Whether you need a 50,000-square-foot industrial building or a 1.5-million-square-foot distribution hub, DFW can meet your needs. North Texas construction and leasing remains strong in the industrial sector, driven by fulfillment and distribution centers for major retailers, suppliers, and logistics companies. We gathered six of the top minds in the industrial sector — Kurt Griffin, Craig Jones, Jon Napper, Terry Pohlen, and Nick Cassavechia — to talk about the past, the present, and the future of the North Texas industrial arena during a roundtable at the Amenity Lounge conference room at St. Paul Place in Dallas.
MEET THE EXPERTS
Nick Cassavechia is Partner and Chief Operating Officer at Frontier Equity. He’s a graduate of the Hankamer School of Business at Baylor University. Prior to Frontier Equity, Cassavechia worked at Quadrant Investment Properties LLC, HFF, and was a pitcher in the Detroit Tigers organization.
Kurt Griffin is Executive Managing Director at Cushman & Wakefield, having returned to that company from JLL. During his more than 26 years in real estate, Griffin has completed more than 300 transactions totaling 40 million square feet of space valued at more than $800 million.
Craig Jones is Managing Director at JLL where he is responsible for overseeing the strategic development and growth of the company’s industrial focus, and the execution of industrial and office-technical transactions. In his 19-year career, Jones has completed over 32 million square feet of transactions, valued at more than $350 million.
Jon Napper is Managing Partner and Founder of Courtland Development, a regional development firm with offices in Dallas and Houston. He has more than 25 years and 18 million square feet of commercial real estate expertise.
Terry Pohlen, Ph.D., is Associate Professor of Logistics and Director of the Center for Logistics Education and Research at the University of North Texas. Pohlen’s research focuses on the costing and financial management of logistics and supply chain management.
Brad Struck is President of Industrial Services at ESRP, where he is responsible for building and growing the industrial services team and overseeing daily operations. His focus is on total cost of occupancy including transportation, labor, logistics, taxes, electricity, and real estate in areas such as e-commerce fulfillment, food storage, and rail-served real estate.
LANCE MURRAY: What are your impressions on the general state of industrial real estate in and around Dallas-Fort Worth right now?
KURT GRIFFIN: The industrial real estate market is very healthy. I’ve been a broker in this market for a long time, and I’ve never been through a cycle that’s been so robust, deep, and active. Last year [in 2016], we had record absorption of 23 million square feet. We’re tracking about 12 million square feet of absorption through the first half of this year. Our fundamentals are still very good. Overall, we’re under 7 percent vacancy. On the demand side, we see lots of requirements in the market.
CRAIG JONES: Earlier this year it felt like, ‘Hey, we’ve got a little bit too much going on in this market.’ A lot of construction was going on, but the [leasing] activity wasn’t happening. As we got toward the middle of the year, we’ve seen some deals land, some deals signed, and some that were right on the [cusp]. Now it feels very balanced. We’re seven—going on eight— years into this cycle. Two years ago, a lot of us were saying ‘Where is the bump in the road?’ Balance is the word that keeps coming to mind.
JON NAPPER: I agree with you. Six months ago, we were getting ready to start the first of our two buildings in Mountain Creek [Business Park in Dallas] and we backed off [DFW Inland Port] in Wilmer simply because we felt like there was a tremendous amount of oversupply along the (Interstate) 20 corridor. In the last six months, most of that product has been absorbed. Now seems to be a good opportunity to go ahead and start building in the south.
GRIFFIN: We are tracking vacancy at about 20 percent in South Dallas.
NAPPER: Obviously the best location is the south [DFW] Airport, right? All these developers are lining up to acquire new product in the South Airport submarket.
GRIFFIN: That’s true. That whole area is getting ready to open up.
JONES: We’re tracking right around 7 percent [vacancy] in the overall market. There are some dominos that will fall in South Dallas that will bring that vacancy down pretty fast. There’s a lot of activity in the 200,000- to 500,000-square-foot range. It’s picked up a lot of South Dallas. The tag line in our market has always been the 900,000- to 1-million-square-foot buildings. There are a few of those [projects] in South Dallas where the activity has been slower. The matrix has flipped from the past year or so. We see more [leasing] activity around the 500,000-square-foot size, rather than the 700,000-, 800,000- or a million-square-foot size. When a couple of those leases pop, vacancy goes from 20 percent to 10 or 11 percent.
GRIFFIN: The market was building a lot of new speculative product, and some of these bigger deals that are coming into town have ended up being built since. A lot of speculative product has come online at the same time. Some of those bigger deals are going to develop soon because they have special requirements and need amenities.
NAPPER: That hurts those guys sitting on a million square feet.
BRAD STRUCK: Yeah. How many 1-million-square-foot buildings are vacant or on the market?
