DFW MARKET INSIGHTS – INDUSTRIAL – 4Q 2023

Dallas - Fort Worth Industrial Summary - 4Q 2023

4Q 2023 Industrial Insights DFW Commercial Real Estate

Summary

The Dallas-Fort Worth industrial market is marked by record deliveries, pushing vacancy rates to decade highs. Developers added 70 million square feet in 2023, the highest level on record with almost half that volume coming from buildings 500,000 square feet or greater. The trend is a consequence of aggressive speculative construction over the past few years. Increasing availability is contingent on building size, type and location. Logistics buildings above 500,000 SF report availability of 15%, up from 9% in 2020. Meanwhile, availability rates for buildings 50,000 SF or less remain stable at 5%. By geography, periphery submarkets with heavy speculative development report the most dramatic rise in availability, led by SE Dallas/I-45, and outlying industrial nodes Kaufman County and Denton where existing stock is relatively small. Meanwhile, interior submarkets near major highways and DFW International Airport maintain stable vacancy rates and are better insulated from the current supply wave.

Net absorption has stabilized with tenants taking 58 million SF over the past year, down from the peak of 74 million SF in mid-2022. Even so, that level remains above the pre-pandemic average of 48 million SF reported during 2017 to 2019. Overall deal volume remains consistent across deal size, with the largest leases 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. For example, California-based canned beverage manufacturer DrinkPAK committed to 2.8 million SF across two facilities in Fort Worth, bringing an estimated 1,500 jobs to the area.

Construction is rolling over fewer starts as rising interest rates and elevated construction costs dissuade developers from starting new projects. Quarterly construction starts have fallen to about 5 million SF over the past two quarters, down from the peak of over 25 million SF in mid-2022. CoStar's forecast calls for the market vacancy rate to rise to 9% before stabilizing at the end of 2024 when the amount of unleased space delivering each quarter should decline significantly.

Market rent growth is 9% year-over-year, cooling 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. Market participants say there's downward pressure on asking rents for newer buildings as tenants have more options. Pricing power is shifting in favor of tenants seeking logistics space in outlying submarkets, while landlords continue to escalate rents within interior submarkets.

Leasing

The Dallas-Fort Worth industrial market is experiencing growing pains as the pace of deliveries is outpacing net absorption deliveries of 68.1 million SF, while tenants moved into 29.7 million SF over the past year. Net absorption is stabilizing after peaking at 49.2 million SF in 2021 with recent performances more consistent with the five-year average of 33.1 million SF. At 8.5%, 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 in south Dallas and north Fort Worth.

Leasing volume has plateaued but remains above pre-pandemic 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 reports 58 million SF in leasing in the past 12 months, 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. The latest is Walmart leaving its 788,000-SF distribution center at 4300 Westport Parkway and relying on its recently completed distribution centers in Lancaster that offer more automation. The company still needs headcount for these new centers and is offering a one-time bonus of $7,500 for employees in Fort Worth to transfer to Lancaster. 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. Some spaces vacated by retailers facing bankruptcy is being taken quickly. For example, Bed Bath & Beyond placed its 800,000-SF space in Lewisville 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 41.5 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 forecast calls for vacancy rates to rise above 9.5% through 2024 before stabilizing in 2025 and beyond. Meanwhile, availability rates are rising to 11.0%, led by logistics buildings, which report availability of 12.7%. 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%.

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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.

February 2, 2024

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