Industrial revolution

With industrial vacancy at near-record lows, North Texas developers are kicking off new projects and wagering that brisk demand will continue.



With industrial vacancy at near-record lows, North Texas developers are kicking off new projects and wagering that brisk demand will continue.

It’s a solid bet. With its central location, robust transportation infrastructure, and the most talented real estate developers in the nation, Dallas-Fort Worth continues to demonstrate its significance as a major warehouse and distribution hub. So what’s driving activity? Where do the greatest opportunities lie? And what barriers stand in the way? To find out, we gathered eight industrial market leaders to get their on-the-ground insights. Here’s what they had to say. 

DFW Real Estate Review:  Let’s start by talking about industrial activity so far this year.

JON NAPPER: And who’s making all the deals.

DAVE ANDERSON: We came off a very good 2013, with 18.6 million square feet in positive absorption, which was really the strongest we’ve had since 2000. It’s tough to repeat that. We’re up to about 6.7 million square feet so far this year, so we’re not on pace to do 18.6. But if we end up somewhere in the 13 million-to-15 million-square-foot range, I think we’d all be very happy. 

NAPPER: That’s about average. A little more. 

ANDERSON: The average over the past 30 years is … 

NAPPER: 10.5. 

ANDERSON: 10.7. 

TOM PEARSON: I would agree with Dave on the forecast for absorption by the end of the year. We experienced a little bit of a lull in the summer.

MICHELLE WHEELER: We’re now seeing tenants making decisions much more quickly than they were in the past. 

TERRY DARROW: We’ve got several deals that are ready for move-in now that are pretty good-size deals that actually happened last year, so that will really make for a robust second half. We’re thinking that, like Dave, 13.5 million is good, especially in light of the absorption last year. If you look at it, a lot of that happened in the fourth quarter, but you’re not going to follow quarter after quarter with that heavy of absorption. So we had a big fourth quarter last year, and we should have good third and fourth quarters this year. 

JIM BRICE: I would agree. From our company’s standpoint, we did over 600 deals and at least 10 million feet last year; and through June this year, we’ve done 255 deals and at least 4 million feet, so I think we’re on pace. We’ve got several large deals that we’re about to make, so I think from a company standpoint, we’re going to be very similar to where we were last year. And as Terry mentioned, last year, from the absorption standpoint, you can take 10 deals and get to 12 million feet pretty quickly.

NAPPER: It reminds me of 1992. Nothing had been built for three or four years and all of a sudden Alliance popped out of the ground and started making deals, and it was a little pent-up demand. The pent-up demand has been solved, and now we’re leveling off a little bit just for some regular growth that we’ll see in 2014-2015. 

Where is demand coming from? Are we seeing demand from big users, midsize, small, or all—or does it just depend? 

BRICE: From our company’s standpoint, we’re seeing it from 25,000 feet all the way to 300,000. The 100 to 250 has been very, very active. Last year, the larger deals were more active than they are to date, and it was the 100s to 300s that were kind of slow. This year, that activity has taken off. If you have 200,000 to 300,000 feet on the ground, you’re seeing a lot of it getting preleased, so that sector has really picked up. We currently have a development in Coppell that we’re just finishing that’s 280,000 feet and we’ve got three deals looking at it.

NAPPER: We have had many million-dollar and million-square-foot deals come out this year. We’re starting to see a lot more 50,000-square-foot or 25,000-square-foot products on the market right now. 

BILL BURTON: I think it’s a little bit indicative of the strength of the market. Summer was a little bit of a lull. Some summers are slower than others, and I think this was one when people were taking vacations. But I think the fact that you’re seeing the smaller deals—in the 250,000-to-300,000-square-foot range—shows a broader base. 

BRAD STRUCK: As we’re talking to tenants, we’re finding many are growing within Dallas. You’ve got a guy that’s in 50 that’s going to 100, or 50 to 75, or he’s in 100 and needs an extra 50. So it’s kind of nice to feel the growth from within Dallas. 

