Dallas - Fort Worth Industrial Summary - 2Q 2023
Vacancy rates in Dallas-Fort Worth are expanding on account of deliveries outpacing net absorption through early 2023. Around two-thirds of recent deliveries are buildings of 500,000 SF or greater and reflects the aggressive pace of speculative construction. Vacancies are shifting higher faster among these buildings also, with a vacancy rate expansion of 2.4% over the past quarter.
Vacancy and availability rates are rising the fastest in some established industrial hubs, including SE Dallas/I-45 and NE Tarrant/Alliance, two epicenters for speculative development. In burgeoning exurban industrial zones, including Kaufman County and Denton, vacancies are also seeing rising vacancies, as their existing inventory is relatively small. Meanwhile, urban industrial nodes and areas within proximity to D/FW International Airport are still maintaining relatively tight vacancy rates. They should be better insulated relative to exurban industrial nodes with high volumes of construction. CoStar's Base Case scenario calls for the market vacancy rate to rise to 8%, though there is greater downside risk for rates to surpass this rate, with demand stabilizing over recent quarters.
The pace of construction has hit an inflection point in Dallas-Fort Worth. Construction starts have tapered over the past two quarters, indicating that the rise in deliveries will move through the market over the next year. Meanwhile, developers are starting fewer new projects as higher interest rates have pushed the cost of construction financing higher. Through the first quarter of 2023, 6.3 million SF started, which was the lowest level since the second quarter of 2020. Lower levels of construction are expected through the near term, which should alleviate supply-side pressure and allow vacancy rates to stabilize through the end of 2024 or 2025.
Leasing activity is plateauing after setting a blistering pace over the past two years. Industry leaders cite, “the market has been on fire in the past two years; there is some normalization in the market.” Leasing activity is evenly spread across the size spectrum over the past two quarters, with leases of 200,000 SF or greater accounting for 50% of all lease volume. There remains interest among smaller spaces; leases of 50,000 SF or less accounted for 19% of all lease volume. These buildings continue to garner attraction from tenants and stay on the market only a short period.
Market rent growth is showing signs of cooling after two years of double-digit growth. Quarterly rent appreciation is slowing, coming in at $0.14 in nominal growth, below the peak of $0.26 reported through mid-2022. Further vacancy expansion may slow rent growth more dramatically compared to the U.S. Supercharged demand in 2021 propelled rent growth performances and allowed Dallas-Fort Worth to outperform the U.S. norm. Rent growth performances are led by logistics hubs within the market and are influenced by location and supply.
The Dallas-Fort Worth industrial market is experiencing growing pains as the pace of deliveries is outpacing net absorption. In turn, vacancy rates are shifting higher as the market is reporting over 30 million SF in deliveries, while tenants have moved into 14 million SF year-to-date. The market vacancy rate has jumped by 130 basis points since the end of last year. Vacancy rates are poised to expand further as projects of the 63.4 million SF underway are anticipated to deliver over the next year or so.
Demand for industrial space is coming off a breakneck pace over the past two years. The share of pre-leased space is trending near 19%, among the lowest rates in the country, and another risk to vacancy rate expansion. Meanwhile, availability rates are 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.
Leasing volume is consistent with pre-crisis norms. 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 the year before. Nation-leading population growth has intensified competition among grocers for the region's $24 billion in annual grocery spending. 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.
There are some examples of firms vacating large blocks of space. Retailers including Bed Bath and Beyond moved out of its 800,000-SF distribution facility in Lewisville; Neiman Marcus left its 507,000-SF distribution center in Irving; and as part of a larger effort to consolidate manufacturing operations, Stanley Black & Decker is moving out of its 425,000-SF manufacturing facility in Fort Worth, which was developed by Hillwood in 2021. The company is still occupying its 1.2 million-SF distribution hub in Northlake, where it moved in 2019.
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.
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.