, and 10.3 million square feet in new leases were signed during the first quarter.
Meanwhile, rents are also rising across the DFW – asking rents are averaging over $5 per square foot – and will likely outpace inflation in the next few years. This means almost all leases signed in the last four years in Dallas are below market.
Preparing for the future
If you’re a tenant, you can act now to prepare for the future and protect yourself against competitive pressure and paying a higher rental rate.
If you need more space, you may want to consider renegotiating with the property owner now before your lease comes up for renewal. It’s a landlord’s market, but you may be able to get a rent reduction if you take additional space or sign a long-term lease.
Some tenants are digging further into potential consolidations within their footprint and investing in technology to utilize their space better. Even trying to control operating costs is important as few tenants actually know their all-in real estate costs behind the initial face rate.
If you’re a tenant with future expansion plans, consider buying your current building or a new facility, either yourself or with an investor like Mohr Capital. Even if it’s larger than you may need. You always have the option of subleasing the excess space until you can utilize the balance in the next year or two.
Finally, if you’re an owner-occupier and you’re looking for a way to fund a business expansion, you might want to consider selling your building and leasing it back. Investor demand is fierce, and property values are increasing daily. In short, you are monetizing the value of your tenancy while the market is at a historic high.
I’ve been involved in DFW commercial real estate for nearly four decades, and I’ve never seen more demand for industrial properties from tenants or investors. That’s why I feel confident saying that everything’s coming up roses for DFW industrial.
Bob Mohr is the founder of Mohr Capital and Mohr Partners.