Q2 2012 Dallas, Texas Industrial Market Trends

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Q2 2012 Dallas, Texas Industrial Market Trends

The strong local economy is underwriting a strong revival in the Dallas area industrial real estate market. Demand for warehouse/distribution space both in the airport area and in south Dallas, where the development of large-scale intermodal-related properties has become a dominant force, leads the way. Despite declining vacancy and high absorption numbers, construction remains prudent, confined heavily to build-to-suit projects such as, for example, the large facilities currently underway for Kohl’s, Target, and Prime Distribution Services. However, speculative development, including one large project underway by Prologis and another on the way from IDI, has reappeared. Rents stabilized last year and are showing new growth in 2012.

Dallas also hosts a large high-tech-related sector based in the greater Plano area of the suburban north (the “Telecom Corridor” is located in nearby Richardson). While this sector has been slower to show signs of overt recovery, stabilization has become apparent.

Note: This report addresses the industrial market on the Dallas side of the Metroplex, the geographic area defined formally as the Dallas-Plano-Irving Metropolitan Division, although some notable activity in neighboring areas may be cited if relevant. A separate Reis Observer covers industrial real estate in the Fort Worth-Arlington area, which includes much of the D/FW Airport area and the Alliance Airport area farther north. However, the Irving-Coppell area, also tied to D/FW Airport, is covered in the metro Dallas report. At last count, the Dallas area warehouse/distribution market played host to 238.9 million square feet; the Flex/R&D market was counted at 44.2 million.

OCCUPANCY


The recovery of occupancy in the warehouse/ distribution market began during 2010 as demand returned, net absorption regained positive ground and speculative construction remained subdued. By the second quarter of 2012 the vacancy rate in this sector had fallen to 14.4%, down 60 basis points from a quarter earlier amid the latest quarter’s surging demand, down 270 from the 17.1% second quarter 2010 peak. With a substantial volume of space due on line in the second half of the year, however—and even more expected for 2013—the downward trend will soon yield to a flatter curve.

While it is unusual for a Flex/R&D sector to record lower vacancy rates than its warehouse/distribution counterpart, that has been the recent trend in metro Dallas. Reis put the second quarter Flex/R&D rate at the relatively low mark of 12.7%, down 10 basis points for the quarter, down 30 year-over-year. As reported by Cushman & Wakefield, second quarter vacancy in all Dallas-side industrial real estate combined was 11.6%, down fully 170 basis points since the second quarter of 2011.

SUPPLY AND DEMAND


The shortage of speculative development in the recent period along with the return of strong demand is resulting in shortages of some types of space, according to local sources. Two related effects include acquisition of emptied existing properties for retrofitting (see Special Real Estate Factors and Submarkets for a recent major example in McKinney) and the inevitable return of speculative development. The latter, according to Cushman & Wakefield, made its return this year led by Prologis’ recent start of a new, 653,600-square-foot spec project in the metro south. Until then, recent development had been dominated by build-to-suits such as those for Whirlpool, Kohl’s, Prime Distribution, and others (see Submarkets). Indeed, the 3.2 million square feet of warehouse/distribution space reported under construction by Reis as of mid August were dominated by 1.8 million in three build-to-suits.

By Reis’ count, net absorption of warehouse/distribution space has been strongly positive and running well ahead of same-term new supply since the latter half of 2010. The total for the first half of 2012, accompanied by only 15,000 square feet of new space, was 1.6 million square feet. Additional positive activity along with the delivery of new supply is expected for the remainder of the year. According to the firm, 403,304 square feet of warehouse/distribution space in three projects (including an 83,000-square-foot building beyond current submarket boundaries), along with a 202,000-square-foot manufacturing building, completed construction metro wide through July. One more, a 951,500-square-foot distribution center for Kohl’s in the Far South Dallas submarket, will deliver by the end of the year. Two others, both singe-tenant properties with a combined total of 848,000 square feet were underway for post-2012 completions. Included is a 398,000-square-foot facility for Prime

Distribution, which started in July. Despite the slow resumption of spec activity, large volumes of development have been entitled at major business parks. Reis reports 27.1 million square feet of warehouse/distribution space in numerous projects in the current planning-proposal pipeline. “Right now,” an executive with Colliers International’s Dallas office informed the Dallas Business Journal (Journal) in June, “there’s something like 9 million square feet of industrial deals in the market that are all 500,000 square feet or larger. Some of those deals can take an awfully long time to get done, but some of them could get done in the later part of the year.”

Net absorption of Flex/R&D space has been unsteady but mainly positive through recent quarters. The total for first half 2012, including second quarter’s 26,000 square feet, was positive 10,000 amid no deliveries of new supply. Only 75,800 square feet of Flex/R&D sector space were under construction per the date of this report, all in the Traxxas headquarters project in north suburban McKinney due on line in December.

RENTS


With absorption running strong, the advantage in the warehouse/ distribution market has begun to shift in the direction of the landlord. Rent growth turned positive in the fourth quarter of 2011 and has remained so, overall, since. At $3.94 psf and $3.64 psf, asking and effective averages for the second quarter of 2012 were up 1.0% and 1.1% for the period (and year-to-date as well). Additional gains are expected over the remainder of the year and after, as the new cycle proceeds. As noted by Jones Lang LaSalle in a recent report, landlords have become “less aggressive” in the offering of rental concessions and TI dollars.

The return-of-growth trend applies as well to Flex/R&D space rents. Following a period of large losses, lease rates in this sector stabilized during the fourth quarter last year. Reis put second quarter 2012 mean asking and effective rates at $6.39 psf and $5.74 psf, up 0.2% each for the period, each up 0.3% year-to-date. Acceleration in rates of growth is expected for both averages over the remainder of the year. Reporting on all Metroplex industrial space combined, Cushman & Wakefield put the second quarter direct mean asking rate at $4.18 psf, up 3.2% year-over-year.