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The Dallas-Fort Worth industrial market is experiencing a surge in construction, resulting in record-high deliveries and pushing vacancy rates to levels not seen in a decade. In 2023, developers introduced a remarkable 70 million square feet of industrial space, marking the highest level on record. Nearly half of this volume came from buildings exceeding 500,000 square feet, a trend attributed to aggressive speculative construction efforts in recent years.
The availability of industrial space varies based on factors such as building size, type, and location. Logistics buildings larger than 500,000 square feet now report an availability rate of 15%, a significant increase from 9% in 2020. Conversely, availability rates for smaller buildings of 50,000 square feet or less remain stable at 5%. Geographically, periphery submarkets witnessing heavy speculative development, such as SE Dallas/I-45, Kaufman County, and Denton, have experienced the most substantial rise in availability due to their relatively smaller existing stock. Meanwhile, interior submarkets near major highways and DFW International Airport maintain stable vacancy rates and are less impacted by the current supply surge.
Although net absorption has stabilized with tenants occupying 58 million square feet over the past year—down from the peak of 74 million square feet in mid-2022—it still exceeds the pre-pandemic average. This stable demand is seen across all deal sizes, with third-party logistics firms, manufacturing companies, and retailers being prominent leasers, attracted by Dallas-Fort Worth’s central location and extensive transportation network. For instance, DrinkPAK, a California-based canned beverage manufacturer, committed to leasing 2.8 million square feet across two facilities in Fort Worth, bringing an estimated 1,500 jobs to the region.
However, construction activity has slowed due to rising interest rates and elevated construction costs, with quarterly starts decreasing to approximately 5 million square feet over the past two quarters from a peak of over 25 million square feet in mid-2022. CoStar’s forecast predicts the market vacancy rate to rise to 9% before stabilizing by the end of 2024, as the amount of unleased space delivered each quarter is expected to decrease significantly.
While market rent growth remains strong at 9% year-over-year, it has cooled from its peak in mid-2022. There is a noticeable slowdown in quarter-over-quarter movements compared to the national average, with downward pressure on asking rents for newer buildings as tenants gain more options. Pricing power is shifting in favor of tenants seeking logistics space in outlying submarkets, while landlords continue to increase rents within interior submarkets.
Throughout every quarter of 2021, the demand for industrial space has soared to unprecedented levels, as reported by JLL. Vacancy rates, reflecting this surge in demand, have plummeted below the 10-year average of 7.1%, reaching a mere 6.4%.
Multiple factors are driving this heightened demand. The relentless expansion of e-commerce, the restructuring of supply chains, and a rapid influx of population growth are all significant contributors to the escalating demand and acquisition of industrial space across DFW and other key regions nationwide.
Despite a slight deceleration from its historic peaks in recent years, demand remains exceptionally strong in DFW’s industrial sector. In 2023, the market witnessed over 28 million square feet of net absorption and nearly 52 million square feet of leasing activity, aligning closely with the region’s robust performance in the past. This underscores DFW’s resilience and prominence as a key logistics hub in the United States, with ongoing expansion evident.
Since late 2019, the region has added a remarkable 100,000 net new industrial jobs, with 25,000 added in the last year alone. This translates to an annual growth rate of 3.1%, significantly surpassing the national rate of 0.2%.
Throughout 2023, vacancy rates experienced a notable increase, surpassing their long-term average. At 9.4%, the
market vacancy rate has jumped by 230 basis points,
compared to the low of 5.3% at the end of 2022. This swift escalation suggests a potential market imbalance has emerged. Upon closer examination, the majority of this increase can be attributed to the substantial influx of new developments still in the process of leasing up.
Vacancy rates are anticipated to increase further due to the completion of projects totaling 32.4 million square feet over the next 12 to 18 months. Currently, the pre-leased space constitutes approximately 25% of this total, marking one of the lowest rates in the nation and posing another risk to vacancy rate expansion. CoStar’s projections suggest that vacancy rates will surpass 9.5% by the end of 2024 before stabilizing in 2025 and beyond.
