DESPITE PANDEMIC, NORTH TEXAS INDUSTRIAL REAL ESTATE SEES NEW HIGHS
By Ryan Salchert
Dallas Business Journal
December 28, 2020 | 8:00 AM
The COVID-19 pandemic has put a strain on nearly every commercial real estate asset class in North Texas. However, despite the pandemic, industrial real estate is performing better than it ever has.
North Texas’ industrial market was already coming into 2020 with some wind behind its sails. The region was coming off its fourth consecutive year of more than 20 million square feet of industrial absorption, according to CBRE. In comparison, 25.1 million square feet of new space was delivered in 2019. Another 23.5 million square feet was under construction as of January 2020. Expected deliveries in 2020 were estimated to exceed 2019 numbers by 21 percent, according to Yardi Matrix data complied by CommercialCafé. This expected figure placed North Texas behind only California’s Inland Empire for expected deliveries in 2020.
When the pandemic struck, industrial deals and leasing activity initially slowed down, as real estate activity did across all other asset types. However, once shelter-in-place was lifted, things started to pick back up fairly quickly. While most new office projects have been pushed back to at least 2021, new speculative warehouse projects were breaking ground just a month after shelter-in-place began. Experts say the pandemic’s impact on industrial was unique, as it accelerated the trends that had made it such a hot asset previously.
“Prior to the pandemic, demand for distribution centers was really high, and it has only continued to grow through the pandemic,” Jacob Milligan, vice president and Dallas market officer of Prologis, told the Business Journal in June.
Activity continued to pick up, with large leases being signed from companies like Amazon and Uline, large sales being executed by companies like Stockbridge Capital Group and Cabot Properties, and millions of square feet of new industrial space being proposed every month. Between the second quarter of 2019 and the second quarter of 2020, industrial investment in North Texas grew by 24.8 percent, according to data from Real Capital Analytics compiled by CBRE.
“Since about May or June, it’s been full steam ahead in the market. We’ve jammed about 12 months of deals into the last six months of this year. This last half has seen a ton of velocity and pricing has been up about 5 to 8 percent of what we were at before all this,” said Dustin Volz, managing director of Capital Markets at JLL. “We’ll have a record year in 2020. This will be the busiest year that our team has ever had in DFW.”
The North Texas market also set a new local record for the most industrial absorption seen in the first three quarters of any year at over 21 million square feet, according to Cushman & Wakefield.
“With the exception of the first four to six weeks of Covid, it’s been white-hot. Never been busier in my career. Absorption and construction numbers are on pace for another record type year,” said Conrad Madsen, co-founder and partner at Paladin Partners. “With the growth of e-commerce from 11 percent to 16 percent of total retail sales during Covid, industrial is the golden child of commercial real estate asset classes. I’ve never seen the market any hotter than its current state. The White Swan of CRE just keeps getting prettier each day.”
This record-breaking absorption can be pinned on a few factors, including the growth of e-commerce and the success that many industrial tenants are having this year. There’s also been an influx of new tenants looking at North Texas for the first time.
“That’s a trend that you’re going to continue to see. It’s from all over, but the strongest concentration (of new tenants) is from the West Coast,” said Chad Albert, principal and partner at NAI Robert Lynn.
Looking towards next year
As good as 2020 was for industrial real estate in North Texas, experts feel just as confident about the year ahead. On the investment side, Volz says the buyer pool is 30 percent deeper than it was before the pandemic began and that investors are coming from all over to find deals in the area.
“We’re seeing a lot of high net-worth family offices and a lot of private equity groups that historically played in other segments of real estate,” said Volz. “It’s high net worth money coming out of Central and South America, it’s institutional money coming out of Europe, and you have your Korean and your Singapore money, which is fully back in the market. A lot of those guys are looking direct on investment opportunities.”
While brand new, single-tenant properties are getting the most attention, Class B assets are also in high demand, a trend that should continue into next year.
“We just traded a Class B portfolio at a 5.3 percent cap (rate). I think there will be opportunities where Class B is going to be trading in the high fours in the next 12 to 18 months. There’s a huge appetite for Class B product and a big lack of available product for groups to go chase in that space,” Volz said.
Plenty of more Class A space will be coming online in the next year or two. As of the third quarter, North Texas experienced its 19th consecutive quarter of more than 20 million square feet of industrial space under construction, according to JLL. Even though so much new space is hitting the market, experts say it is getting absorbed just as quickly.
“You’re seeing some large facilities get leased up during construction before a roof is even on. It’s a timing thing. For some deals, maybe it’s a 12-month lease-up. I think the average is going to be somewhere between six to nine months. That will be the target for a lot of these landlords,” said Albert.
As for 2021, Albert says high absorption is likely to continue.
“With tenant confidence continuing to rise, I think that’s going to be a real trigger for demand and activity.”
Other trends are also likely to help the industrial market stay strong in the future.
“E-commerce continues to grow and on-shoring and nearshoring to Mexico, which will drive more distribution centers to DFW, is definitely real,” said Madsen. “However, if the next administration goes back to the old ways of not incentivizing American manufacturing, we could see the manufacturing portion dry up. I hope they look out for the American worker and manufacturer like we have had over the last four years.”