If You Build It, They Will Come: Demand For Spec Industrial Soars in Dallas-Fort Worth
Developers in Dallas are chasing skyrocketing demand for industrial space by going all-in on speculative projects.
Without a tenant lined up prior to construction, spec projects are inherently risky. But more developers are adopting an “if you build it, they will come” mentality as the onshoring of manufacturing, record-low vacancy rates and the rise of e-commerce push demand far beyond supply.
“We’ve seen that speculative developments are leasing before they have broken ground or while they are under construction, and since the lease-up timeline has been so dramatic, people are just comfortable with this,” said Grant Pruitt, president and co-founder of Whitebox Real Estate.
The DFW market absorbed 45M SF of industrial space in 2021 but delivered less than 28M SF. Recent market data by Cushman & Wakefield shows speculative projects accounted for 100% of new project completions in Q4. Of the 54M SF of projects under construction now, 82% are speculative.
“Right now, investors look at [spec] as lower risk,” said Ching-Ting Wang, research director at Cushman's Dallas office. “Demand is very, very strong in the market … You can build these buildings and get people in very quickly.”
About 28% of industrial projects under construction are pre-leased, Wang said. This is lower than the 35%-40% benchmark seen a couple of years ago, but Pruitt said a variety of other factors put him at ease with that lower percentage.
“When you have almost 60M SF that you’re projecting for [absorption in] the coming year, and you’re at 10% rent growth … and you're at a 5.4% vacancy — which is an all-time low — I can get behind having less of a pre-leased product because the comfort level is there,” he said.
Land prices for industrial development in DFW have been on the rise, which Pruitt said has pushed some players out of the game entirely. According to reporting by the Dallas Business Journal, pricing across submarkets was about double or triple the historical average in late 2021, and those costs are expected to continue to rise in 2022.
“You really have to be an institutional investor to play in these spaces,” he said. “We’re seeing industrial property trade at higher values on a per-SF basis than office properties in DFW. When you’re doing that, you have to have massive pocketbooks to accommodate.”
Robinson Weeks Partners is one of the latest out-of-state developers to plant its flag in the DFW industrial market. The Atlanta-based firm has about 2M SF of spec space in the pipeline, including I-20 Dallas Crossing, a more than 410K SF, Class-A distribution facility in South Dallas.
Tyler Jones, the company’s senior vice president of acquisitions and development, said the spec model is highly sought after because most companies need space sooner rather than later.
“Most users don’t have the time to wait for build-to-suit,” Jones said. “Most build-to-suit deals are really just going to users that are highly specialized and have some sort of reason that they can’t go into an existing space.”
The pandemic accelerated the need for industrial space as more people began buying goods online. According to Federal Reserve Economic Data, online purchases accounted for close to 13% of overall retail sales in Q4 2021, up from 11% during the same quarter in 2019.
More industrial space will be required if this shift continues — according to Pruitt, 50M SF of industrial space is needed to accommodate every 1% in sales that transitions from sticks-and-bricks retail to e-commerce.
Transwestern Development Co. recently announced its foray into the DFW industrial market with two major projects: Cowtown Crossing, a 1M SF logistics center in North Fort Worth, and McKinney National Business Park, a 945K complex in McKinney. Regional Partner Denton Walker said the group is marketing to a variety of users, including retailers leasing warehouse space for inventory.
“Industrial is the new retail,” Walker said. “Most retailers are stacking up, they’re leasing more space than they need because of some of the supply chain challenges.”
The shift to e-commerce is forcing retailers to rethink their need for physical space, said Fred Ragsdale, an associate with JLL Dallas’ Industrial Services Group.
“I’m not saying [brick-and-mortar] retail is dead by any means, but the way people are buying goods now is drastically changing,” he said. “With that, you are seeing a lot of downsizing in the retail world showing up in distribution centers, because [people] can do more with less retail space on the industrial front.”
Experts don’t foresee industrial development slowing down in DFW anytime soon; however, Ragsdale said external factors, such as labor shortages, could force owners to become more efficient with their space, thereby minimizing demand.
“Labor is tight,” he said. “The only way to really sort through that is to pay people a lot more or to become innovative in your operation and in your supply chain — whether that’s [through] efficiency within the warehouse or creative solutions to how you move goods through your supply chain.”