Highlights

• Net absorption of 2.54 million square feet in Q3 2024.
• BroadRange Logistics signed the largest lease of 1.07 million square feet.
• Amazon acquired a 625,000 SF building for $91 million.
• Vacancy rate dropped to 8.08% from previous quarters.
• Investment and large user sales, including Amazon’s purchase, signal renewed market activity.

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Perfectly Situated.

With digital revenue up 54% since 2019, companies are searching for ways to store and ship products more efficiently. The Southeast provides extraordinary access to the US population through I-85 within a 24-hour timeframe, a win when considering DOT regulations. But that isn’t the only draw.

“Gaps often overlooked within our supply chain have come to a head over the past two years, requiring companies to consider different options when transporting and storing product,” said Jason Schnittger, Managing Director of Stream’s Charlotte office. “Port-related activity, automotive and EV-related users, and other manufacturing users have been like gasoline on already white-hot demand across the Southeast region.”

Exponential port growth has caused the Port of Savannah’s TEU totals to nearly double over the past decade and Inland Port Greer to increase 14% in 2021. As such, ports throughout the Southeast are investing billions to strengthen their infrastructure.

According to Brad Bays, SIOR, Managing Director and Leader of Stream’s Industrial Division in Atlanta, the influx of port activity has created a significant demand for industrial space. “We keep developing bigger-box properties, and most are leasing up prior to delivery,” said Bays. “Because of this, we are seeing substantial rent increases, with rates two to three times higher than they were just two years ago.”

Mounting port activity has also increased demand for Industrial Outdoor Storage (IOS), giving rise to a newer, $200-billion asset class that provides additional storage for bulk materials, trailers, and drops.

Unmatched Incentives.

To meet industrial demand, YardiMatrix predicts that more than 350 million square feet of new space is needed annually, totaling 1.8 billion by 2026. To capitalize on this trend, the Southeast has numerous economic incentives in place, such as port volume increase credits and low tax rates, adding to the region’s overall appeal. Federal legislation is playing a role as well.

The Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act of 2022 provides $52.7 million for American semiconductor research and development, and workforce development, along with a 25% tax break for domestic manufacturing. With such incentives, Hyundai announced its plans to open a $6.5 billion EV and battery manufacturing facility near Savannah, GA, and Toyota recently purchased 2,000 acres in Greensboro, NC, for a $1.3 billion battery plant.

BMW and Volvo are also active in South Carolina, with BMW announcing a major expansion to their GSP manufacturing plant and Volvo announcing two new GSP plants.

“The Southeast is quickly becoming a second Detroit, in the sense that auto manufacturers and key suppliers are flocking to the region,” said Bays. “We’re becoming the automotive capital of the US.”

Growth is not without its challenges.

While other regions may boast wide open available land suitable for industrial development, Atlanta and the Carolinas face specific topographical challenges not seen elsewhere, resulting in some limitations.

“Unlike other regions, here in the Carolinas, natural water features can hinder development,” said Schnittger. “Also, because growth has happened so rapidly, some municipalities have had difficulty keeping up with infrastructure, making available and developable land harder to come by.”

In prior cycles, rising construction and land costs resulted in higher rents which stunted demand for space. But this cycle is very unique. Even with rising construction prices, land prices, and rent, demand has continued un-checked—though increased debt costs and continued high construction costs could potentially slow down speculative development.

“Tenants need space to meet consumer demands and future changes. So, despite ever-increasing rental rates over the last several quarters, demand hasn’t wavered,” said Bays. “However, as rental rates increase, some companies have found that 3PLs provide greater flexibility, especially if they’re uncertain about signing a long-term deal in today’s economic environment.”

Currently, 3PL accounts for 39% of Atlanta’s total demand for space over 100,000 square feet.

Positioned for Success.

As the market continues to evolve, there are many questions and opportunities that Schnittger and Bays are prepared to tackle. “Our goal is to provide clients with the latest information and trends to make an informed decision,” says Schnittger. “Stream’s agile, innovative platform provides us the resources to do just that.”

Bays couldn’t agree more. “The demand is high, as is development. More than 18 million square feet of industrial space are under construction in Savannah alone. Between the population increase, location, and economic incentives, it’s not really a surprise. The Southeast has much to offer.”

Jason Schnittger is a Managing Director in Stream’s Charlotte office, leading industrial growth across the Carolinas. He previously served as Managing Director of Stream’s San Antonio office and has more than 20 years of commercial real estate experience.

Brad Bays, SIOR, is the Managing Director and Leader of Stream’s Industrial Division in Atlanta. With nearly 20 years of experience, Brad has completed more than 10 million square feet of industrial, flex, land, and construction transactions, accounting for $200 million in transactions.

The post Understanding the Increased Demand for Industrial Space in the Southeast appeared first on Stream Realty Partners.

How will the industrial market be affected by the headline office relocations?

