Vacant Buildings Not Sitting Vacant

DALLAS—Last week, Robert Kramp, director of research and analysis in the Texas and Oklahoma division of CBRE, provided a RealShare Texas sneak peek about population growth and e-commerce trends. But there is so much more going on in DFW in terms of construction, leasing and rent growth. In the first of a two-part exclusive, Kramp provided further insight into those industrial market trends.

GlobeSt.com: Texas currently has 30-plus million square feet under construction. A majority or 62% of delivered construction was preleased in first quarter, according to CBRE. Do you see this rate of preleasing continuing across the state?

Kramp: Yes. As supply chain optimization is coupled with rapidly developing building and material handling systems, we expect industrial building to become increasingly specialized. We are currently in the second longest expansion period in the US, and occupiers have the capital to reinvest into their supply chains. As industrial occupiers continue to get more sophisticated supply chains, we expect the growing trend of build-to-suit and highly customized speculative product.

GlobeSt.com: What key trends are you seeing in your markets with new construction and leasing activity?  Are you seeing a flight to quality with rental rates rising?

Kramp: Occupiers are reinvesting in their supply chains and therefore are paying higher rates for more sophisticated buildings. I want to illustrate that the buildings they are vacating are not sitting vacant. There is still plenty of demand for second generation space in Dallas/Fort Worth and other markets throughout Texas.

As an example, we had 26.8 million square feet come on line here in 2017–a record amount in a single year for the DFW market. Over 71 million square feet has been delivered to market in DFW since 2015, 71 million square feet delivered within two years and three months, and yet the vacancy rate in DFW was 5.8% at the end of first quarter 2018, at historic lows. This illustrates that there is incredible demand across the spectrum of occupiers from users with larger requirements to local businesses with smaller needs.

GlobeSt.com: Are you seeing more build-to-suits versus spec?

Kramp: Yes. As occupiers get more sophisticated about their supply chains, their requirements are getting more specific and buildings are becoming more specialized. In DFW, for example, CBRE research tracked 44.4% of all projects underway as build-to-suit deals. This aligns with what many of our brokers are seeing in their practices too. We expect this trend of build-to-suit industrial projects to continue with rapidly advancing technology that will create greater efficiencies in supply chains.

GlobeSt.com: Do you think this bigger and taller focus is here to stay?

Kramp: Yes, due to a variety of factors, buildings will continue to get larger and higher. One contributing trend is consolidations into larger regional distribution centers and advances in material handling systems and racking layouts. Freezer/cooler space is already measured in cubic feet and I think that realistically, we could find that we are using this same measure for other types of industrial product. As buildings and transportation become increasingly automated, we can expect to see ever-higher clear heights–at least to the point where the math still works out. We do have a lot of land in Texas, so multi-story warehouses, which cost about 60% more to build than a single-story building of the same floor area, are on a fairly distant horizon.

GlobeSt.com: Do you think rising construction costs (tariffs/labor shortages/etc.) are going to deter development? Or is the demand strong enough to maintain pace?

Kramp: Rising construction costs and increased competition for labor is certainly a headwind. However, barring a macro-geopolitical event, demand and development should remain strong at least for the foreseeable future. As long as Texas keeps attracting new residents and creating new jobs, the demand for industrial space will be there.

GlobeSt.com: Has rent growth slowed? What are your projections for the coming quarters?

Kramp: Rent growth in Austin has tapered off slightly, but this is not considered one of the state’s primary distribution markets. Across the board for distribution space, rents have remained steady and while not growing wildly, are still providing regular and steady returns for owners, which is what draws them to this asset space.

GlobeSt.com: Do you see or foresee a rise in last-mile/high-density facilities?

Kramp: Not like what we are seeing in coastal markets like New York City, Seattle and San Francisco, because e-commerce users are able to serve their last-mile customers out of their distribution centers due to the loops that surround and traverse our major population centers in Texas. Austin is a market where this type of last-mile development makes the most sense as it has the population density and traffic congestion that makes warehouse development near the city center economically viable.

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