Industrial CRE is Leading the Way in Dallas-Fort Worth
Last spring, pandemic-related shutdowns brought the longest economic expansion in U.S. history to an abrupt halt. Although COVID relief measures helped prevent another Great Recession, CRE transactions fell to lows not seen since 2008 – 2010. But a few notable markets have proven to be exceptions to this rule — chief among them Dallas-Fort Worth.
As Kourtny Garrett, CEO of Downtown Dallas Inc., puts it, “Cranes are still flying high over downtown Dallas.” The numbers back up this anecdotal assessment. D-FW pushed past Manhattan and Los Angeles to rank first in CRE transaction volume in 2020, closing $15.39 billion in deals by November 2020.
Continued development in D-FW’s urban centers isn’t even half of the story. True, further analysis of the region’s ascendency reveals that multifamily has managed to hold its own even as retail, hotels, and office property sales have slowed considerably.
But the real hero here is industrial. Investments in that property type grew nearly 25 percent between Q2 2019 and Q2 2020. Since then, several more high-profile industrial projects have broken ground in D-FW.
- Amazon, already the most prominent industrial tenant in North Texas, is expanding its regional distribution system with the lease of 219,000 square feet in the Mansfield International Business Park and the addition of six new delivery stations across the D-FW Metroplex.
- Walmart is keeping pace with Amazon by building two new e-commerce facilities in Lancaster. As if this $800 million investment weren’t enough, the retail giant also plans to build automated fulfillment centers in existing brick-and-mortar stores throughout D-FW.
- Walgreens is moving one of its key operations to Fort Worth with the launch of its Central Pharmacy Fulfillment Center. This shipping operation will be taking over 100,000 square feet at the AllianceTexas development in the summer of 2021.
- The Home Depot, which currently operates 20 distribution centers in Texas, is opening a 1.5 million-square-foot distribution center in Dallas. The new site will process deliveries, both to customers’ homes and local stores for pickup. “The Dallas-Fort Worth market is a key hub for The Home Depot’s delivery and supply chain strategy,” the company explains in a press release dated February 2, 2021. “Ultimately, the company’s supply chain footprint in the Dallas-Fort Worth area will grow from 2.1 million square feet to 4.5 million square feet and will create approximately 1,500 new jobs by the end of this year.”
- Pennybacker Capital is partnering with M2G Ventures to redevelop a 1960s-era business park in Northwest Dallas. Upgrades planned for the nine-acre site include extensive refinishing of building facades and structures, new lighting and paving, enhanced parking, and ecologically sound landscaping. “We are excited to partner with M2G to build a creative, new standard for urban-industrial space in the coveted Dallas-Fort Worth market,” says Thomas Beier, partner and portfolio manager at Pennybacker Capital.
- Digital Realty, a world leader in data-center innovation, already operates 30 data centers in Texas, including multiple facilities in D-FW. In January, the company announced it would be moving its corporate headquarters from San Francisco to Austin.
Clearly, industrial is the engine powering CRE markets across the Lone Star State. Just as importantly, however, industrial’s recent performance provides insights into several trends that transcend any single property type. In this article, we’ll identify those macro trends and discuss why lenders, investors, appraisers, and other CRE stakeholders would be wise to monitor them closely through 2021 and into 2022.
1) Everything can be ordered online, and anything can be delivered anywhere
Even before COVID, brick-and-mortar retailers were either racing to up their e-commerce game or closing up shop altogether. The pandemic has only accelerated this trend, as those Amazon, Walmart, and Walgreens deals indicate.
Meanwhile, the nearly nationwide shutdown of commercial foodservice establishments has been accompanied by the rise of ghost kitchens — eateries set up for delivery-only service. Competition in this space has ramped up so quickly that The New York Times has already reported on the rise of the ghost franchise.
Ghost kitchens address another issue facing restaurateurs trying to widen their razor-thin profit margins. Retail is expensive, and waitstaff add considerably to almost any dining establishment’s labor costs. Here, a statistic from Euromonitor is especially telling: “60% of the cost of a Starbucks latte represents the cost of rent and staffing.”
Ghost kitchens are a classic example of addition by subtraction — or, more specifically, expansion via contraction. Without dining rooms to manage, business owners can focus all of their attention on their menu, their digital marketing, and the efficient use of their limited kitchen space.
We are currently witnessing fundamental changes in the way consumers consume. The CRE industry is likely to respond by building new facilities or repurposing existing retail inventory to support the ever-increasing demand for warehousing and delivery services.
2) Businesses aren’t staying put or standing pat
A year into their experiment in allowing their people to work from home full-time, businesses are realizing that the practice actually works. Consequently, those coastal metropolitan areas that typically claim the lion’s share of Fortune 500 companies no longer have the same competitive advantage they used to.
The San Francisco Bay Area, Los Angeles, New York, Philadelphia, etc., have long appealed to major corporations because similar businesses tend to concentrate there. This concentration, in turn, creates a strong pool of talent and an environment that supports collaboration and innovation.