This is what gets us most excited. Over the last three years, the news has been filled with headlines of massive corporate relocations and consolidations within North Texas, including Toyota, State Farm, Liberty Mutual, Fannie Mae, JP Morgan, and Kubota. The industrial market does not truly see the effects of these moves until the move is complete, employees have relocated to Dallas-Fort Worth, and their families start consuming products in their new neighborhoods. We have seen a lot of construction activity from businesses related to these large relocations, but we are just now starting to see the bulk of the population growth in Dallas, Fort Worth, Frisco, and the surrounding suburbs. This will increase the overall demand for industrial space. While it is hard to draw a straight line from an industrial lease to the end consumer, we know that each person who lives in DFW accounts for 105 square feet of occupied industrial warehouse space. So, for example, if 10,000 new jobs come to DFW, and bring around 25,000 new people with them, that accounts for 3,750,000 square feet of positive absorption within the industrial market.

The market is great; what do we have to worry about?

As you look at the overall vacancy and absorption across our 770 million-square-foot industrial market, all signs point to a tight, positive market. While this is true in the vast majority of product types and locations, there are a few submarkets that we’re keeping our eye on. At this very moment, leasing activity above 150,000 square feet on the north side of DFW Airport is slower than most would have expected or wished for. There is an abundance of activity up to 125,000 square feet, but the activity is much slower on larger blocks of space. Why is this? We believe several factors are at play. Most predominately, we see that the average tenant sizes in infill markets and in markets that are closest to the population has become smaller over time. Increased rental rates, scarcity of land, the requirement to maximize building values, the underwriting that is required to compete within the capital markets, and the overall congestion due to population growth are all factors that we feel contribute to this trend.

We also have our eye on the southern Dallas County market. The South Dallas market is by far the fastest growing with the most development activity. During calendar year 2016, we delivered or started construction on 10.5 million square feet of new product within this market, while absorbing about half of this number, at 5.8 million square feet. Given the amount of product that is available in this submarket, and the ongoing volume of new construction starts, we believe that this market will not experience the same rental rate growth as other markets within DFW during the next twelve months.

Looking ahead, another market that has our attention is South Fort Worth. While this area has not experienced much development during this cycle, there are many developers that have acquired sites or who are under contract on sites, with close to two million square feet of product planned. By comparison, South Fort Worth has only delivered 750,000 square feet of new product since the beginning of 2014. This is clearly the most logical next step as other submarkets have become developed, and we have no doubt that it is the next step in the continued build out of the North Texas industrial market, but it will be interesting to see how the new developments perform, and the depth of this submarket.

Our team of seventeen industrial specialists continue to be pleasantly surprised with the current market and are excited to see what the balance of 2017 brings. We are working hard and having fun. Here is to a busy summer!

Blake Kendrick is the managing director of Stream Realty Partners’ Dallas industrial team and a partner in the Dallas office.

SOURCE: D Magazine

The post A Mid-Year Analysis of DFW’s Industrial Market by Blake Kendrick appeared first on Stream Realty Partners.

Stream Realty Partners (Stream), a national real estate services, development, and investment firm, hosted its sixth annual Dallas-Fort Worth (DFW) State of the Market at the W Dallas Victory Hotel with more than 300 business leaders in attendance. Featured keynote speaker, Geoff Colvin, Fortune Magazine’s Senior Editor-at-Large and author/commentator on business and economic issues, discussed how the nature of business is changing dramatically and why self-disruption is required to separate world-class businesses from the rest.

Key Insights on Dallas Office Market
Chase Lopez, Senior Associate of Stream’s office division

• Stream’s office leasing team consists of 13 brokers covering all the major markets across Dallas and Fort Worth.
• At the end of the election year, the DFW office market had an overall vacancy percentage of 15 percent, absorbed 2.3 million square feet, delivered 3.4 million square feet, 11.4 million square feet under construction, and rental rates averaged $26 full service.
• Currently, 24 office buildings are under construction with build-to-suits totaling 62 percent and spec construction representing the remaining 38 percent. The combined percentage preleased is 72 percent; however, spec construction is 25 percent preleased. The three leading submarkets for new construction are Uptown, Upper Tollway, and Las Colinas, excluding the build-to-suit construction.
• The top five year-over-year job growth in DFW combined with a minimal amount of new office supply delivered since 2010 indicates that the market today is healthier than it’s ever been.
• Since 2010, the market has experienced rent growth of 26 percent, vacancy decreasing by 3 percent, and realizing 19.6 million square feet of positive net absorption (which is 2.2 million square feet more in new deliveries since the start of the cycle).
• There are five major indicators required to be in sync during a healthy real estate cycle (1. Absorption, 2. Deliveries, 3. Vacancy Change, 4. Rent Growth, & 5. Economic Diversification)
  • DFW is just beginning to witness the healthiest balance across each category
    • A testimony to the health of DFW was witnessed 2 years ago when the oil market crashed. Many investors assumed the DFW recovery would be hampered as a result.
    • Not only was our recovery not hampered but some economists would argue DFW benefited from the oil market crash due to our presence of various transportation related companies.