WHEELER: I agree. We do a lot of shallow-bay product, and many of our tenants are expanding. We’ve got tenants who are on their second and third expansions right now. We’re seeing that across the board in a lot of our spaces. 

DARROW: I remember when 200,000 was a big deal and 350,000 was a really big deal. The way we look at deals has changed, and we’re fortunate to have all the growth we’re having in this market. We’re also very fortunate to have a couple of buildings going up in Pinnacle Park that are going to be 87 percent leased out of the ground. That’s a 140,000-foot deal and a 372,000-foot deal; so one pretty good-size deal and one fairly small deal for the market today. But that size tenant—it’s healthy. 

ANDERSON: I was looking at some stats, and I broke down the size of tenants in 25,000-square-foot increments—25 and 50 and so on. If you look at every segment of the market, the vacancy rates are all falling in the 6.1 to 6.9 range, so every segment of the market is pretty healthy today. Now, if you flash back a year ago, it was the big bulk—buildings at least 200,000 square feet in size—that was tightest. Vacancy was down to the 5.5 range and lower. Right now, what you see is a tremendous amount of absorption in the under-200,000-square-foot range. And the big bulk is starting to creep up as we bring on this new supply, and it will continue to increase throughout the year. 

BURTON: Would you say there are 15 million feet or 18 million feet under construction? I bet if you took the top 15 buildings, that’s probably around 13 million or 15 million square feet. I don’t know that people have been as focused on the smaller buildings. But it’s harder for the individual—a private investor—to build, just because of the equity requirements. So I think that’s been slower. You see more of the institutional investors or the large private investors building the big boxes. I think if you look at the buildings that are under construction, the bulk of them are in the large space. And you still have all this activity in the smaller space. You’re going to see some continued tightness in the smaller user inventory. 

BRICE: Oh, no question. That’s why you’re seeing rent growth. But you can’t find good shallow-base sites. If you do, you’re pioneering. We ran out of land. If you go up I-35 or to the lake, if you go to Coppell, most of those sites are gone. 

ANDERSON: But where you want to build the smaller bays for smaller-tenant product is around established markets, such as the airport. There are some sites that are developer-controlled currently being developed. But if you fast forward a couple years from now, those markets will be completely built out. 

PEARSON: I think part of the issue is that many small buildings haven’t been built, and consequently, when you look at the economies of scale of building smaller buildings, you’ve got to structure a rent that you feel like will be accepted by the market. The DCT piece in Coppell is a good example. I believe the price point is $5.75 or $5.50 with an $8 finish. 

DARROW: But we’ll make a deal. 

PEARSON: Yeah. They had to get as much coverage as they could get. 

NAPPER: It’s even more difficult in South Dallas because we don’t have the comps to show that you can get $3.65 or $4.50 rent rates for a smaller product type. So you’re really selling to your financing partner.

WHEELER: But with the smaller tenants, even if you’re paying $4 for dirt and they want to be in an infill location because of their employment base, that’s where they want to be. The trouble right now is construction costs are starting to creep up. We’re seeing the institutional equity, while they were focused on the monster boxes, and now all of a sudden they’re moving a little bit farther to the left on trying to figure out if they need to do something more in the shallow-bay space because they just can’t find the opportunities. 

DARROW: That’s really a place for a maturing market, too.  

PEARSON: It’s interesting how we tend to get a myopic vision. Because we’ve been working in this market for so long, we’re predisposed to think in terms of rents having to be at a certain point. But when you get outside of Dallas you find markets that don’t have nearly what we have to offer with people paying higher rents than we are. It’s not that they can’t pay it; I think part of it’s been a mindset. We were flat on rents for so many years up until the last 12 or 18 months, and now we’re starting to see that come up. Other markets, such as California, have been doing [annual escalators] for quite a while. 

What role does e-commerce play going forward and what other industries are growing and driving activity?

STRUCK: Dallas is good for e-commerce. It’s ranked as probably one of the five or six top places in the country because of two intermodals that feed it, and then [we have] the local outbound of FedEx and UPS. 

