DFW Industrial Would Take A Hit In Recession, But Probably A Mild One
The Dallas-Fort Worth industrial market has had such a good run in recent years, spurred on by demand from e-commerce and other factors, that it is natural to wonder when it may come crashing down.
"A recession will have an impact on the overall market no matter how balanced the supply and demand picture looks," Stream Realty Managing Director and partner Cannon Green said.
But most experts say that impact will just be a slowdown from record activity, not a dramatic hit.
"With higher interest rates and other economic factors starting to weigh on the economy, the industrial market isn't going to be as white-hot as we've seen the last few years," Gordon Highlander President Greg Gordon said. "But with the rise of e-commerce, combined with the migration of out-of-state businesses to DFW seeking lower taxes, less regulation and an affordable workforce, I don’t see a big pullback looming in the industrial market."
There may be pain in some submarkets. In certain parts of DFW, namely far South Dallas, supply has far exceeded demand, Green said. The impact of a slowdown would be more pronounced in those submarkets.
But in most submarkets, demand has exceeded supply and rents are rising. Areas that are growing in population — both close to the urban core and further away — will be more insulated from an economic slump, Green said.
Going into any potential recession, the local industrial market has relatively robust fundamentals.
According to CBRE, 2018 was the third straight year of annual absorption surpassing 20M SF for the DFW market. Industrial occupiers took down over 7.1M SF during the fourth quarter, bringing the year-to-date absorption total to 21.2M SF.
Despite that brisk absorption, the marketwide vacancy rate remained flat during the quarter, coming in at 6% at the end of 2018, CBRE reports.
That is because development is still strong: Product coming online totaled nearly 8.3M SF during the quarter, with only about 40% pre-committed.
"There's always the potential for overbuilding, as we’ve seen it play out several times in previous real estate cycles," Scannell Properties Managing Director Kris Arviso said.
"But there are several factors that lessen the likelihood of industrial becoming overbuilt, or could soften the negative impact from becoming slightly overbuilt," Arviso said. "First, tenant demand is robust and the continued drive of retailers to build out their e-commerce platforms shows no signs of slowing down."
Arviso said vacancy rates are well below the long-term average, which gives DFW industrial a cushion to absorb any supply/demand imbalance and remain healthy.
And a national governor is coming to limit new supply — it is challenging to find good industrial sites, Arviso said. Labor might constrain supply.
"Labor is extremely tight across the Metroplex," Green said.
Companies looking for industrial space are thus making decisions based on proximity to labor first, and price second, he said. Fringe areas with less population growth will thus be less desirable places to develop new product.
Arviso, Gordon and Green will be speakers at the DFW Industrial & Logistics Outlook on Feb. 13 at the Westin Galleria Dallas.