The industrial market's vacancy is predestined to edge up, given the depth of the global fiscal crisis and the 9.6 million sf that's due to come on line before the year ends. To date this year, 14.4 million sf has delivered, of which 76% was vacant at completion, according to Cushman & Wakefield of Texas Inc.'s third quarter research.
As a credit to Dallas/Fort Worth's tenacity, year-to-date net absorption hit 4.6 million sf at Q3's close, down 2.65 million sf from third quarter 2007. "The bottom line is compared to the rest of the county, we're doing pretty well. We've had almost five million sf of absorption in our market in a tough economy," says Dan Cook, C&W's senior director in Dallas. The times seem slow because the North Texas market has been on steroids for the past few years, he adds. Inventory is up to 492.8 million sf.
In simple terms, supply and demand will have to adjust to the new economy. "It will be at least 12 months before we see any new spec construction," Cook predicts for GlobeSt.com. What are delivering are projects that were too far along to stop before the slowdown permeated the marketplace.
"Once they're started, you have to go ahead and finish them," Cook says. "But, we have smart developers. Our market is smart. They're not going to add new [spec] buildings-- they'll do build-to-suits." And that he says includes his new assignment for ID3 Partners LLC, a local developer, to find tenants for the 814,320-sf I-45 Tradeport II on a 60-acre tract in Sunridge Business Park in southern Dallas County.
[IMGCAP(2)]Cook and Jeff D. Thornton, senior vice president in Dallas/Fort Worth for Indianapolis-based Duke Realty Corp., point out that the market is slow, but not stalled. The market changes are in line other slow times in other years. In other words, transactions take longer to close and deal sizes have shrunk. C&W's research shows this year's average deal size is 23,000 sf whereas it was 27,000 sf in 2007. In the 150,000-sf-plus category, there have been 23 leases signed this year--12 less than last year at this time.
Dallas/Fort Worth's big picture is leasing activity is down 24% in comparison to 2007's first nine months. Absorption is down 36%.
"We're in a recession environment with the economy," Thornton says. "Typically businesses don't grow. We're still seeing good activity on RFPs and we're still showing space." But, he does admit many tenants are opting to renew to wait out the economy.
Building owners once again are offering free rent and higher tenant-improvement allowances as signing perks instead of shaving face rates. And more have started to insist on letters of credit from prospective tenants. "It's safe to say landlords will be more stringent going forward in how they underwrite lease deals," he says.
Cook says owners are returning to inserting rate bumps into industrial leases. "It's the next step as opposed to an outright drop in rates," he says. Industrial rents range from $3.75 per sf to $8.56 per sf. In comparison, they were $3.55 per sf to $8 per sf when Q3 ended in 2007.
Delta Associates, the Washington, DC-based research arm of Transwestern Commercial Services, collates its data differently, but the overall picture is the same. Absorption is slower, rents have edged up and vacancy is going to continue to climb. Delta's researchers point out the region's spec space gives it an advantage in the short term because it helps the metroplex "continue to position itself as a top national distribution performer, particularly as a weakened dollar continues to fuel a healthy appetite for exports."
Fresh back from a logistics seminar in Denver, Cook says it was obvious that Dallas/Fort Worth has a role to fill in the new economy. Rising fuel costs are causing distributors to adjust their models from two large centers on each coast to include smaller ones to service states in between. "In every scenario that was presented for smaller distribution centers, Dallas/Fort Worth was on that map," he reports. "That could help us on the other side of the equation."
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