Q&A: Sean Dalfen On Dalfen Industrial's Major DFW Pipeline
As demand for industrial space grows, particularly in the Sun Belt states, real estate investment management firm Dalfen Industrial is acquiring and developing industrial assets across the U.S. and Canada. The company is based in Montreal, but DFW is firmly on its radar, with 2M SF under construction. Local market fundamentals are whetting its appetite for assets in the far north DFW suburbs, as well as Garland, East Dallas, Mesquite, DFW Airport and the Great Southwest Industrial area.
Dalfen recently acquired roughly 46 acres in Mesquite zoned as industrial tracts near the Skyline Logistics Hub.
With industrial CRE white-hot, Dalfen President and Chief Investment Officer Sean Dalfen went on the record with Bisnow to reveal where the market is in this cycle and where his firm is placing its bets.
Bisnow: What are some of the recent acquisitions or developments in the DFW area that Dalfen Industrial is particularly proud of in terms of what these particular properties do for your portfolio and presence in the market?
Sean Dalfen: We are developing six buildings in Dallas close to 2M SF. Our development spreads across the north, airport and east markets of Dallas. We are particularly proud that each of these developments is built to cater the respective needs of each.
In McKinney, we are catering to the last-mile fulfillment needs of the continuously growing Far North Dallas population. For the Mesquite market, our development is centered on the companies’ ability to draw from the exceptional workforce in that market. Our DFW [Airport] project is serving the robust DFW demand for high-quality fulfillment space for those wanting a centralized location in the Metroplex and companies who need to be in close proximity to the airport.
Bisnow: What are Dalfen's long-term goals for DFW and what particular submarket or submarkets in DFW are receiving your attention?
Dalfen: We are focused on continuing to grow our platform with a strategy implementing both ground-up development and acquiring quality assets with a last-mile focus to key population centers. The DFW submarkets that we remain very interested in are the northeast [suburbs] inclusive of Plano, Allen, McKinney and Garland; East Dallas and Mesquite; and the DFW Airport area and [Great Southwest].
Bisnow: Everyone has been focusing on last-mile delivery warehouses and e-commerce distribution space. How much space have you acquired or developed internationally in the past three years related just to this area of industrial?
Dalfen: We have acquired and developed roughly 15M SF over the past three years.
Bisnow: With industrial in such high demand, are prices per square feet creating a scenario where acquisitions are becoming less affordable? If so, how will Dalfen in particular respond to that?
Dalfen: In select markets where demand far exceeds supply — this includes many submarkets in DFW — it has made more sense to develop new properties as opposed to buying stabilized older properties at higher than replacement costs. This is why you are seeing us develop in multiple locations in the Metroplex and strategically across the country.
Bisnow: What percent of your business is allocated to industrial development and what are your plans on the development side?
Dalfen: We focus exclusively on industrial properties, and the mix is approximately 80% acquisitions and 20% development. This year we will commence construction on a total of more than 2.5M SF of speculative warehouse space nationally in the markets where we have offices. Currently, we are developing projects in Dallas, Atlanta, Orlando and Cincinnati.
Bisnow: Are you most interested in speculative industrial spaces — or are there other areas of particular interest on the development side?
Dalfen: Our preference would always be to build with a tenant in tow. However, in markets where the demand drivers are exceptionally strong and where we truly understand the specific nuances of the area, we have no problem building on a speculative basis. The fact is, today more than ever before, leasing decisions are made by tenants at the last minute, and therefore having a spec ready building allows us to get in front of the majority of deals.
Bisnow: Do you hope to grow industrial development work to make up at least 20% to 30% of your business at some point in the future?
Dalfen: We aren’t merchant builders, and the vast majority of our development projects are build to core. With this in mind, whether development will make up a greater or smaller component of our overall business in the future is tied directly to whether it will make more sense to build rather than buy existing at that point in time. We make our investment decisions based on market conditions and the specifics on the ground.
Bisnow: What would you tell parties wanting to grab attractive industrial properties in DFW in today's market — are all of the good deals going away and are prices going to continue to rise?
Dalfen: Yes, all the good deals are gone — stay away.
Bisnow: The McKinney submarket has been getting a great deal of industrial attention. What are Dalfen's plans in McKinney? How many buildings and/or square feet do you have going in this submarket?
Dalfen: We rounded out our existing portfolio of 211K SF by completing an additional speculative development of a 115K SF building in January. We recently executed our first lease in that property with Cinemark for 26K SF and continue enjoying great activity from a wide tenant base.
Bisnow: What makes McKinney an attractive market for you and what industrial assets are of interest — last-mile, storage, etc.?
Dalfen: We really like the McKinney area and the strong fundamentals it provides. Our buildings enjoy great access to I-75 and close proximity to the fantastic amenities and demographics that the city of McKinney’s growth has enjoyed, and is poised to continue to grow upon in the near future.
Bisnow: Other than DFW, are there other markets where you are interested in either acquiring industrial properties or developing properties?
Dalfen: Yes, there are multiple markets throughout the country and Texas that we are strategically focused on. These include cities like: Miami, Atlanta, Denver, Orlando, Phoenix, Salt Lake, Austin and Las Vegas, amongst others.
Bisnow: As demand tightens in DFW, what is going to happen to the cap rate on industrial properties in your opinion?
Dalfen: Cap rates aren’t necessarily tied to an individual market’s supply-and-demand fundamentals. They are much more correlated with overall macro factors like interest rates, bond yields and the health of the national economy. If anything is certain it’s that economic trends are cyclical, and we have had a bull market for a long time. It’s highly likely that we will be faced in the future with a scenario where industrial vacancy rates continue to tighten and cap rates actually increase. In short, demand drivers for industrial are continuing to grow, due to e-commerce, transport costs rising, increased urbanization, lack of quality infill properties and a myriad of other things. Yet, when a market correction happens that will lead to a tightening in the capital markets, which in theory can definitely drive up cap rates.
Bisnow: Do you see industrial dying down nationally anytime soon or is this a market expected to continue to grow?
Dalfen: All of our research points to industrial demand continuing to grow nationwide. That said, there are definitely locations in the country and industrial property subtypes which will contract. Real estate is a local game and you need to truly grasp the nuances in each market where you operate to succeed in the long term. In order to consistently profit, you have understood the locations where you want to invest.
Bisnow: How would you describe this particular era of industrial when compared to past markets in your career?
Dalfen: We have never seen a market like this before. Today, industrial is a more important asset class than it has ever been since the industrial revolution. The mega trend shift in consumer buying habits, let’s call it the “Amazon effect,” has transformed the demand drivers for industrial in such a significant way.