JONES: Five or six.
STRUCK: That’s a lot of competition for a speculative project.
GRIFFIN: There are currently only two projects that are delivered and on the ground. You’ve got PLR [Port Logistics Realty] on I-45, and Copeland Commercial’s I-20 Commerce Center on Houston School Road.
GRIFFIN: There are a couple more coming.
STRUCK: It would be fair to say South Dallas is the only part of the city that would be at risk. I mean, the (DFW) Airport market and the GSW [Great Southwest] all seem to be very strong. Even the Garland activity is picking up.
JONES: I wouldn’t even use the word risk, in my opinion.
NAPPER: It’s just a fact that the only readily available sites are in the southern sector. Except for new products that come along the airport, you’re not going to find any additional sites at GSW.
GRIFFIN: That’s 12 or 18 months away. One of the comparisons we often make is from when the North Airport sale market was emerging. It always led in vacancy. It always led in absorption as well. That’s the same dynamic that we’re seeing in South Dallas right now. It does lead in vacancy, but it has also led in market absorption for past three years.
JONES: The other word is opportunity. We’ve looked in the northeast part of the country for buildings from 800,000 to a million square feet, and they don’t exist. These companies have a “right now” requirement, and we all know how hard it is to title land up in the northeast. If you have to do a build-to-suit development, it might take 18 to 24 months. When we look at these buildings in South Dallas, or the two more that are about to come online that are 900,000 to a million square feet, there’s an opportunity there.
GRIFFIN: An example of that is the VanTrust building, which just broke to Amazon for 920,000 square feet. That deal came to market and was done within two weeks.
STRUCK: Dallas, overall, is in a bubble though. Compared to the rest of the country, we’re in a great place, even if we might have availability in South Dallas. I wouldn’t want to be in any other industrial market in the country.
NICK CASSAVECHIA: We’re seeing some developers redeveloping obsolete property. We see it in Garland. You finally see people raising roofs and looking at those opportunities and asking, “How can we take advantage of such a great location and turn it into a product that meets the needs of these tenants?”
JONES: You bring up a great point. Those are the groups that have been lost in this whole puzzle. When you start off something like this, the first thing you start talking about is new development. But we forget where we were when we all started — those 25,000- to 150,000-square-foot deals [that] are the bread-and-butter deals, always. And that’s what’s been in those infill sites.
CASSAVECHIA: [The vacancy rates] are all below 5 percent.
JONES: It’s built a little bit of tenant frustration. They’re like, “Where do I go?” … “and my rates have gone up 30 percent.” If, all of the sudden, we turn around and something that we’ve been doing every day is increased by 30 percent, that’s a significant number.
GRIFFIN: We were looking at a national statistic our research department put out recently, and I think it’s true for Dallas, too: Infill vacancy is 370 basis points lower than greenfield vacancy. To Craig’s point, there’s a lot of rent growth on infill locations because sometimes they’re a little more challenging. Sometimes there are additional costs involved in the entitlement.
STRUCK: Some of the bigger deals can afford to go to Dallas. But if you’re a 20,000- or 30,000-square-foot distribution company, you have to be right in the middle of the action because of traffic patterns. You can’t afford to get way outside of town. They have no choice but to pay those rents.
NAPPER: One thing you can do to entice them is to sell it to them. There’s a tremendous market right now for just selling those smaller buildings.
GRIFFIN: That’s a fairly recent phenomenon. For the majority of our careers, those types of tenants said, “No, we just want to lease.” Why don’t more users in Dallas want to own their real estate? We’re seeing that change now.
CASSAVECHIA: At some point, you’ve got to think that it’s going to tip when these businesses aren’t doing so well with their found income. They say, “Well, I can go put my real estate in a lump sum and put it back in my business.” If everyone is healthy and flush with cash, they might as well [buy], especially when we’re [increasing] rents 20 or 30 percent.
Let’s talk more about the tenants. What trends are you seeing on the occupier side?
STRUCK: Tenants are definitely looking at longer-term leases. A three-year lease is nonexistent. We’re seeing tenants saying they’d rather negotiate a seven-year lease. Then during [final] stages, they [want] a 10-year lease.
NAPPER: One of the biggest things that’s happened in this cycle — one that’s never happened before — is built-in rent growth. We’ve got a bump system now where you can go into base rent, and you’ve got 2- or 3-percent bumps [each] year. That has given our real estate sales market the opportunity to see built-in increased pricing or increased growth in their financials.
GRIFFIN: It’s brought new investor interest to this market, and capital is more interested in owning in Dallas. Great fundamentals make for a hot market.
STRUCK: It’s why we are where we are.
NAPPER: All of the sudden, we’ve got rent growth. We’ve never had rent growth before.
