Foundations - Summer 2018

A baseline for the region’s future



INDUSTRIAL TENANTS CONTINUE TO FLOCK TO NORTH TEXAS

Dallas-Fort Worth’s industrial sector continues to see fervent interest from tenants, developers, and investors. According to research from Cushman & Wakefield, net absorption for the second quarter came in at a whopping 8.5 million square feet, nearly double the 4.7 million square feet absorbed in the second quarter of 2017. The activity propelled midyear absorption to 11.7 million square feet, and puts the market on track to again eclipse 20 million square feet in net absorption for the year.

Major move-ins during the second quarter include Kohler in South Dallas (1.3 million square feet), Tellworks in Arlington (722,733 square feet), and GE Appliance (702,000 square feet).  Overall vacancy now stands at 6.4 percent, down a bit from the year-ago figure of 6.6 percent.

Leasing activity continues to keep pace with new development. The market currently has 22.6 million square feet of industrial space under construction, Cushman & Wakefield reports, with activity focused on the DFW Airport (5.4 million square feet) and South Dallas and Alliance submarkets (4.7 million square feet each). So far this year, 10.8 million square feet of new industrial space has been delivered to the market. Notable leases signed during the second quarter include VM Innovations in South Dallas (416,891 square feet), Rent the Runway in Great Southwest (319,200 square feet), and XPO Logistics at Alliance (318,768 square feet).

SOURCE: CBRE Cushman & Wakefield

 

DEMAND IN 2043: LOOKING AHEAD 

Walter Bialas, vice president and director of research at JLL in Dallas, has taken a look at how population growth in Dallas-Fort Worth will influence how the region looks in 25 years. A new report estimates how many homes, office buildings, and industrial facilities will be needed, as well as multifamily housing. Based on a standard 65/35 split between single-family and multifamily, he says the region will need to build 900,000 new homes and 640,000 apartments. Population growth of roughly 4 million new residents will spur development of another 325 million square feet of industrial, warehouse, and manufacturing space, Bialas says.

The amount of office space will need to grow, too. Assuming higher utilization rates of perhaps 150 square feet per office employee, DFW’s existing inventory of 225 million square feet would need to grow by 125 million square feet to accommodate new businesses that could emerge in the future, he says.

STABLITY, SOME EXPANSION RETURN TO ENERGY INDUSTRY

Dallas-Fort Worth is an internationally recognized hub for energy companies that maintain their international, national, or regional headquarters in North Texas: Think Exxon Mobil, Pioneer Resources, and ConocoPhillips. Companies that serve the oil and gas industry such as Flowserve, Fluor, and Holly Frontier also call it home.

After a tumultuous few years for the energy sector, stability has returned and these companies are looking for growth opportunities. And, with growth, comes additonal real estate needs.

According to a new report from JLL, this stability is leading to some expansion by companies that “right-sized” in recent years. Efficiency and cost-control likely will remain, even as the sector continues to stabilize.

In North Texas, for example, Pioneer is constructing its new 1-million-square-foot headquarters in Las Colinas. That new HQ will result in 650,000 square feet of office space returning to the market when Pioneer vacates Williams Square.

What are the challenges? Remaining conservative on expansion, for one. Also leasing to startups, spin-offs, and recently recapitalized companies carries a higher risk, despite new capital investments, JLL said in the report.

There are opportunities, too: As equity investment funds continue to support new companies in North Texas, new office demand could be generated. And, this new stability positions energy tenants to negotiate longer-term lease deals, albeit for smaller space requirements.

DFW POSTS NEAR-RECORD OCCUPANCY 

The retail sector is showing strength moving into the second half of the year in both occupancy and new space, with Dallas-Fort Worth likely to hit 200 million square feet of retail space for the first time in its history by year’s end.

That’s according to a recent report from the Weitzman Group that paints an optimistic picture of DFW’s retail real estate sector moving forward.

The outlook for the North Texas retail market moving into 2019 remains “strongly positive, as retail is supported by growth in the key areas of population, job gains, and single- and multifamily-housing deliveries,” Weitzman says. 

The mid-year occupancy rate in 2018 was 92.5 percent, up slightly from the 2017 year-end total of 92.4 percent. This year’s occupancy rate is one of the market’s highest in more than three decades, second only to the 92.7 percent occupancy rate reported in DFW at year’s end in 2016, Weitzman says.