Dallas, Houston, and Austin have their own well-established industries that offer all of the above at a lower price point. Silicon Valley in particular is feeling the pinch, with Hewlett Packard, venture capital firm 8VC, DZS, Inc., and Oracle all relocating to the Lone Star State.
In his remarks about Digital Realty’s relocation to Texas, CEO A. William Stein sums up what many corporations are looking for in a new home state — and finding in Texas. “The central location, affordable cost of living, highly educated workforce, and supportive business climate have helped make Texas an epicenter for business activity and technology growth,” he says.
The effect of these industry giants moving to Texas will ripple throughout the industrial CRE market. These organizations will need vendors to provide everything from supplies to marketing services. This trend also has implications for other industry sectors, as new job opportunities will continue to fuel the state’s population growth. Housing prices in traditionally affordable markets have risen dramatically during the COVID pandemic, which may increase demand for multifamily units, along with all the infrastructure required by population growth — shopping centers, medical facilities, schools, and more.
3) Regional centers make bringing goods to market easier and more reliable
Since 2017, trade tensions, severe weather events, and the pandemic have exposed weaknesses in global supply chains. While globalization is not going away, finding suppliers and building distribution centers closer to home makes for a more resilient supply chain. E-commerce, with its demand for speedy deliveries, is also driving the trend towards warehousing products in nearby outlets.
Which cities will benefit the most from this industrial gold rush? Mark Zandi of Moody’s Analytics looks to gateway cities for growth in the industrial sector, but not everyone agrees with this assessment. “While we think of gateway industrial locations being the major U.S. ports,” says Walt Bialas of Goodwin Advisors, “I’d be so bold to expand Mark’s observation to include key logistics hubs… D-FW falls squarely into this category.” D-FW’s intermodal capabilities only add to its attraction as organizations seek to address supply chain vulnerabilities by building new domestic facilities.
4) The suburbs are where it’s at (again)
Unoccupied office buildings, vacant hotels, shuttered shops, and empty restaurants are driving down CRE values in countless American cities. To take but one example: New York City Mayor Bill de Blasio’s FY 2022 budget forecasts a decline in property tax revenue of $2.5 billion.
Yet most municipal governments are incredibly dependent on a solid tax base. Without it, cities struggle to fund schools, public safety, sanitation, and other essential services. The $350 billion earmarked for state and local government in the most recent COVID relief bill may seem like a generous sum, but it can only backfill so much.
Although officials won’t know the full extent of the fiscal difficulties facing their cities until post-pandemic property assessments have been completed, many residents and businesses aren’t waiting around. Even before the pandemic, buyers searching for more affordable housing were venturing far into the suburbs and exurbs. (The 2017 federal tax reform that capped state and local tax (SALT) deductions probably didn’t help.)
Then came the pandemic. The shift to remote work eliminated commuting concerns, and social distancing has proven easier to practice outside of those densely populated areas that became virus hot spots.
This embrace of suburbia transcends single-family residences. Multifamily construction in those outlying communities has only picked up more steam over the last year. Many companies have chosen to follow that money. Uber has established a major hub in D-FW, Tesla broke ground last year on an assembly plant in Travis County, and Apple is constructing a 133-acre campus in Austin.
Nevertheless, the quick shift to remote work in March 2020 has not shifted back to the office. A hybrid model that requires only occasional trips to a centralized location — or perhaps whichever satellite office is most convenient — will likely be most white-collar workers’ new normal.
The post-pandemic economic outlook
In remarks delivered this February, Esther George, President and CEO of the Federal Reserve Bank of Kansas City, credits the Small Business Administration’s Paycheck Protection Program (PPP) with helping commercial landlords and tenants weather last year’s stormy economy. The PPP provided liquidity that allowed lenders to offer forbearances, keeping foreclosure costs off the books and thus improving CRE loan performance metrics.
However, George warns that the economic fallout of the pandemic may outlast support programs. “Should that occur,” she cautions, “many renters and businesses could find themselves unable to meet their obligations, forcing banks to realize losses on existing loans and weighing on credit growth and broader economic activity.” The federal government has designed the $1.9 trillion American Rescue Plan to prevent this very thing from happening.
This legislation includes emergency rental assistance, grants for restaurants, and increased funding for the PPP program. As of this writing, Congress has extended the deadline for PPP applications from March 31 to May 31, 2021. (The CDC has extended its eviction moratorium through the end of June, but this federal regulation remains controversial, and the Texas judiciary has chosen not to enforce it.) As noted, state and local relief should help shore up municipal budgets, and, if past performance is any indication, the next round of individual stimulus checks will spur retail spending.
We will learn much more as landlords in Texas pay their CRE property tax assessments in the weeks and months to come. Only then will we begin to form a complete picture of how COVID has affected appraisal values across all property types. Nevertheless, all signs point to the smart money staying on industrial now and for the foreseeable future.