Key Insights on Dallas Industrial Market
Sarah Ozanne, Senior Associate of Stream’s Industrial Division

• Stream’s industrial leasing team consists of 17 brokers that cover all the major markets across Dallas and Fort Worth.
• In 2016, Stream completed 476 transactions which represented more than 16 million square feet and $580 million in value. Our Tenant Representation service line continues to grow, now totaling 34 percent of our division, as well as building sales, now 19 percent in addition to our standard core and leasing business.
• DFW ended 2016 at a record low with a 6.5 percent vacancy rate on 750 million square feet in the total market. Net absorption for the year was 22 million square feet.
• So far in 2017, DFW has absorbed 6.5 million square feet of industrial product. Construction deliveries are increasing, but net absorption continues to exceed that growth.
• Development under construction is most predominant in the Great Southwest and South Dallas submarkets. As the Great Southwest increasingly becomes an infill market, with little available land, South Dallas has the most robust pipeline of assets in planning.
• In the current cycle, there are 111 million square feet under construction, in planning or that has been delivered.
• The demand is caused by job and population growth, as well as e-commerce.
  • DFW boasts the top job growth rate in the U.S. at 3.9 percent.
  • At 7.1 million people, DFW ranks as the fourth-largest populated city in the U.S., and is the third fastest-growing city in the country.
    • Many new Texans, including the groups that are coming with the major corporate relocations that have been announced haven’t even arrived yet. So, these numbers are only going to increase.
  • E-commerce represented nearly 9 percent of all retail sales in 2016 and is at a growing rate of 16 percent annually.
  • Of the top 12 e-commerce businesses that you see here, eight have facilities in DFW and 10 have a presence in Texas.
    • Amazon represents 7 million square feet in DFW, which is almost 1 percent of the entire market. 35 percent of the 7 million square feet has signed within the past two years.
  • Fulfillment is the next largest sector influencing the industrial market. UPS and FedEx now represent 6.8 million square feet within the market. These numbers continue to grow, with several new facilities in talks or in leases.
• Across the market we’ve seen rental rates grow 11 percent in the past year. This is an average across all markets, and is substantially higher in core infill markets and with new product. Although South Dallas has seen rent growth, it hasn’t reach double digits.
• Stream’s expectation for 2017 is an absorption of over 21 million square feet, a growth of three percent in occupied base, which is 65 basis points above the long-term average. Although that’s fairly conservative, it’s the lowest vacancy we’ve seen in the past 20 years.

Key Insights on Healthcare Market
John Huff, Managing Director of Stream’s Healthcare Platform

• The top trends within the healthcare industry are being driven from the results of the changes in healthcare laws and reimbursement over the past few years. As the laws are focused on lowering costs to the consumer and providing affordable insurance to everyone, the fallout has led to lower reimbursement to the providers. As a result, the facilities being developed and planned are focused on being able to deliver the highest quality of care, in a lower cost setting.
• What we’re seeing from an ownership standpoint is that more doctors are represented by brokers, leading to more concessions, like free rent and termination options, which was rarely seen in the healthcare industry 10 years ago.
• From a development standpoint, the industry is becoming retail-oriented. Micro-hospitals are being constructed throughout DFW. Instead of spending $100 million on a 90-bed hospital, they can spend $20 million and still capture patients and process their medical needs in the micro hospital.
• Last year, there was $7.7 billion delivered in outpatient clinics alone. That doesn’t include the major hospitals or large medical centers, simply the pop-up emergency clinics, free standing EDs, walk-in clinics and micro-hospitals to name a few. Another $6.5 billion have started construction.
• Healthcare facilities and MOBs have become a “Darling” asset class for investment due to the static tendency, high replacement costs and low renewal capital requirements.
• As DFW’s population grows, more patients are created which will lead to the need for healthcare facilities to handle the new patients.

Key Insights on Investment Sales
James Mantzuranis, Vice President of Stream’s Investment Sales Division

• Stream’s investment sales division, led by Managing Director Jamie Jennings along with James Mantzuranis, focuses on middle-market opportunities ranging from $2 to $40 million, although the group has transacted on opportunities in excess of $80 million.
• The spectrum of product types covered by the team include industrial, office, flex, healthcare, and land, as well as debt and equity placement for acquisitions and new developments.
• During the current cycle, the investment sales team has closed on more than 50 transactions totaling more than 120 buildings with a gross asset value in excess of $500 million.
• Stream is tracking approximately 30 active industrial transactions, ranging from $5 million single-tenant buildings to billion-dollar plus multi-city portfolio and platform sales.
• Stream is tracking approximately 40 active office transactions, including $10 to $15 million suburban assets up to multiple hundred million dollar-plus core deals representing trophy assets in their respective submarkets.
• Investors today are less likely to look at opportunities with a “get in and get out” mentality, often assuming to hold assets for 10-years or longer. Dallas is no longer a momentum play due to strong fundamentals, fueled by population growth.
• Foreign capital buyers have been a major player, although they are focused on mega DFW transaction and bondable lease assets. Transactions that do not fit this mold or fall under $30 million in gross value are not receiving the same impact and attention.

Austin Commercial, Jackson Walker, VTS, BOKA Powell, Republic Title, Wilson Office Interiors, Gap Solutions Group, Kimley Horn, and Platinum Parking sponsored Stream’s 2017 State of the Market event.

View event photos here

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