DALLAS-It isn’t exactly news that industrial leasing and construction activity increased in the Dallas-Fort area during the past year. What is interesting, however, is that the bulk of that leasing and construction activity took place among smaller users.
“What you saw happen this past year was that leasing activity started jumping out in spaces under 100,000 square feet,” comments Josh McArtor, senior vice president with CBRE. Colliers International vice president Ward Richmond agrees, pointing out that the smaller users have been prevalent because of stronger comfort levels with the economy. Furthermore, adds Blake Kendrick, managing director-industrial with Stream Realty: “Regional and local guys started making more decisions and were comfortable enough to go out and acquire more space.”
With that space filling up, it makes sense that construction would increase as well. But the experts tell GlobeSt.com that the stuff going north was build-to-suit, rather than speculative development.
“Before this year, about 75% of the space coming to market was speculative,” comments Walter Bialas, senior real estate strategy executive with Jones Lang LaSalle. “But last year, about 85% of that space coming online was build-to-suit. That’s a sea change of how our market’s been responding to space demands.” Adds Colliers executive vice president Allen Gump: “We became similar to a lot of markets in that, within a year, we transitioned from a spec product market to a build-to-suit market.” The main reason for the focus on build-to suit, he goes on to say, is rental rates. “Those rates haven’t justified a lot of spec construction, but they’re finally getting back to a point where you can justify it,” Gump comments.
Though smaller users were busy taking down space through leases, it was the larger users that decided to build their own. Amazon is planning a 1.1-million-square-foot center in Coppell, Restoration Hardware has selected Grand Prairie for an 850,000-square-foot distribution center and Home Depot is well underway with its South Dallas distribution center.
These projects are coming online during an interesting period in the DFW industrial market. “We’re in an inventory constrained situation for half a million square feet,” Jones Lang LaSalle’s managing director Terry Darrow notes. “In the recent past, when we’ve gotten to 10% vacancy, developers started building. But that hasn’t happened this time, as banks are more careful about how they lend money.”
This has led to an industrial sector that is, for the time being, in equilibrium. “It’s fairly healthy here,” observes Cliff Booth, president of Westmount Realty Capital. “We have the drivers that are positive for growth – rail service, geographic location and the fact we’re a major distribution hub today.” As such, he adds, space is being taken up – and built – both by tenants looking to expand and newcomers arriving in town. The experts predict that, with the continued demand and not a whole lot coming online, to look for increased rent rates.
Though 2012 was the year of the build-to-suit, the experts believe more speculative space will be in the works during 2013. Colliers’ Ward Richmond points to already in-the-works projects, such as Prologis’ Park 20-35, a 653,000-square-foot facility in Lancaster and IDI’s 530,000 square-foot Valley Parkway Distribution Center in Lewisville.
“The construction activity we’re seeing these days is incredibly disciplined compared to 2006-2007,” McArtor says. Six or seven years ago, he went on to explain, developers came online with more than 200 buildings a year. “The activity level today is more in the 40-building range,” he says. “In this cycle, we’re seeing the strategy of build-to-own, rather than build-to-sell. Institutional capital is coming in and wanting to own and hold long term. It’s a different theme than in the last cycle.”