‘There Are Clouds On The Horizon’: Slowdown Headed For DFW's Industrial Market

Tightening of monetary policy is expected to put a dent in Dallas-Fort Worth’s industrial pipeline as investors and lenders wait out the effects of rising interest rates, new data from Cushman & Wakefield shows.

“While the D-FW industrial market performed well during the second quarter and demand remained strong, there are clouds on the horizon,” Executive Managing Director of the Dallas office Kurt Griffin said in a statement.

Absorption was slightly down in the second quarter at 7.7M SF, compared to 9.5M SF absorbed in Q1, per Cushman data. Notable move-ins included Nike taking over 1M SF in South Dallas, UNIS moving into a 669K SF space in Alliance, and NFI assuming 511K SF in South Dallas.

There is more than 70M SF of new development in the pipeline, but the increased cost of capital is prompting caution among lenders. Investors are closely watching the effects of rising cap rates, which grew 50 basis points on average over the last three months, per Cushman’s data. 

DFW has been riding an unprecedented high for the past few quarters. Skyrocketing rental rates and low cap rates led to a boom in speculative industrial development, and while developers may be hitting the reset button, Cushman Executive Director David Eseke, who also leads the Dallas office’s industrial tenant advisory and leasing activity team, said the Metroplex has the fundamentals in place for a quick rebound.

“We’ve been going 100 mph the last 12-18 months, barely keeping the car on the road with all the tenant demand,” he said in a statement. “With tenant activity slowing and more stability in the capital markets and construction environment, I think we’ll return to a fast but manageable 75 mph pace that seems more sustainable long-term.”

Inflationary pressure is already playing a role in the quality of industrial space users are targeting, LanCarte Commercial Real Estate President Sarah LanCarte said at a June 21 Bisnow event. Desire for Class-B and C space, where landlords have more wiggle room to offset rising costs, should triumph over less flexible Class-A space in the coming months.

“Groups that would never in a million years look at this product type are interested in buying because … they can raise the rents,” she said.

DFW’s industrial vacancy rate sits at 5.2%, an increase of 10 basis points compared to the first quarter, according to the data. Some of the largest leases signed in Q2 include Target, which will take over 1.2M SF in the Alliance submarket; The Hayes Co., which leased close to 713K SF in East Dallas; and Libbey Glass, which signed a lease for 605K SF in East Fort Worth. 

Population growth and consumer spending habits should keep tenant demand high even amid a shortening of supply, Cushman Executive Managing Director Nathan Orbin said. Owners will respond to inflation via pricing adjustments, Griffin said, and rental rates are expected to increase from the $5.79 per SF seen in Q2. 

“This is a healthy move for the market that will calm some of the frenzied activity of the past few quarters,” Griffin said. “We expect rental rates to continue to increase in the near term to keep up with inflation and user demand to remain relatively strong over the course of the remainder of the year.”