ANDERSON: E-commerce in general accounts for about 8 percent of total retail sales. And I think we’re just on the tip of the iceberg as far as what we’re going to see in industrial growth in e-commerce—bigger buildings and so forth. By 2020 its projected e-commerce will be up to 20 percent of retail sales, which will be distributed from warehouses. We’ve already seen quite a few e-commerce deals here in town, but we’re going to see tremendous growth in that area. I think that’s why you’re seeing some of the bigger buildings already being built spec. But e-commerce is going to require a different type of facility, and that’s probably going to be the biggest challenge for developers: Can they build a spec building to accommodate an e-commerce user?

PEARSON: I think one of the other things driving e-commerce for Dallas is the fact that e-commerce facilities like to be in growth centers. As everybody knows, Dallas has led the country in population growth since the early ’90s, and it doesn’t look like that’s going to change any time soon. I think we’ll continue to see an influx of those kinds of facilities. Some of the facilities that we’ve seen, like Williams-Sonoma, are only partly devoted to e-commerce. We may see straight fulfillment or just light assembly and distribution associated with e-commerce, depending on the tenant. 

STRUCK: Along Tom’s point, the biggest key for e-commerce is seasonal employment. It really amps up between October and December, so [these businesses] have to be in an area where they can multiply their employees by three for that surge. They’ve got to be in an area where there are colleges and universities, and lots of highways.

DARROW: All kinds of things happen in e-commerce. It’s also direct-to-store, so a lot of the ordering is done on the Internet but shipped to a store for pickup, so the multichannel side of it is really growing. You’re going to see all kinds of things. 

BURTON: Yeah, e-commerce is kind of a big word. What does that mean? Williams-Sonoma, Amazon, Walmart—they all have full e-commerce strategies. So it’s going to grow; it’s going to have impact. UPS just leased a new hub at Alliance, and FedEx is also expanding its ground operations in Alliance. A lot of that has to do with the growth we’ve seen in north Fort Worth and southern Denton County, but it also has to do with e-commerce, since both Amazon and Walmart are there. I think that’s all indicative of continued growth in that marketplace. 

ANDERSON: I think the amount of investment that they’re going to have in those facilities is what’s causing some pause for these big users. They’re trying to figure out what’s going to go inside the box. I think all of them are sitting back and trying to figure this out. Once they figure it out, I think we’re going to see a really big boom. 

BURTON: That’s a great point. Michele, you were talking about deals happening faster. In certain segments and sizes, it’s happening faster, but in the large size, it’s not, because there are the other factors. 

WHEELER: Such as automation, technical ... 

BURTON: Yes, the labor and the automation. 

DARROW: The other thing that’s critical is transportation. I believe that BNSF will tell you that one of its very largest customers is FedEx Ground. Because they’re taking the 53-foot trailers, putting them over flatbeds, bringing them to your intermodal, putting them on the ground, and pulling them away with tractors. It’s cheaper to do that. They’re figuring out the transportation side of this, and FedEx is on the biting edge. 

STRUCK: I think they don’t know what size they need [because of the growth of e-commerce]. They’re thinking, “Do we take 500,000 down? Do we take 700,000? Do we take a million?” And if they try to run something out 10 years, those numbers are worthless. They just can’t do that. So I think that’s another reason they hesitate. If they can find a land site where they can build 500,000 and maybe build later on another 200,000 or 300,000, but a developer is not going to hold that for them, so it’s kind of hard for them to find something. 

Are there other industries or factors driving demand? 

BURTON: We are seeing manufacturing have an impact. GE’s locomotive manufacturing is spinning off some activity. Lockheed is in Fort Worth. It’s only going to grow because they’re still in a low rate of production. They haven’t even ramped up. 

PEARSON: We’re also seeing activity in consumer products—any kind of consumer products—from household items to automotive. 

DARROW: Plus food and beverage. 

