Industrial Market Snapshot – Dallas/Fort Worth
The Dallas/Fort Worth Industrial vacancy rates are trending down from historical highs despite lingering affects from the recession. It remains a tenant market in a broad sense, but at the “low and mid-size” end of the spectrum, under 50,000 square feet, incentives are beginning to marginally abate as velocity, leasing and sales from these healthy regional, smaller nationals and large local firms who are survivors, and now require more space.
While some investors seem to be reacting to the recession, lender capital has returned for this mid-size user group, particularly for “user” property acquisitions. These firms are experiencing inventory growth as the consumer slowly steps up its confidence in spending discretionary dollars.
With vacancies trending down and lenders cautiously re-entering the market, we are also beginning to see several mergers on the horizon which might also be a direct reaction to a recession. The recent ProLogis and AMB Property Corporation merger has yet to bring to surface what formal operational structure will provide the brokerage community in Dallas/Fort Worth (AMB Property Corporation outsources leasing and management whereas ProLogis performs these duties internally), but what is known is that Prologis has 22,616,079 square feet of industrial projects in the Dallas/Fort Worth Metroplex and adding 4,501,662 square feet of AMB’s product will represent a base inventory of a whopping 27,117,741 square feet. The grand total of the Dallas/Fort Worth Industrial Base as reported by Costar on 12.31.10 was 665,865,171 sf. The merged entity will control 4% of theDallas/Fort Worthmarket.
Other planned mergers should affect theDallas/Fort Worthmarketplace – which is one of the top five distribution hubs in the country. When ATT buys T-Mobile, the supply chain shrinks as they combine their warehousing operations. The economics upstream to the AT&T/T-Mobile merger includes cost savings and operating efficiency. Operational savings for the combined AT&T/T-Mobile firm creates negative leverage at the real estate level, generally putting space back on the market that was previously an income earning asset for a real estate landlord.
The consolidation trend will continue. DFW having an annual positive absorption growth of over 10,000,000 square feet annually will help absorb some of this excess space, eventually, but when will we return to the norm? The market absorbed 792,969 square feet in 2010, and had a rare negative absorption year in 2009.
Where are the “Nationals” and Fortune 1000 Users? They have been an absent commodity since 2007 – 2008. Are they going to continue to sit on their wallets in 2011? The bulk warehouse segment in Dallas/Fort Worth is clearly in the dumper, but the national companies are beginning to circle as they see blood in the water (read: inventory needs will force them to add distribution space). This will be the story of 2011. If not, it will be a long tough year for the national developers.
There are currently 66 Class A buildings that have 250,000 square feet of vacant space or more on the market. We need an “All Star” year upwards of 10,000,000 square feet in absorption. Even at this projected absorption level, rents will continue to level off at historically low numbers for these Class A buildings until we absorb some of this massive overhang of available bulk buildings. 2011 should be a recovery year and rents should solidify in 2012.
The question is — will the recession have any long-term effect on how the market is developed? Lenders would agree that “Developments” are three “four letter words”. With that being said, there are several major projects that will affect the pipeline. Whirlpool and Dallas Intermodal, with 1,000,000 square feet between them, is great reading but no net absorption (they moved out of about the same amount of space).
So, one might ask what needs to be done to encourage activity in the market? If you were to survey the industrial brokerage community, on a scale of 1 to 10, the first quarter of 2011 would rank a solid 7 while the first quarter of 2010 was only a 4. It looks good on paper, but now we need to convert activity into deals instead of just talking about them. Also, we need the return of the Bulk User. If it happens, that would be 2011’s major commercial real estate news story.