DC Velocity - March 2011

Dallas/Fort Worth may be
good barometer for industrial
property market

Anyone looking to divine the prospects for the U.S. industrial property sector in 2011 and beyond could do worse than to examine the market known by the acronym DFW.

The Dallas/Fort Worth region—which locals refer to as either DFW or the “Metroplex”—embodies the opportunities and risks ahead for the industrial segment as it digs out from the worst downturn in memory. The region is home to 6 million people and growing; Texas has led the nation in net job creation for the past decade. Relatively solid economic fundamentals have kept down foreclosure rates for the area’s industrial properties. Dallas/Fort Worth’s central location and proximity to Latin markets also make it an attractive warehousing and distribution hub to support domestic and North American trade.

Add to that a temperate climate, a muted union presence due to Texas’s status as a right-to-work state, and the absence of natural barriers to expansion (like mountain ranges), and it is hardly surprising the Metroplex has over the years been a powerful magnet for industrial development.

According to a quarterly survey by developer Jones Lang LaSalle Inc. (JLL), Dallas/Fort Worth recorded nearly $900 million in industrial transactions through the first nine months of 2010, making it second only to Los Angeles in total transaction volume. DFW’s volume through the 2010 period was more than triple what it recorded for all of 2009, the JLL report said.

CREDIT CRUNCH PERSISTS

But for the region’s developers, it’s not all wine and roses. While transaction velocity has accelerated, there has still been no significant new development for the past 12 to 14 months as developers struggle with overcapacity, falling rents, and a buyer’s (or lessee’s) market for warehouse and DC space.

Currently, the DFW vacancy rate stands at 12. 2 percent, down from 14. 5 percent at the bottom of the downturn. In normal times, a 12-percent vacancy rate would be a trigger point for development. However, these times are anything but normal; leery lenders burned by bad loans have virtually shut off the credit spigot, and Dallas has not been spared the impact.

“You don’t have the availability of debt that you had in previous cycles, and it will handcuff the current development cycle,” said Terry Darrow, who runs JLL’s DFW practice. “A lot of underwriters have been stung, and they will

go figure …

55%

The percentage of U.S. and Canadian shippers responding to a recent survey who said they would not use a trucker with poor CSA 2010 safety audit scores “at any price.”

SOURCE: MORGAN STANLE Y & CO.

underwrite tougher than before.”
Darrow said that asking rents from local developers have
barely budged in the past two years and that current rental
rates are in many instances well below what developers pro-
jected when they built the facilities several years back.
What’s more, buyers continue to demand and receive gen-
erous concession packages that include free rent for a peri-
od of time and very attractive—for them, at least—lease
renewal terms, he added.

“The deals that are getting made are very bloody,” Darrow said.

Developers in DFW can take solace in the fact that they’re not alone. Especially for so-called spec investments, “there is little—close to zero—debt financing available,” said Stephen F. Blau, senior director at Newmark Knight Frank “My hunch is that development will continue to be constrained until there is a more robust national recovery,” said Blau.

TURNING POINT

Darrow is optimistic the DFW property market has found a bottom. Due to falling vacancies and little new supply, rental rates have begun to stabilize, he said. Rents are starting to show marginal improvement, and landlords are more reluctant to offer concessions to lure or keep tenants, he added.

While 2011 will be a “firming year” for DFW industrial property, Darrow doesn’t expect the pendulum to swing the sellers’ way until the very end of 2011 or the start of 2012. He advises companies looking to make a deal in the market to act sooner rather than later.