Industrial development will continue to grow in 2023, despite market uncertainty

BY BILL BAUMGARDNER

During the past 10 years, Texas has seen the greatest development cycle in a generation, driven by an unprecedented growth story that has seen the state’s population grow by more than 4 million people. Texas joins California as the only state with a population of more than 30 million.

Certainly, the biggest winner during this cycle has been the industrial sector, as the COVID-19 pandemic accelerated e-commerce trends by at least five years into the future. Today, even as the market cools nationally and e-commerce giants like Amazon and Walmart begin layoffs, Texas is still poised for growth in both the short- and long-term.

This is especially true in the Dallas-Fort Worth region, which continues to be the top industrial market in the nation and a gateway market to the rest of the country due to its central location and global supply chain connectivity. According to a recent Yardi Systems report, the current construction pipeline is set to boost the statewide industrial footprint by 7.8 percent. Emerging Texas markets San Antonio and El Paso will benefit extensively from their border access.

However, as the slower flow of capital and higher interest rates begin to impact newer entrants into the sector, Texas will see new starts begin to drop initially, but not to the level of other markets nationally. A recent

Prologis Research report — the best barometer for the market’s future — says new U.S. warehouse development starts will drop to a seven-year low in 2023, even as rent growth exceeds 10%. Decreased development in 2023 will then only drive-up demand. The pipeline will drop from over 500 million square feet in Q3 2022 to 275 million square feet by year-end 2023.

Dramatic interest rate increases have changed the dynamics for most commercial property transactions. The interest rate, once at an all-time low of 3.5 percent, is now approaching 7 percent. Banks have paused lending and capitalization rates continue to climb, which impacts the investor market. But this environment has its perks if you play the game right. Wellcapitalized buyers can build out their portfolios with many institutional buyers standing on the sidelines while interest rates level out.

With Texas experiencing significant growth, even in the wake of actions taken by the Fed to curb inflation, it is poised to continue its strong industrial run to meet the demands of a growing consumer base.

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Here are four focus areas for 2023:

1. E-commerce remains the driving force for industrial growth

Consumer spending isn’t slowing. According to a Cushman & Wakefield report, the DFW industrial market reached a new record-high of 76.2 million square feet of space under construction, the most of any industrial market in the country. Dallas-Fort Worth remains well above the national average with an additional 50.6 million square feet of proposed space anticipated for development over the next three years.

According to Prologis, e-commerce leasing will bounce back to become the second-most-active year on record (after 2021). E-commerce sales are reaccelerating as the outsized desire for in-person experiences diminishes and the e-commerce value proposition for consumers remains intact.

Leasing activity is also re-accelerating. Prologis’s proportion of new leases signed by e-commerce customers rose to more than 17% in Q3 from a trough of 13% in Q1 2022.

2.

Well-capitalized firms have a big advantage.

Well-capitalized firms have thrived in the similar market uncertainty we’re facing now, and this year won’t be any different.

VanTrust, whose portfolio also includes office, multifamily, retail and hospitality, will remain focused on the DFW, San Antonio and El Paso markets. We broke ground on Phase II of a 59-acre speculative logistics park in El Paso, which boasts a 2 percent industrial vacancy rate. This final phase will add two additional buildings totaling 483,698 square feet to the area and comes on the heels of Phase I's 100% occupancy. As an early entrant into the El Paso/Juarez region, we know the area is ideally positioned to serve as a strategic international distribution point, which will drive manufacturing demand for years to come. In fact, since more companies are looking to protect their supply chains and reduce taxes by reshoring their operations to North America, the El Paso/Juarez market will stand out for its last-mile distribution centers and strategic amenities dedicated to speed-to-market delivery.

This trend, along with growing consumer reliance on e-commerce retailers, will attract developers to the region and drive the El Paso/Juarez market’s success well into the future.

3. Industrial demand isn’t dropping. Buyers will forever be drawn to Texas’ centralized location and friendly

Bill Baumgardner

business practices, and markets like DFW, San Antonio and El Paso will continue to benefit.

DFW, and its 5 percent vacancy rate, is a vital U.S. logistics hub with its extensive transportation and distribution network. San Antonio has become a destination for large industrial tenants, pushing its vacancy rates to a record-low 3.9% last year. According to CBRE, most industrial users in El Paso aren’t new and are poised to expand their footprint in the versatile market. Users are seeking spaces that range from 25,000-450,000 square feet with an average size of 100,000 square feet.

4. Sustainability matters more than ever.

Sustainability has become an important differentiator in the market, so look for installed warehouse rooftop solar capacity to double and EV truck charging capacity to exceed 10 megawatts.

VanTrust will extend our focus on sustainable development in 2023 as we grow in Texas. Green Globes is a comprehensive, science-based building rating system from the Green Building Initiative, Inc. (GBI) that supports a wide range of new construction. Environmental objectives pursued through Green Globes lead to lower energy and water bills, reduced emissions, optimized health and wellness benefits and minimized waste. VanTrust has a few Green Globes certified buildings under our belt, and we’ll push to have more certified developments in Texas in 2023.

When thinking about 2023’s outlook through a historic lens and set against the growth backdrop in Texas, I believe we’re poised to see some minor turbulence in the near future, but we’re certainly better positioned than ever before to expand over the long-term.

Executive Vice President Bill Baumgardner leads the Texas office of VanTrust, a full-service real estate development company. Bill brings to VanTrust more than 30 years of experience and works with the team in identifying high-quality real estate projects. His responsibilities include site selection, feasibility, acquisition, and development of new, build-to-suit and speculative opportunities for office, industrial, mixed-use and multifamily product types.

REDnews would like to congratulate the latest inductees into our Texas Commercial Real Estate ICONS

John Atcheson, ARCO Design/Build

Nikelle S. Meade, Husch Blackwell LLP

Dougal Cameron, Cameron Management

Nathaliah Naipaul CCIM, XAG Group

Bill Cawley, Cawley Partners

Rebecca Olaguibel, City of McAllen

David Craig, Craig International

Jennifer Pierson, STRIVE

Lynn Davis, Fidelis

Alfred (Tom) Rohde, Rohde Ottmers & Siegel Realty

Patrick Duffy, Colliers

Michael G. Scheurich, Arch-Con® Corporation

Andy Flack, HomeLand Properties, Inc.

Philip Schneidau, Woodbranch Management, Inc.

Pam Goodwin, Goodwin Commercial

Timothy Veler, SVN | Veler Commercial

Abe S. Goren, Wilson Cribbs + Goren

Christen Vestal, Provident Realty Advisors

Lispah Hogan, Newmark

Michele Wheeler, JacksonShaw

Patton Jones, Newmark