Weitzman bases its mid-year 2018 occupancy rate on a review of a total DFW retail market inventory of 198.1 million square feet of space in projects with 25,000 square feet or more, which Weitzman says is the largest retail inventory for any Texas metro area. 

Despite some major store closings — think Sears and Toys “R” Us — the DFW market has maintained steady occupancy because those closures are largely being offset by pre-leased new construction and the backfilling of large retail vacancies, Weitzman said in the mid-year report. 

The Sears and Toys “R” Us closures are resulting in more than 1 million square feet of vacancy, Weitzman says, and involve three Sears mall anchor stores and several locations of the toy retailer totaling 600,000 square feet.

Weitzman doesn’t expect those buildings to remain vacant, though, as there has been interest from concepts ranging from fitness uses to multitenant redevelopment. Of the vacancies, Weitzman expects the best locations to be redeveloped within the next 18 months.

Combined, those closed stores represent just about one-half of one-percent of area vacancy, based on DFW’s retail inventory, Weitzman said. 

Leasing in existing centers this year is bolstering occupancies by eliminating vacancies of all sizes, and many projects involve renovations and redevelopments.

Weitzman said that, in terms of new space, North Texas is experiencing significant development activity. By year’s end, the space expected to open is on track to approach the 4.1 million square feet that came online last year. 

The North Texas market is on track to add roughly 3.5 million square feet of retail space during this calendar year.  

CITY OF DALLAS MANDATES THAT APARTMENTS MUST PROVIDE RECYCLING

In a move aimed at helping Dallas reach its goal of becoming a zero waste city, the Dallas City Council has mandated that Dallas apartment communities and other multifamily dwellings must provide recycling for their residents by January 2020.

Under the ordinance, complexes with eight or more units must provide a capacity for 11 gallons of recyling a week for each unit. Landlords can use dumpsters, carts, bins, and compactors to achieve that mandate.

Roughly half of Dallas’ residents live in multifamily buildings, but roughly a quarter of them offered recyling under the previous voluntary program.

“The city and various groups have been working toward our zero waste goals for years now and this action is going to move the needle considerably,” Dallas City Council member Sandy Greyson said.

2018 LEASING ACTIVITY DOWN FROM 2017

Even as relocations and expansions continue across North Texas, the region’s office leasing is behind last year’s robust figures led by a surge in 2017 of big companies moving to new buildings.

According to the latest estimates from commercial property firm Cushman & Wakefield, through the first half of 2018, businesses have net leased roughly 965,000 square feet of office space in Dallas-Fort Worth. That’s roughly a third of the net office leasing in the first half of 2017 — one of the strongest leasing periods in more than a decade — the firm said.

“Overall deal activity remains strong,” Cushman & Wakefield Executive Director Johnny Johnson told The Dallas Morning News. “We are tracking more than 5.5 million square feet of active prospects in the market.

“We are maintaining a healthy balance of supply and demand.”

Cushman & Wakefield said that some of the largest office tenant moves in the second quarter were made by NTT Data in Plano,  Steward Healthcare in Richardson, and Ethos Group in Las Colinas.

In the second quarter, roughly 632,000-square-feet of net office leasing was counted, according to Cushman & Wakefield. Most of that leasing was in Richardson’s Telecom Corridor and the Legacy-Frisco area along the Dallas North Tollway, the report said.

And, pending office leases by Samsung, 7-Eleven, Genpact, and Darling Ingredients should add to the demand totals in the second half of 2018 and into next year, Cushman & Wakefield said.

TOP DFW OFFICE LEASING MARKETS 
Based on second quarter year-to-date 2018 net leasing

Telecom Corridor: 520,294 sq.ft.
Legacy Frisco: 352,653 sq .ft.
Downtown Dallas: 317,827 sq.ft.
Las Colinas: 245,095 sq.ft.
Downtown Fort Worth: 173,172 sq.ft.
DFW Total: 935,657 sq.ft.

NEW CONSTRUCTION

Las Colinas: 1,985,900 sq.ft.
Uptown Dallas: 654,375 sq.ft.
Legacy-Frisco: 390,000 sq.ft.
North Fort Worth: 328,354 sq.ft.
DFW Total: 4,382,768 sq.ft.

Source: Cushman & Wakefield