DFW MARKET INSIGHTS – INDUSTRIAL – 3Q 2023

Dallas - Fort Worth Industrial Summary - 3Q 2023

3Q 2023 Industrial Market

Summary

Vacancy rates in Dallas-Fort Worth are expanding as deliveries outpace net absorption through mid-2023. Deliveries spiked to their highest level on record, with half of that volume coming from buildings 500,000 SF or greater. The trend reflects the aggressive pace of speculative construction in the Metroplex over the past few years. Meanwhile, net absorption has softened over the past three quarters, coming off white-hot demand that led to record-setting rent growth.

Industrial availability is rising quickly, led by larger buildings. Buildings above 500,000 SF report availability of almost 16%, up from 9% in mid-2020. That is well above the average Metroplex availability rate across all properties regardless of size, which has risen from 8.7% to 10.7% over the same period.

By geography, availability and vacancy rates are rising the fastest in some established industrial hubs, including SE Dallas/I-45 and NE Tarrant/Alliance. Vacancies are also rising in burgeoning industrial zones including Kaufman County and Denton, where the existing inventory is relatively small. Meanwhile, urban industrial nodes and areas within proximity to D/FW International Airport maintain relatively tight vacancy rates and should be better insulated as more supply comes to market.

Net absorption has slipped over the past three quarters as leasing activity has plateaued. Market participants cite longer timelines to execute leases, leaving space to spend more time on the market. The largest leases are driven by third-party logistics firms, manufacturing and retailers seeking to harness Dallas-Fort Worth's central location in the U.S. and multi-modal transportation network to move goods across the country.

The pace of industrial development is cooling through mid-2023, with construction starts ticking lower over the past three quarters. Market participants cite fewer construction loans as the cost to finance projects has risen, in tandem with interest rates. CoStar's Base Case scenario calls for the market vacancy rate to rise to 8-9% before stabilizing in mid-2024, when the amount of unleased space completing construction each quarter should begin to decline significantly.

Market rent growth is cooling after two years of double-digit growth. The market is reporting annual growth of 9.2%, down from the peak of 12.6% in mid-2022. Quarter-over-quarter movements indicate a more rapid slowdown relative to the U.S. norm, a trend that is expected to continue through the near term. As with vacancy and availability, rent growth performances are influenced by geography. Pricing power is shifting in the hands of tenants in outlying submarkets, while landlords maintain a firm grip on rents in the market's interior.

Leasing

The Dallas-Fort Worth industrial market is experiencing growing pains as the pace of deliveries is outpacing net absorption deliveries of 63.0 million SF while tenants moved into 33.1 million SF. Demand is coming off the heels of a peak of 49.3 million SF set in 2021, and is consistent with the five-year average of 32.8 million SF. At 7.9%, the market vacancy rate has jumped by 230 basis points, compared to the low of 5.3% at the end of 2022. Net absorption has been supported by national retailers occupying large blocks of space, including Walmart, Niagara Bottling, and Dollar General each taking over 1 million SF in major industrial hubs south Dallas and north Fort Worth.

Leasing volume has plateaued but remains above pre-crisis norms. Market participants say demand persists, but tenants and decision makers are taking longer to commit to space due to elevated economic uncertainty. The market is reporting 58 million SF in leasing, down from a peak of 72 million SF at the end of 2021, but above the average lease volume of 52 million SF reported between 2017 and 2018. Larger logistics continue to support leasing activity with buildings 500,000 SF or larger accounting for 29% of lease volume in 2023, on par with the average reported over the past three years. The latest example is Southwire Company taking 1 million SF at NE Tarrant/Alliance in a recently completed building at Alliance Westport 25. Developed by Hillwood, the logistics building features 40-foot clear heights and is adjacent to the BNSF Alliance Intermodal facility.

There are some examples of firms vacating large blocks of space. 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 still occupies its 1.2 million-SF distribution hub in Northlake, where it moved in 2019. Space vacated by retailers facing bankruptcy is being taken quickly. For example, Bed Bath & Beyond placed its 800,000-SF space on the sublease market, and it was taken by Flexport five months later.

New firms are entering the metroplex thanks to its central location and distribution network. McMaster-Carr is investing $360 million in a new regional headquarters at a 117-acre site in Alliance. The location will serve as a regional corporate office and distribution facility. The e-commerce industrial supplier is a major vendor to scores of industrial companies globally. The site's details are forthcoming.

Vacancy rates are poised to expand further, as projects of the 52.3 million SF underway are anticipated to deliver over the next 12 to 18 months. The share of pre-leased space is trending near 25%, among the lowest rates in the country and another risk to vacancy rate expansion. CoStar's House View forecast calls for vacancy rates to 9% through 2024 before stabilizing in 2025 and beyond. Meanwhile, availability rates are rising to 11.3%, led by logistics buildings which report availability of 13.2%. Large logistics buildings delivering in outlying industrial nodes in south Dallas and outlying areas, including Kaufman County and Denton, push availability higher to 20% to 30%.

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 in the Metroplex, led by Texas Instruments and other firms, including National Semiconductor, Maxim Integrated Products, and STMicroelectronics. Texas Instruments is expanding its operations, with 102,000 SF under construction in Plano, breaking 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. Meanwhile, China-based Junchuang selected Fort Worth as a base for its North American R&D hub. The firm supports the EV market with brands including Jaguar, Land Rover, Ford, and Mazda. The company plans to occupy 55,000 SF at 46 Ranch Logistics Park in south Fort Worth and plans to bring 120 jobs by 2025. The trail of high-tech manufacturing is moving north along I-45, with GlobiTech breaking ground on a $5 billion plant in Sherman. When production is at capacity, the facility will employ 1,500 and produce more than 1 million silicon wafers monthly.

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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.

November 29, 2023

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