Industrial Vacancy In DFW Tops 8% As Construction Pipeline Unloads And Interest Rates Chill Deals
Dallas-Fort Worth’s red-hot industrial sector is beginning to cool as massive chunks of inventory are unleashed on a market that isn't as frenzied as it once was.
More than 12M SF of new space was completed in the third quarter, and another 58.4M SF is on the horizon, once again putting DFW in the No. 1 spot for the largest construction pipeline in the nation, according to a new report from Savills.
At the same time, companies are waiting to see where interest rates are heading, which has slowed leasing activity and compounded the area’s simmering vacancy issue.
“Dallas has just seen an influx of activity over the last couple of years, and it’s been performing well,” Savills Research Manager Deandre Prescott said. “What goes up has to come down at some point.”
DFW’s performance parallels that of the nation in that it is beginning to normalize after experiencing pandemic-era highs.
Across the U.S., industrial vacancy saw an annual increase of 150 basis points to 5.4%, whereas Dallas’ rate increased 180 bps to 8%. At both levels, construction starts have dropped significantly as lending tightens and developers struggle to capitalize.
The slowdown in leasing has yet to impact rental rates, though Prescott said he expects that to change as more supply delivers.
Asking rates grew nearly 12% year-over-year to $6.97 per SF in the third quarter, a trend that is heavily influenced by Class-A prices pushing rents across the board, he said.
“We don’t necessarily expect rents to continue shooting upward if vacancy is increasing and net absorption is slowing,” Prescott said. “Our take is that rents are going to flatline.”
Despite a perceived waning of demand, numerous deals of 100K SF or larger were completed in the third quarter, including a 799.4K SF sublease for Flexport and a 520K SF sale of a property in Southwest Dallas to Westcore.
Net absorption totaled 8.5M SF, though that number lags the 10.5M SF absorbed at the same point last year and is significantly lower than the 12.2M SF of new product that was delivered in Q3 this year.
The Federal Reserve’s fiscal playbook will play an important role in how industrial performs moving forward. If interest rates begin to stabilize, market activity will likely pick back up, Prescott said.
If the opposite occurs, tenants will remain on the sidelines and the glut of vacancy will grow more severe.
“If you have negative impacts on a macro scale, that does transpose to the real estate side of things as well,” Prescott said. “As of now, it’s more of a slowdown. We haven’t seen anything that raises major concerns.”