NAPPER: Especially the southern sector, you’ve got a lot of labor involved. Of the 2.5 million square feet of buildings down there, only about 600,000 of it is distribution. The rest of it is manufacturing: making plastic bottles, water, American Leather, and now Cummings. 

DARROW: Let’s don’t short our proximity to Mexico either. I know Mexico has had its challenges, but a lot of the bulk product is being made in Mexico and assembled in Texas. I think that bodes very well for manufacturing in Texas. 

PEARSON: When it comes to fulfillment centers, security is another factor, in terms of what they require, and having enough land there where they can fence it off and have the necessary security. I think that’s another factor that goes into building coverage and site coverage.

ANDERSON: Yes. We took a look at the cost of a fulfillment-type, e-commerce building. You need extra parking, more trailer storage, fencing, security, circulation lanes, and so on. It ended up that the additional land, concrete, paving, lighting, and fencing added about $10 a foot to the building cost. That’s a dilemma that developers have today. Do they build an e-commerce spec building for a potential user? If they’re competing for non-e-commerce users, they’re just not going to win. They’re going to have a rate that they can’t achieve. 

WHEELER: The majority of the build-to-suit proposals have the maximum parking, trailer storage, fencing, etc. Though they all want it, how many of them want to pay for it?

ANDERSON: The last couple of build-to-suits—Kimberly Clark and Georgia Pacific—both were looking at 850,000 to 1.5 million square feet. I think it’s a real dilemma, because the investors then look at it and say, “Wait a minute. What about the second generation?”

Let’s talk a little bit about southern Dallas. It seems it’s really exploding. I’m curious to know why the time is finally right for activity in the southern sector.

NAPPER: The southern sector has been there for 20 years. But we’re just now experiencing and enjoying it. The reasons are that labor is now there, transportation is there, and you have the availability of sites. We’ve run out of development sites in North Dallas; there are virtually no sites around the airport. Ten years ago, we started looking to where the next sites would be, and then DISD was going for a triple Freeport exemption, and that started a whole subculture down there and a whole different market. You can develop a building at $3.50 rent rates, which everybody wants to do. 

PEARSON: I’ll tell you another thing I experienced. Seven or eight years ago, Chris Teesdale and I took a listing from the Allen Group, and we had 300 acres or so that they wanted to sell. We made all the rounds to every developer, sent it out to the brokerage community, and the big negative we heard is that there’s “no history.” At that time, there was very little history of absorption in that market, so getting a lender on board was almost impossible. Now, eight years later, you have a history of build-to-suits down there. I think it was a big thing when companies came and had these big requirements. Developers started to see the other areas where sites were available, and all of a sudden, people and money come flooding into the marketplace.

ANDERSON: But how lucky are we? There’s maybe 9,000 acres of potential industrial land sitting 10 to 12 miles from downtown Dallas. It’s at the confluence of I-35 and I-45, which can hit major markets in Houston, San Antonio, and Austin. Plus, you’re right there at I-20 going east and west. Then there’s the FedEx Ground hub, which is the second-largest ground hub in the country. Everything is aligned. 

DARROW: I think it’s a mental block. If you think about LBJ and the Tollway, how far is that? You can get out of the parking garage and be up there in 15 minutes. Well, you can do the same thing to I-20 to South Dallas. So mentally there has been some sort of wall—and we don’t go over that wall—but it has changed. 

BRICE: I think you have the amenities and the labor pool now. If you look at all the communities—DeSoto, Cedar Hill, Duncanville—the growth that has taken place in the southern sector is from a labor standpoint. 

NAPPER: Niagara had a job fair for 250 employees, and they had 1,600 people [show up]. All they did was advertise in the local papers. 

DARROW: And they were qualified workers, too. That’s what they were excited about: They were qualified laborers. 

WHEELER: Originally a lack of infrastructure in South Dallas was the issue. 

