The market is quickly tightening for smaller-footprint industrial developments, while larger properties continue to struggle finding occupants.
In the current Dallas-Fort Worth industrial market, there’s almost a direct correlation between vacancy rates decreasing and developments shrinking in size.
For projects 50,000 square feet in size and under, commercial real estate firm CoStar shows a 6.5% vacancy rate — the tightest in the metro — despite nearly two million square feet of space vacated over the last year within that category.
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“These small bay buildings of 50,000 square feet or less have a large percentage of older stock, some of which becomes obsolete over time,” said Cody Gibbs, director of market analytics with CoStar.
He explained that if the market is split into properties built before and after 2000, net absorption for newer properties clocks in at a positive 1.1 million square feet over the last year. While that still leaves around 900,000 square feet in the red for that segment in total, it represents strong demand for smaller-footprint properties built to more modern standards, such as higher clear heights.
To put that into context, Gibbs said there is around 1.8 million square feet of new construction for this segment currently underway.
A competitive edge
Citadel Properties recently sold three buildings in this size category at Allen Exchange, a 72,000-square-foot flex industrial development by McKinney-based Gillett Commercial, and built by Raymond Construction, headquartered in Richardson.
“When you look at an industrial building in this tight submarket, if you’re a landlord you have a ton of leverage so rates have been climbing like crazy,” said Citadel senior adviser Katherine Pool, who facilitated the deal alongside company partner Mac Morse.
She explained that it is crucial for brokers to learn about potential deals as early as possible, and manage clients’ expectations about pricing and competitiveness.
“The velocity and volume of deals for this product type post-COVID-19 has been second to none,” Morse said. “The pricing is very competitive but it highly depends on the type of product, the type of user that it fits, and the micro-market it’s in.”
And not every market is created equal. While demand is certainly strong, Morse said the caveat is that location still plays a critical role in a property’s attractiveness.
For the Allen Exchange development, for instance, two of the buildings were sold to what Pool and Morse call “owner users,” or owners who occupy the property they purchased to facilitate their business needs like warehousing, maintenance or shipping and logistics.
The largest 51,000-square-foot building was purchased by Texas Star Pharmacy. Well Go USA Entertainment, a global distributor of action and independent films, purchased a 10,600-square-foot building. The buyer of the final building was not disclosed.
“The type of buyer who is looking for these types of properties is usually a local business owner,” Pool said. “The school districts in Allen and surrounding areas are fantastic, and the [U.S. Highway] 75 corridor is in the middle of the metro’s path of growth.”
But even in hot corridors, new construction comes with its own obstacles, including a challenging financing environment, elevated land prices and limited availability.
“If there was land that you could build it on, there would be a lot more Allen Exchange developments,” Morse said.
Go big or go home
Since 2020, Gibbs said over 163 million square feet of large industrial space has been delivered, compared with 28 million square feet in the 50,000- to 150,000-square-foot bracket.
“When we’re thinking about the largest buildings, we’ll sometimes see them being built for a particular tenant. Drinkpak is a good example in South Fort Worth, and Amazon is another good example,” Gibbs said. “But one of the things we’ve seen a lot of, especially in the last development cycle of the last few years, is that construction of 500,000-square-foot industrial buildings were built on spec believe it or not — not many of them were built with a specific tenant in mind.”
Despite over 18 million square feet absorbed for properties 250,000 square feet and larger, vacancy rates are still hovering around 10.6%, according to CoStar. Gibbs said it’s taken some time for some larger buildings to find occupants.
That’s led to a slowdown in new construction, even in strong leasing markets like AllianceTexas, where Gibbs said roughly 235,000 square feet of new space was finished over the last year.
“Meanwhile, over this same time period we’ve seen tenant demand for space hit a little over 3 million square feet, or equivalent to 3.4% of their existing inventory, helping this area see a major recovery in their vacancy rate below the Dallas-Fort Worth average,” he said.