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Trepp: Commercial Assets In Texas, Southwest Buoy Industrial CMBS Performance

Industrial buildings in Dallas-Fort Worth remain a boon for CMBS investors who rely on the assets' strong net operating income. 

Dallas skyline

Texas and neighboring states led the nation in net operating income growth when evaluating the performances of loans backed by industrial commercial properties, a new report from research and analytics firm Trepp says. 

After studying 7,010 loans backed by industrial properties in nine U.S. regions, Trepp discovered states in the Southwest Central region — including Texas, Arkansas and Oklahoma — posted the highest consistent net operating income increases, with NOI growing 4.06% year over year in 2015, 5.98% in 2016 and another 3.64% in 2017. Trepp is awaiting 2018 remittance reports to analyze last year's data. 

"Average NOI growth clocked in between 3.51% and 4.66% from 2014 to 2016 as empty industrial space was quickly absorbed," Trepp said in a report. "Growth was more moderate in 2017, with a rate of 1.59%, the second highest among the major property types that year."

The Dallas-Fort Worth-Arlington market saw its year-over-year NOI growth by industrial CMBS exposure shoot up 14.01% in 2016 and another 5.78% in 2017.

Trepp attributes sharp increases in industrial NOI over the three-year period in Texas to the success of research and development parks and business centers strategically located in Dallas, San Antonio and Austin.

Texas’ robust export cycle also drove strong performances within the industrial space of CMBS.

The Lone Star State benefits from high levels of manufacturing, a favorable regulatory and tax environment, highly skilled workers, rebounding oil prices and Hurricane Harvey recovery efforts — all of which have buoyed CRE growth rates in the state, Trepp said.

This acceleration in industrial loan performance is not limited to Texas. Industrial loans backing CMBS continue to perform well in the national retail environment, where the “Amazon effect” has caused companies to replace brick-and-mortar stores with warehouses and flex spaces to accommodate last-mile deliveries to customers relying on e-commerce.

“In the CMBS realm, this demand has enabled borrowers to fill properties with ease and boosted income,” Trepp said.

By January 2019, industrial loans served as collateral for approximately $20.5B in securitized private-label mortgages, representing 4% of the entire CMBS market, Trepp reported.

Warehouse and distribution facilities alone backed up $8.3B, or roughly 40.38%, of all outstanding industrial CMBS loans by loan balance.