DFW Industrial rental rates up nearly 25% from year prior.

EXECUTIVE SUMMARY

Q2 2023 in Review

By the end of Q2 2023, the overall vacancy rate in the Dallas-Fort Worth (DFW) industrial market rose 100 basis points quarter-over-quarter, from 6.4% to 7.4%. Net absorption continued its streak—marking 12 straight years of positive absorption—at 5.6 million sq. ft. in Q2 2023. Year-to-date, net absorption is at 15.6 million sq. ft. Year-to-date, deliveries total 38.2 million sq. ft. Nearly 50% of all deliveries in the DFW Industrial market are 0% pre-leased thus far in 2023, contributing to uptick in the vacancy rate (7.4%) in the second quarter. Deliveries—16.5 million sq. ft. in Q2 2023—decreased 23% from 21.6 million sq. ft. quarter over-quarter and increased 63% from 10.1 million sq. ft. year-over-year. Construction remains strong at 64.8 million sq. ft. in the pipeline—averaging 72.7 million sq. ft. per quarter since Q2 2022. Rent growth continues to keep up with inflation, increasing 6% quarter-over-quarter, currently standing at $0.75 per sq. ft.

Dallas-Fort Worth Economic Update

The DFW unemployment rate increased to 3.8% in May 2023, slightly up from 3.7% in April 2023. The metro’s jobless rate beat the national rate (3.7%) but was lower than the state’s rate (4.1%). As of May 2023, total employment in DFW was 4.2 million. The DFW private hourly earnings dipped to $33.77 in May 2023 from $34.40 in April 2023. However, the DFW three-month moving average for hourly earnings ($33.99) was above the state average ($31.21) and the national average ($33.32).

MARKET OVERVIEW

Vacancy Rate Increases to 7.4%

By the end of Q2 2023, the overall vacancy rate in the DFW industrial market is at 7.4%, up 100 basis points from 6.4% in Q1 2023. This increase is partially due to the lag in lease-up for the newest deliveries. Nearly 50% of all the properties delivered thus far in 2023 are 0% leased. In comparison, approximately 12% of properties built in 2022 are still 0% pre-leased. In addition, Flex, Manufacturing, and Warehouse/Distribution space have vacancy rates of 5.1%, 3.9%, and 8.1% respectively for the second quarter of 2023. Experts predict the overall vacancy rate to rise to 8-9% before stabilizing in mid- 2024 when the amount of unleased space completing construction each quarter should begin to decline significantly.

Deliveries Increase 64% Year-Over-Year

In Q2 2023, deliveries totaled 16.5 million sq. ft. in the DFW industrial market. Quarter-over-quarter, deliveries decreased 24% from 21.6 million sq. ft. in Q1 2023. Year-over-year, deliveries increased 64% from 10.1 million sq. ft. in Q2 2022. Since last year, some of the largest deliveries that hit the market have been a 994,000-sq.-ft. warehouse on 4450 Logistics Drive delivered in April 2022; a 707,940-sq.-ft. distribution center on 2900 North State Highway 161 in December 2022; and a 1.5 million-sq.-ft. distribution center (Walmart) on 2300 East Beltline Road in April 2023. Construction remains strong with 64.8 million sq. ft. in the construction pipeline—averaging 73 million sq. ft. per quarter since Q2 2022. The construction pipeline has more than doubled from 2020 levels when construction averaged 32 million sq. ft. per quarter.

Leasing Down 26% From Previous Quarter

The volume of signed lease transactions during the second quarter—comprised of new leases and renewals—was 14.0 million sq. ft., 26% down from the previous quarter’s 19.1 million sq. ft. Notable leases signed within Q2 2023 include Dollar General securing a lease for a 1.0 million-sq.-ft. distribution center at 1201 Bold Ruler Road in May 2023, and JT Logistics inking a deal for a 350,904-sq.-ft. warehouse at 1600 North Polk Street in June 2023.

12 Straight Years of Positive Absorption

Net absorption—move-ins minus move-outs—for the quarter was at 5.6 million sq. ft. as the end of Q2 2023. This represented a 43% decrease quarter-over-quarter, from 9.9 million sq. ft. in Q1 2023. Year-to-date, net absorption is at 15.6 million sq. ft. This marks 52 quarters—equal to over 12 straight years—that the DFW industrial market recorded overall positive net absorption.

Investment Sales Trends

Year-to-date, CoStar Capital Market Analytics reports the cumulative 12-month sales volume at $3.0 billion in the DFW industrial market. With 576 deals completed thus far in 2023, the average transaction price currently stands at $138 per sq. ft. with an average transaction cap rate at 7.2%. In comparison, the cumulative 12-month sales volume in 2022 was $4.1 billion with 1,588 deals completed. In a notable transaction, MDH Partners closed on a 670,914-sq.-ft. Class-A industrial building (Fort Worth Logistics Hub) in April 2023. Located at 9450 Burleson Cardinal Road, this building was acquired for $67.5 million and was 100% leased at the time of sale.

Rental Rates Increase 23% Year-Over-Year

Due to tight supply and consistent demand, industrial rents in DFW have been rising. In Q2 2023, the average monthly rental rate for the DFW industrial market was $0.75 per sq. ft., up 5% quarter-over-quarter from $0.71 per sq. ft. in Q2 2023, and up 23% year-over-year from $0.61 per sq. ft. in Q2 2022. The average monthly rate per square foot for Flex space stood at $1.10 per sq. ft., while the rates for Manufacturing space and Warehouse/Distribution space were $0.64 per sq. ft. and $0.66 per sq. ft., respectively. The Northwest Dallas Outlying and DFW Airport submarkets currently have the highest overall average rates at $1.21 per sq. ft. and $0.97 per sq. ft., respectively.

Alex Babcock
Senior Research Analyst
[email protected]
tel 713 275 9618