NAPPER: You’ve got to give credit to the City of Dallas and the infrastructure improvements they’ve made. And they have really helped not just Dallas but Wilmer and Hutchins. They brought water and sewers to those areas, plus tax incentives to corporations that come into the southern sectors, and that’s been a positive. Mountain Creek throws out $320 million a year in tax base and employs 1,600 people in just that little 400-acre development. 

Where are some of the next hot spots around North Texas? 

NAPPER: Right down I-45. 

ANDERSON: Alliance has plenty of land to go for some time; I think the South Dallas corridor has plenty of land to go for some time. It’s going to take a little bit of a sales job to go farther south, but I think there are some e-commerce people that will be looking for temporary labor. For them, maybe it’s better to be in Midlothian, Waxahachie, Ennis, or Corsicana. Maybe they’re going to go be a big fish in a small pond and tap that labor base. 

NAPPER: That’s always been, as you look at the history of industrial of Dallas, where the next land sites are. It went out to Alliance, and now it’s down on I-20, and that’s great. There’s some mental block right now about getting south of I-20.

PEARSON: I like to remind [Hillwood President] Mike Berry of this: 20 years ago when you started Alliance, they used to come to our office and make a presentation to us on Alliance, and we scratched our heads a little bit wondering where the labor was going to come from. It was just like South Dallas at the time. And I kid Mike and say, “Well, now you’ve got to call them for an appointment to come out there to see them about Alliance.” The biggest criticism of that area right now is just the fact that there’s not many restaurants or amenities. Although, there certainly are up in the I-20 corridor, which is part of what’s attractive about that area, besides being off the Interstate. 

NAPPER: Infrastructure in the I-20 corridor is still going to be critical. The lack of infrastructure is going to be a continued consideration [in South Dallas] for sites, just because so few of them have water and sewer. 

STRUCK: Is there a concern about the drought and water restrictions? I heard somebody turned down a food manufacturer because the city didn’t want that much water going toward a manufacturing operation. Are you hearing that as a concern? 

NAPPER: Mountain Creek has a 24-inch waterline that runs through the middle of it, which is why we have Nestlé Waters on one end of the project and Niagara Bottling on the other end. They’re putting a million gallons a day back in the sewer system out in Mountain Creek. Dallas’ water and infrastructure is fine, but I think when you get down to Wilmer, those buildings are running off an 8-inch waterline. 

DARROW: I don’t know how many of you ever heard John Stemmons say that our Achilles’ heel is going to be water. It’s all reservoir based, there are no wells and so forth. I still think that’s a challenge for us. I think we’ve got to be farsighted on that, on reservoirs and how to get the water for the manufacturers and for the population, too. We’ve got to pay attention to that. 

BURTON: We have less rain but more people. 

DARROW: That’s right. 

BURTON: So water is an issue. We’ve actually started a water company, and we’re putting a purple pipe system into Alliance in hopes that we can develop agreements with TRA and others to use the effluent for irrigation long term. All our new buildings have purple pipe going in so that we can ultimately do that. 

How would you put the balance of supply and demand right now, and how do you expect that to evolve? 

DARROW: I think we’re pretty well balanced, and we’re going to absorb what we’re building. There’s going to be some overage. We’re going to have some vacancy. Vacancy is about 5.6 percent. It’s got to increase, but that may be healthy. Five percent vacancy, that’s just something for pro forma, right? 

ANDERSON: You’re going to see it start to tick back up. We have a lot of construction going on right now, and we’re probably not going to keep pace with that development. Although the last quarter, we had just maybe $2 million of starts, and this quarter we’ll probably be about the same. So we’re sort of pulling back a little on the construction. But we’re 25 million square feet below our equilibrium, so we have room to move up. Our equilibrium over 30 years is about 9 percent.

BURTON: Around 65 or 70 percent of the construction right now is in the big boxes, where we really didn’t have the space. Well, now we’re going to have the space, so we’re going to have to work our way through some of that. But as far as the mid- to smaller size, it feels pretty good. 

