Dallas - Fort Worth Industrial Summary - 1Q 2023
The Dallas-Fort Worth industrial market is undergoing a massive expansion. Thanks to its central location in the U.S., excellent highway and rail networks and world-class airports, the metroplex is in an excellent position as a logistics and transportation hub.
The pace of construction has accelerated over the past five years, placing Dallas-Fort Worth in the top spot for industrial construction in the country. Developers are able to work quickly thanks to abundant, relatively cheap land. There is more than 80 million SF underway, or 8% of current inventory, and developers have grown existing inventory 24% since 2015. The share of pre-leased space is trending near 19%, among the lowest rates in the country. While the pace of ground breakings has slowed over the past quarter, the market is expected to feel growing pains, beginning with availability and vacancy rates shifting higher. One of the leading industrial brokers describes the market as, "on fire for the last three or four years, one year bigger than the next. It is ending; there will be a normalizing in the market."
Demand has met the swelling construction pipeline. Industrial tenants continue to take space at a rapid clip, grabbing 64 million SF in 2022. That's the second-highest leasing volume, coming off the heels of a blistering 2021, when the market reported 73 million SF absorbed. Thanks to the impressive demand response over the past two years, vacancy rates remain compressed near 20-year lows. Even with a consistent demand response from tenants, vacancy rates are poised to shift higher due to immediate supply-side pressure.
E-commerce, third-party logistics, and manufacturing firms continue to drive demand in the market. Amazon has made an outsized impact on the market, occupying 19 million SF and becoming the largest industrial user in the market. Roughly half of that space is represented by distribution facilities 1 million SF or greater. Even as Amazon's expansion plans have slowed nationally, other retailers continue to tap into the metroplex's growing population. Regional and national grocers, including Kroger, Albertson's, and H-E-B continue to battle for the region's market share with new distribution facilities. Meanwhile, DHL and FedEx dominate among shipping and logistics firms, each taking more than 4 million SF.
Rent growth has accelerated over the past two years, tracing robust demand. CoStar's outlook calls for rent growth to cool through the near term, as supply-side pressure is expected to push availability and vacancy rates higher.
Outperforming demand and rent growth has driven interest from investors, with sales volume shifting higher over the past two years. Asset pricing has accelerated, with the strongest growth on record over the past two years. While investors remain keen on the long-run structural advantages in Dallas-Fort Worth, deal volume was curbed by rising interest rates, which have weighed on investor sentiment.
Industrial leasing has continued to trend higher over the past three years. Demand is coming from national retailers, consumer packaged goods, and manufacturers seeking to tap into Dallas-Fort Worth's expansive logistical network, growing population, and robust economy. Net absorption has trended higher, catalyzed by the rise of e-commerce and last-mile distribution, allowing vacancy rates to compress over the past two years.
More firms taking larger blocks of space helped drive leasing activity. Segmenting lease sizes, those tenants signing leases 500,000 SF or larger accounted for 19.4 million SF in 2022, up from 14.1 million SF in the year before.
Nation-leading population growth has intensified competition among grocers for the $24 billion in annual grocery spending in the region. To support new retail locations and connect to consumers, more grocers are filling distribution facilities. For example, San Antonio-based H-E-B entered the market over the past two years with new stores in Collin County and signed on for 620,000 SF at the Intermodal Commerce Park in NE Tarrant/Alliance. Kroger is also building a 350,000-SF automated online grocery facility. Meanwhile, Walmart has invested $800 million in two new distribution facilities totaling 2.2 million SF.
As companies reevaluate their supply chains following the recent passage of the CHIPS Act grant, the metroplex is well-positioned to take advantage of future opportunities. Several semiconductor manufacturers already have a presence here. These include the inventor of the first integrated circuit, Texas Instruments, and other firms, including National Semiconductor, Maxim Integrated Products, and STMicroelectronics. The market has already started to reap the benefits. Texas Instruments is expanding its operations with 102,000 SF under construction in Plano. The company has broken ground on a $30 billion campus north of Dallas in Sherman. TI considered putting the four-factory campus in Singapore before deciding on North Texas. In addition, GlobiTech announced it would also build a $5 billion plant in Sherman, with construction kicking off in 2023. When fully staffed, the facility will create 1,500 new jobs and produce more than 1 million silicon wafers monthly.
Demand for industrial space is coming off a breakneck pace over the past two years. Meanwhile, development activity has accelerated, with construction levels ticking up north of 80 million SF over the past year. These two trends combined are a recipe for rising vacancy rates. There are early signals this shift is materializing, with availability rates creeping higher, tracking above 10% over recent quarters. Burgeoning industrial nodes in outlying areas including Kaufman County and sections of Denton are seeing availability rise quickly as new projects hit the market. Looking ahead, CoStar's Base Case forecast calls for vacancy rates to expand above 7% through the near term.
The information contained herein was obtained from CoStar; however, Bradford Companies makes no guarantees, warranties, or representation as to the completeness or accuracy thereof. The presentation of this property is submitted subject to errors, omissions, change of price or conditions prior to sale or lease or withdrawal without notice.