Navigating Economic Uncertainty And Oversupply: DFW Convenes At Bisnow’s Nov. 6 Industrial Outlook Event

Dallas-Fort Worth has had a greater supply of industrial assets than it knew what to do with, but in Q3, the number of assets under construction reached a more stable place. CBRE’s third quarter report found that new construction was down to 10.8M SF from 14.3M SF the previous quarter. 

While vacancy remains high at 9.8%, CBRE predicts that when tenants move into spec deliveries brought forth by oversupply, the vacancy rate should start to come down.

Commercial real estate professionals considering getting involved in the DFW industrial market can learn more about the best ways to finance properties by attending Bisnow’s Nov. 6 DFW Industrial Outlook event. Attendees will explore topics that include industry trends, the response to economic uncertainty and advancements in technologies.

Click here to register for the event.

Among the speakers is Anthony Scavo, president and managing partner of real estate owner and manager Basis Industrial. Scavo will speak on the “Financing Industrial Real Estate” panel. 

The Boca Raton-based company has been working on establishing its footprint of industrial assets in Texas. Basis Industrial’s portfolio in the region comprises over 1M SF, with 12 properties in Dallas and two in Houston, according to a press release.

In a discussion with Bisnow, Scavo spoke about the impact of rising interest rates on DFW developments, growth amid vacancies and the financing strategies that Basis Industrial has been turning toward for its Dallas properties. 

Bisnow: How has DFW’s industrial sector been impacted by escalating interest rates?

Scavo: Rising interest rates make the site acquisition process more difficult. Fewer owners are interested in selling due to the rising interest rates causing sale cap rates to rise. This interest rate environment also increases the cost of capital. When rates escalate, it can become more difficult to reach the returns investors are seeking. In the past, people were used to selling these assets at a very low cap rate, making a good return off what they were selling them for. When interest rates go up, cap rates usually follow and that is because of the leverage concerns. You want to avoid buying an asset at a cap rate below your borrowing cost.  

There have been fewer assets being bought and fewer assets being sold — two aspects that go hand-in-hand. When the cost of capital goes up, it's harder for buyers to get financing and it's harder to make deals pencil. That also affects the sellers who want to sell the asset for the most money they can make. When rates climbed as fast as they did, these two aspects worked against each other and the deals became harder to find in this climate and even harder to close. 

There are some deals in Dallas that are still trading for a relatively inexpensive basis — or the total cost of the property per SF of the actual purchase price. Interest rates hurt the going-in cap rates, but when the basis gets low enough, it does get attractive if there's a future exit. Inherent growth that's left in the asset because of the low purchase price makes it still attractive to buy. We have been able to purchase assets sometimes at a 50% reduction to replacement costs.

Bisnow: How has DFW embraced growth and expansion opportunities in its industrial sector? How has the region contended with vacancies?

Scavo: Dallas is land-constrained, but there are ways for investors to acquire buildings farther away, without having traffic concerns, while also getting lower rates outside of the main city center. 

There were a lot of big-box industrial assets built in Dallas simply due to the land area and reasonable cost for said land. Developers were going into Dallas and spacing out these large 1M or 2M SF distribution centers. However, there were vacancies because they overbuilt. It’s going to take a little bit of time for those to stabilize.

Basis Industrial buys multitenant industrial assets where the average tenant size is much smaller than the big-box assets, so we haven't really been seeing a vacancy issue unless there's a competitive component that's causing it. This means that if a competitor right next to us has a lot of vacancy, that may end up driving a lot of vacancies because they’re cutting the going-in rental rate, which is below what we are charging. Most of our Dallas properties, however, are above 80% to 85% occupied, so we're buying them, with a little bit of occupancy built in that we could fill the rest of the spaces up.

Bisnow: What financing strategies has Basis Industrial been adopting for its DFW properties? 

Scavo: Because of the rising interest rates and tight capital markets, we use two different financing structures: either a traditional bank lender or a regional lender. Most of our financing has come from a traditional bank. 

In recent times, equity has been a little bit tighter because of the markets. We’ve been going with some higher leverage, quasi-hybrid equity sources. It's a slightly more expensive cost of capital, but it's a blended rate, so we get more of the upside with a slightly higher rate on the money.

Bisnow: What are you looking forward to most about attending Bisnow’s Dallas-Fort Worth Industrial Outlook event?

Scavo: I’ve spoken at a couple of Bisnow events now, since we have properties all over the U.S. I like working with Bisnow and the group of brokers and industry insiders they bring in. It’s a nice group to speak in front of.

Basis Industrial is mostly known in Florida, and we’re trying to get the Basis Industrial name known more in Dallas. We want brokers to see that we are good property managers and operators, and they can bring more tenants our way. We also want tenants to see that we’re a Class-A property manager, and they know they'll be taken care of when they move into one of our properties.

This article was produced in collaboration between Studio B and Basis Industrial. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.