NAPPER: And that million-square-foot market is being driven by institutional investors. You’ve got the insurance companies coming in and going hard on this stuff, whereas the developer is basically just providing the service of the development, construction, etc.

BURTON: Yeah. They were the takeout originally. Now they’re part of the development, the ownership side. 

NAPPER: Right. They’re in the middle of the ownership, they’re making decisions on lease rates. Developers are getting beaten up on the returns as the build-to-suits come through, because the institutional investors say, “I’ll take it at that. I’ll go that low.” And the rent rates accordingly go down as well. So it doesn’t show a real accuracy of the supply-and-demand market. It shows the institutional investment. And it’s not only the insurance companies. It’s the big wigs. Prologis is right in the middle of them—and Duke and these other guys. And smaller guys like myself are sitting there going, “OK, how do we get these deals financed now?” It’s more and more difficult. It’s private equity. 

DARROW: We keep track of what’s build-to-suit and what is spec building, and we’ve always been about ... 80/20. It would be 80 percent spec and 20 percent build-to-suit, and that had flip-flopped in the last year to 20 percent spec and 80 percent build-to-suit. Well, what we’re showing right now ... we’re back to about 80 percent spec and 20 percent build-to-suit. 

WHEELER: What’s interesting is on the capital market side, you’re actually starting to get paid for taking that risk. So now spec buildings, when you look at what a takeout is on the flip side, you’re almost getting the cap rate compression on speculative basis—
almost as if you were getting paid for having it leased. You’re starting to see that. And I think that’s because there’s so much capital right now that’s trying to find a home, that they’re just saying, “OK, we believe in population and job growth and it will continue, so we’ll take the risk premium right now on the leasing side.” 

BRICE: You’re exactly right. You hit it on the head. 

WHEELER: So you can deliver an empty building right now and still be able to have somebody flip out of it and still have your basis point spread between your return on cost and your exit. 

DARROW: Well, that would be prime for overbuilding. 

WHEELER: But you’re starting to see some of that. 

ANDERSON: We have had good, strong, positive absorption here in Dallas. I think people believe that this is going to go on for several more years—and I’m one of those. And when you look at the job numbers in Texas, and I think this year we’re on pace to do almost half a million in job growth.

BRICE: And a lot of that is submarket based. If you look at some of the shell buildings that are completed in Coppell and Flower Mound, you see a lot of those owners getting offers of people taking them out at shell construction. That’s the market that they all want to be in and they don’t have a presence and don’t want to own and don’t want to go to South Dallas, so they’re willing to take that risk.

WHEELER: And it’s built; it’s there. 

BRICE: That’s right. It’s built. They’re just coming in, buying the shell, and they’ll take the risk. 

BURTON: What do you think the reason for some of the change in the institutional philosophy is? Do you think people are basically looking for payout? 

NAPPER: I just think it’s a lack of being able to put their money anyplace else. You can’t put it in the stock market, you can’t put it in the bank. They’ve got to invest it. It’s huge. 

WHEELER: I think real estate, too, is an inflation protector in terms of interest rate risks. They look at it right now and they can go ahead and lock in, and they’ll take a leasing risk. And they think if interest rates are going to continue to rise, what is that going to do for new development?

DARROW: If we can get 1.75 to 2 percent rent growth assured on a five-year deal or seven-year deal, so you’ve got that positive rent growth, and the cap rate may be lower on the front end, but they’re not selling on an average rental rate. They’re selling on a going-in rental rate, but the cap rate is lower because of that rent growth. 

BRICE: Take a shallow-bay 20-year-old product, where it’s trading on the cap rate basis, and look at the credit that’s involved in there, some of it is just absolutely mind-boggling. That’s why from a development standpoint, if you can get that spread, why buy a 20-year-old product at a 6 to a 6.25 cap rate when I could go build for between a 7 to 8 for that type of product? It’s more about buying a quality site.

BURTON: But it varies, right? It’s going to vary by deal, by building, by people. We throw out cap rate and low, but it’s ... not just, “Oh, here’s a cap rate.”