Simultaneously, availability rates are on the rise, reaching 11.5%, with logistics buildings reporting an availability rate of 13.5%. The delivery of large logistics facilities in peripheral industrial areas, such as south Dallas, Kaufman County, and Denton, contributes to a higher availability rate ranging from 20% to 30%.
In Dallas-Fort Worth, market rent growth has reached 7.5% over the past year, a decline from the recent peak of 11.6% recorded at the end of 2022. This deceleration in rent growth is attributed to the increasing availability of space in the market and a normalization in leasing activity. Brokers commonly report annual escalations of 3% to 4% in the market.
Quarter-over-quarter rent gains have shown a decline of 1.5% in the first quarter, following four consecutive quarters of gains of 1% or more throughout 2021 and 2022. This contrasts sharply with the average quarterly rent gain of 0.1% reported in the three years leading up to 2020. Expectations for future rent growth suggest further deceleration as more space becomes available over the next year. CoStar’s Base Case scenario predicts rent growth to cool to around 6% by the end of 2023 and to register at 2.7% through 2024, aligning more closely with pre-pandemic norms.
Pricing power is declining most rapidly among large logistics buildings located in submarkets characterized by heavy speculative development. Conversely, landlords maintain dominance in buildings situated in the interior of the market, particularly those in proximity to D/FW International Airport.
Rents for large, newer logistics spaces vary depending on location and size. Participants in the market note that pricing power for these spaces is shifting in favor of tenants, especially in outer industrial zones such as south Dallas. While newer buildings exceeding 500,000 square feet have commanded pricing of $4 to $5 per square foot, this could potentially decrease if spaces remain on the market for extended periods.
In one significant lease deal, Cart.com secured a 765,800-square-foot lease for $4.50 per square foot NNN at 301 Apache Trail in Terrell in April 2023. The building, featuring 34-foot clear heights, was constructed in 1999. Cart.com, a California-based medical apparel and footwear distributor, made this move as part of a broader effort to consolidate its operations into a single central location.
Pricing remains elevated for properties located in the interior of the market, particularly in submarkets insulated from rising availabilities. For instance, Kuhmo Tire committed to 393,625 square feet at 3700 Pinnacle Point within Eastern Lonestar/Turnpike, with an effective rate of $6.72 per square foot for a three-year term. The 1 million square foot multitenant building, completed in 2001, features clear heights of 32 feet, with logistics provider Geodis occupying the remaining space.
The industrial sector in Dallas-Fort Worth has seen notable shifts in Q1 2024. According to NAIOP, there has been a 45% decrease in the amount of industrial space under construction compared to the same period in 2023, signaling a significant normalization of warehouse space development. Despite this decrease, the region still boasts a substantial 33.6 million square feet underway, making it the second-largest pipeline nationally and marking a 3.6% increase from the market’s current stock.
Additionally, CoStar reported a significant downturn in industrial market activity in the first quarter of 2024, with rent declines of 1.5% after four consecutive quarters of 1%+ growth. Vacancy rates have risen dramatically, and net absorption has dropped below the market’s average. This downturn can be partly attributed to declining home sales, which have significantly impacted consumer-facing companies and B2B providers of equipment and building materials.
Looking ahead, the market is anticipated to experience a decline in industrial deliveries, with vacancies expected to plateau for most of 2024, peaking at 9.8% by the year’s end. Rents are also projected to slow their year-over-year growth until the end of 2024. Despite the higher vacancies compared to the national average, the Dallas-Fort Worth industrial market continues to outperform the US average for all property types besides specialized industrial, indicating areas of resilience within the sector.
However, availability rates for buildings under 50,000 square feet remain more stable with vacancies running at less then 5% — this is also true of interior submarkets near major highways and the DFW airport, which are more insulated than other industrial buildings located elsewhere in the metroplex.
What does all this mean? It’s a great time to construct, acquire or sell industrial space in DFW. If you have any questions or we can help you with any of your real estate needs, M&D Commercial’s knowledgeable agents are always available and would be happy to provide you with a free consultation anytime. Please reach out to us at (972) 772-6025.
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