As COVID-19 spread across the country, real estate markets across the country have been affected in various ways. However, the industrial asset class seems to endure despite the challenges that the COVID-19 recession has brought forth. Much of this is due to the industrial market’s strong position heading into the pandemic.
Real Estate Fundamentals
The industrial real estate market in Dallas-Fort Worth (DFW) was booming heading into the pandemic. New leasing in 2019 totaled 55.5 million square feet (msf), up 9.3% over 2018 levels. Demand was driven primarily by traditional and online retailers, followed by construction and distribution tenants. Since 2015, demand has outpaced supply in the market with vacancy rates recently declining five straight quarters. As of the end of Q1 2020, demand outpaced supply by 5.2 msf and vacancy closed at a recent low of 5.9%. Vacancy entering the COVID-19 downturn was 260 bps lower than it was entering the Great Financial Crisis (GFC) and 160 bps lower than it was entering the Dot-Com recession.
Since entering the pandemic at the end of March, industrial fundamentals have continued to remain strong. Demand in Q2 2020 closed at 6.4 msf and Q3 2020 at 4.8 msf thereby contributing to the highest cumulative net absorption historically in the first three quarters of the year at 21.0 msf. Supply outpaced demand in Q2 by 4.0 msf and Q3 by 3.2 msf. This resulted in vacancy increasing by 20 basis points to 6.1% in Q2 and 60 basis points to 6.5% in Q3 compared to the onset of the pandemic in Q1. Despite the recent increase in vacancy, vacancy rates still remain well below rates entering into the recessionary period in both the Dot-Com and GFC.
What’s Different This Time?
The DFW industrial market has grown significantly over time. E-commerce changed the world and defined this past industrial cycle. Retailers retooled their supply chains to support consumers’ new way of shopping and DFW, being centrally located, has benefited. Since the GFC, the market’s leasing activity square footage ballooned by 312.1% with the largest growth in the construction sector at a whopping 1,837.5%. Retail and wholesale trade continue to remain the nation’s main driver—accounting for 37.8% of leasing activity from 2018 to Q1 2020 and reflecting a 476.9% leasing activity growth since the GFC. As long as consumers continue to flock online and companies continue to need a strong centrally located hub, demand for industrial space in DFW will persist.
What to Watch
A variety of factors have the potential to impact Dallas’s industrial market. On one hand, shifting economic fundamental trends or a resurgence of COVID-19 may potentially slow recovery. On the other, strong economic fundamentals will soften the blow and Dallas’s prime location will be essential as supply chains evolve.
For more, read our “Industrial: The Recession Proof Asset Class?” report.