BRICE: I agree. But when you see shallow-bay stuff trading at $82 a foot pretty consistently, that’s a big number. 

DARROW: I’m seeing more demand for users to own their own buildings. We’re making deals, especially in the 200,000- to 300,000-foot range. They’re saying, “Well, the developer is running away with this.” The rates are running up, and they’re taking some risks.

STRUCK: It’s hard to find though. I have all kinds of people who ask me to go find them a building to buy because interest rates are so low. 

We talked about water; we talked about infrastructure in South Dallas. What are some other challenges facing the North Texas industrial market? 

BURTON: Costs are going up. 

WHEELER: Construction costs. And labor. It’s mostly labor. 

STRUCK: Well, I’m sure some people sat in on those talks from the transportation department. As the population continues to grow in Dallas, new roads will get built, and tollways, but that deters some people. Five or 10 years from now, they don’t want trucks going down tollways to move product around. 

PEARSON: The transportation guys will always tell you that we’re way behind in what we should be doing for transportation. I think we have 15 compelling reasons you should locate your business in DFW or North Texas. One of the stats that I came across was that North Texas has the largest infrastructure program underway of any place in the country, which is close to $15 billion. When you stack everything up that we have, which is so much more than what many of our competitors and fellow states have to offer, I think we still have a compelling story. And I think that’s what investors are buying as well. So many want to believe that they have a place to hang their flag in Dallas because we do have big job growth going on and population increases that continue—150,000 people a year. You look at the complexion of the companies and virtually everyone is redesigning their supply chains and distribution networks. Dallas continues to come up on their radar, so I think there is a great story for the future. We’re going to continue this growth for the next two or three or four years. 

ANDERSON: It’s amazing when you look at the projects even in the last five years. When you look north of Fort Worth on 820, 121, everything north of the airport that has been done, all of 161 connecting down to Grand Prairie and Arlington, and LBJ, as you mentioned—it’s unbelievable what’s happened over the years. 

Outside of smaller and midsize users, what other factors will drive your bets? 

ANDERSON: We’re quickly approaching our fourth-year anniversary of good, strong, positive absorption here, so a lot of the low-hanging fruit has already been plucked. Many developers have taken land positions; basically all the sites from Flower Mound, Coppell, and Lewisville to Arlington and Grand Prairie are spoken for. The opportunities are going to be with those developers there and in South Dallas and Alliance that develop the proper product and deliver it. I think we’re going to see a pretty good run here. There’s not just going to be a winner out there; there are going to be many, many winners. 

NAPPER: Industrial is such a driving force, but it does generate other opportunities. We have 1,600 employees working in Mountain Creek right now. And all of a sudden, we’ve got a site that’s a multifamily site. We’ve got a retail corner that needs to be developed. ... The opportunities come when you create these business centers. 

DARROW: And hospitals. 

BURTON: We now have four in Alliance. We have almost 37,000 employees a day at Alliance. As a result, we’re doing retail; we’re doing our fourth multifamily project. 

Are there any other topics anyone wanted to address?

STRUCK: I’ve always heard [industrial rental] rates in this city were, let’s say randomly, $3 to $3.25 for many years. Now I think it’s $3.75 or $4. Do you think that’s sustainable? 

ANDERSON: I think it’s definitely sustainable. I think we’ve been really fortunate that cap rates have come down over the last couple of years. I mean, if we were building with cap rates where they were eight or nine years ago, our rental rates would be, for that same building, $4.75. And though I do think the cap rates will stay at this level, at some point rents are going to inch up. 

NAPPER: Construction costs are driving it up as well. 

ANDERSON: For sure. You’re going to have a double whammy. You’re going to have construction costs and then you’re going to have cap rates come up. 

NAPPER: So a $3.25 [rental] rate is not going to last forever, but you’ve still got this perception in the marketplace that if you’re in an unproven market, if you’re not around the airport, you’re going to have to at least be close. If it can’t be $4, it’s going to be $3.65. 

