An industrial oversupply issue is beginning to creep into DFW as an onslaught of new development hits the market.
More than 14M SF debuted in the second quarter, and another 21M SF is under construction, according to a new Savills report shared with Bisnow. Ninety percent of the pipeline is made up of speculative builds, of which about 17% is preleased.
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DFW’s industrial vacancy rate hit 11.2% in Q2, an annual increase of 360 basis points. Meanwhile, the market absorbed 6.7M SF, an increase over the prior quarter but still lower than the last two years, when quarterly absorption averaged about 8.4M SF, Savills Vice President of Industrial Research Mark Russo said via email.
“Activity is picking up among large users, which is a welcome sign for the market,” he said. “However, the current vacancy rate of 11.2% is significant and is at its highest level since 2011.”
Projects that kicked off when interest rates hit rock bottom are now delivering into an environment where demand has waned, causing landlords to reduce asking rents by about 3% quarter-over-quarter.
If that narrative sounds familiar, it’s because DFW’s apartment market is in the same boat.
The reemergence of large users helped buoy industrial demand, with Google signing a lease for nearly 1M SF in North Fort Worth and RJW Logistics committing to about 640K SF in Mesquite.
But even with larger blocks of space being absorbed, Russo said the oversupply phenomenon may not be short-lived. Returning to an equilibrium of 7% vacancy would require two years of stable absorption and no new construction starts, he said.
Demand is also contingent on the performance of the broader economy, which Russo said remains uncertain.
“There is certainly a possibility that things could pick up further,” he said.
DFW has a strong labor pool and geographical advantages that put it ahead of other markets, and continued population and job growth should continue to drive leasing, according to Savills. Still, the negative impact on rents will take awhile to reverse, with the firm predicting a prolonged decline prior to stabilization.
“Sustained rent growth is unlikely until the vacancy rate decreases to around 7%,” Russo said. “Achieving this level would require significant absorption of both existing vacant inventory and unleased speculative developments.”
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