DALLAS-During January of this year, Bill Burton with Hillwood Properties noted that industrial vacancy throughout the Dallas-Fort Worth area was well into single digits. However, unlike in previous cycles, this news wasn’t triggering a mess of development in the sector. The reasons, he went on to say, involved tight lender requirements.
Fast forwarding more than six months, Jones Lang LaSalle reports that industrial vacancies are still in single-digit territory, ranging from 5% (at Fort Worth’s Alliance) to 7.3% (at Great Southwest, in Arlington). However, as Terry Darrow, managing director with Jones Lang LaSalle’s Dallas office tells GlobeSt.com, speculative building is starting to creep back.
“There are two major reasons why spec hasn’t taken off,” he explains. Much like Hillwood’s Burton, Darrow points to tight lending restrictions on speculative building. “Lenders are more concerned about getting paid back,” Darrow remarks. “With pro formas not meeting projections, lenders have become more selective on projects.”
Even developers with equity – such as the REITS – had put a stop to building. “REITs also look at the markets, and their management committees are more conservative than they were in 2007-2008,” Darrow remarks.
The other reason, he goes onto say, was the overbuilding during the mid-2000s. “Management committees were anxious to start new buildings, interest rates were low, the market was performing like wildfire – and we overbuilt right into the peak of a poor market,” he notes. This led to excess space, which took years to be absorbed and leased.
Now the DFW area is reaching that other end of the pendulum; though there have been many build-to-suits constructed, speculative development remains sluggish, though some developers have gone ahead and begun to build again. Most notably, Prologis’ construction on 650,000 square feet of spec space at its Park 20/35 in South Dallas mean other developers are starting to take notice. “People have gone back and told this story to management committees,” Darrow points out. “They’re figuring out that the first in are the first to make money.”
Furthermore, he goes on to say, the industrial sector has evolved during the past decade. In the old days, Darrow explains, much of the building and demand was north of Dallas-Fort Worth International Airport, because that’s where most of the people were. These days, however, most of that land is built out. “Freeways are crowded there,” Darrow says. “If you try to get an 18-wheeler through all the traffic there, you end up with one mad truck driver.”
But industrial is evolving from people orientation to logistics orientation. As such, developers are seeking out places that may not be close to population centers, but that are close to infrastructure such as highways, rail and intermodals. Because of this, Darrow believes the southern tier of the Metroplex will be the next hot spot for speculative building.
But will there be overbuilding? “We’re noted for overbuilding, beginning in the 1970s and through 2008,” Darrow quips. “There’s been the history that, if one is good, 10 is better.” These days, however, more cautious developers are in place. That, combined with continued lender constraints, means few will be ready to rush in and throw up millions of square feet, just because the land is available and they can.
Furthermore, though Darrow thinks it’s a good time for speculative development, some nice build-to-suits have gone north. “If you can do that, you may want to be careful about building spec, if you don’t have to,” he says.