BURTON: To me it makes sense, but history says it’s going to be $3.25. 

NAPPER: Of course, you’ve got the institutional guys who are going to say, “You know what, XYZ developer, I don’t care what you want, we want to get this money out, so we’ll take it at this,” and that rent rate will be low. 

ANDERSON: And it all depends on the cycles. In the down cycle, people start to lower their rates and try to get occupancy. But I do think that those owners of property—of good, class A property around the airport—you fast forward two, three years when there’s no more development going on … 

NAPPER: Rent is going up. 

ANDERSON: When you have a vacancy occur in a 200,000, 32-foot clear building by the airport, and you’re the only game in town, you’re going to be able to name your price. That’s because companies are going to want to keep their employees within 15 miles or a 15-minute drive, and they’re not going to want to go to Alliance—or South Dallas for that matter.

BRICE: Or more importantly, they’re not a commodity-based tenant. They’re servicing someone in that area or it’s their employees—there’s a reason they’re there. It’s not all about occupancy cost. It’s about location, too.

DARROW: Your facility cost is typically 4 percent, 4.25 percent of your total spin as a company. Your transportation cost is 40, so figure it out. That’s why we’re calling on the supply chain, the logistics guys. We can still call on the real estate guys, but these supply chain/logistics guys are the ones who are making a lot of decisions [and they] are coaching the real estate people. But I think we’re fortunate to be here and fortunate to have the [rental] rates as low as they are ... and I think we can sustain it.  

WHEELER: I do think, though, urban industrial is what we classify it—close to the airports, et cetera. There’s still a premium to be urban industrial. I don’t think that changes because that’s where the people are. 

DARROW: And we did a study on being close to the intermodal, too. We think there’s as much as a 15 to 25 percent premium that can be charged to be closer to intermodal. That’s for land, and that’s for rents. That’s going to continue to be very critical, I think, in South Dallas as well as Alliance. 

Can you share your outlook toward the industrial market in this year and next?

PEARSON: I’m as bullish as I’ve ever been about our market and our city and our region. I think Dallas is going to continue to prosper, and I think industrial business is going to continue to flourish here. 

WHEELER: I’m very optimistic. I think our state has enjoyed huge job and population growth, and I think that will continue. The capital markets have kept us balanced, and I think that we’ll continue to enjoy a very robust market. 

BRICE: I agree. It’s going to sound like a big echo in here, but I think we’re going to finish 2014 strong, and I see 2015 continuing on that same level. 

ANDERSON: Looking back at the last three or four cycles, if you look not at the last one, which ran about four years, the two previous ones ran for seven to eight years, so I’m a big fan of that type of vision. I think we still have three or four good years here. The only thing that could curtail that is something that we can’t even think of. 

NAPPER: We’ve started to see a lot of new product come out of the ground. I think there’s pent-up demand associated with that. I think as a result, you’ll see these big million-square-foot buildings. I think for the next 18 months to two years, you’ll see diversified product, more 200,000-square-foot and smaller buildings, and support systems around that, which is the retail and multifamily that will come because these industrial parks are happy. 

BURTON: I’m cautiously optimistic. We’ve got some things we’ve got to work on: rising costs, labor, the infrastructure. We’ve got to work on our schools and our training. But we’re a big consumer market; people are moving here. As we continue to consume, there’s going to be more need for distribution. I think one of the opportunities will be in export ... because of much lower transportation costs. 

DARROW: I think commercial construction is going to continue, residential construction is going to continue. It has to do with our population increase, and the jobs are going to be available here. This is a huge consumption zone and one of the numbers that I like to echo is that 85 percent of the product that comes into the intermodal in South Dallas is consumed within 100 miles of that intermodal. That just says how huge our consumption capacity is here. So I think our outlook is really strong. 

 

STRUCK: I think what’s encouraging is that even though the national economy is not where people want it to be, Dallas has continued to grow. It’s comforting to know that even in down times in the country, we’ll still be doing OK. 

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