GRIFFIN: Do you think because of the restriction on available land for development—almost every established submarket is now an infill market except for South Dallas or Alliance?
NAPPER: It’s like [when] office rents went to net leasing. The brokerage community seemed to promote it. Then all of the sudden the industrial [sector] said they’re going to do rent growth, and we’re going have bumps. Every developer said, “I’m for that.”
GRIFFIN: I think every broker was for that, too.
NAPPER: Their commissions went up. You could see rent growth. Everybody said, “That’s a great idea.”
JONES: Coming out of the crash, tenants got used to that annual increase. And then around 2011 or 2012, we started promoting it more. It’s become a market trend. It’s become normal, and tenants are used to it. They can budget for it.
STRUCK: Because of the dynamic market, occupiers are now making much faster decisions than they were in the past. We’ve all been in situations where tenants are going to lose the building, or you’ve got multiple people competing for a space. They no longer have the luxury of thinking about a decision for months and analyzing it. If they don’t act quickly, they’re going to lose their preferred building.
CASSAVECHIA: The landlords aren’t scared to have a vacancy. The infill markets are so tight that you feel pretty confident that your down time is going to be minimal.
GRIFFIN: From a development perspective we continue to see buildings change. A 500,000-square-foot building three or four years ago would be a 32-foot clear [height] building. Today it’s going to be a 36-foot clear building. Truck courts that were 180 feet now need to be 190 feet or 195 feet. Everyone needs more parking. E-commerce is affecting that.
NAPPER: Access drives around the perimeter are back: No common truck courts allowed. There have been technology changes here in the last few years.
GRIFFIN: We were involved with the first 40-foot clear speculative building in South Dallas. That’s another building that’s about a million square feet. It won’t deliver until 2018. But a 40-foot clear building with 70-foot speed bays, that’s the first time that type of product has ever been built here on a speculative basis.
CASSAVECHIA: What’s driving a wider base?
GRIFFIN: The thinking is that on a 60-foot speed bay, which is the norm today, you can unload a 53-foot trailer, but you’ve only got 7 feet of maneuverability for the forklift driver. If you go to 70 feet, you can unload the entire 53-foot bay and still have plenty of maneuverability for the forklift driver.
MURRAY: What’s driving that?
CASSAVECHIA: I’ve heard it’s been more capital-markets driven. Some of the consensus is that you want to kind of check those boxes. I’m really interested to hear from those of you on the tenant side.
GRIFFIN: I would agree with that. I think it is somewhat capital driven.
NAPPER: It is capital driven. You sit here and build a 50,000-square-foot building, and you make a 32-foot clear. You wouldn’t do that 10 years ago. It would have been an 18-foot clear. Capital markets demand that it have the functionality of a traditional warehouse.
GRIFFIN: We wanted to go 40[-foot] speculative so we would appeal to e-commerce users.
NAPPER: Do we have the equipment and the technology to get up there and get that?
Because for a long time that was the big negative on going clear — everybody had to retool their warehouses to go up and reach that high.
GRIFFIN: Amazon is spending, in some cases, $200 million dollars to outfit the interior of their buildings. They are spending a lot of money to make sure that they can make use of all that cube.
NAPPER: On those 18-month leases.
GRIFFIN: I think they do long-term leases on those deals.
TERRY POHLEN: When you look at e-commerce and the type of materials, they are no longer doing the full pallet in and full pallet out. You have to do parcel in, parcel out. It’s very small quantities. If you are going to be doing that combined with robotics or automation, then it makes sense to go up. They’re holding a tremendous amount of inventory at any one of these e-commerce facilities.
JONES: It’s very specific to each user. Like Kurt said, going spec on a 40-clear building will be an interesting experiment for this market to see whether it’s a consumer goods-type outfit that uses it and says, “We’re only going to go 36 clear.” Or is it an e-commerce user that can invest the money to put the conveyors in and maybe situate it to utilize the building?
CASSAVECHIA: Kurt, do you know if Heinz is concerned doing a 36 clear?
GRIFFIN: We definitely considered the 36 and did sort of a national poll of our co-[representatives] in other markets to see what developers were doing 40 foot clear elsewhere. There are some buildings in Atlanta, Chicago, and Inland Empire with 40-foot clear. We looked at how long it took those to lease up. There wasn’t any appreciable lead time on lease-ups. Those buildings may not demand a rent premium, but we think that capital will be very interested in owning those types of assets long term.
NAPPER: You are not going to get an increased rent for your 40 clear, but your exit is going to be better long term.
What challenges do you face that might not have been in existence 10 years ago?
NAPPER: There’s an interesting technology concept about where the brokerage business is going, kind of like a VRBO (vacation rental by owner) for owners to get on the computer and ask, “Where can I find 100,000 square feet?” If that amount of information gets pushed to the private sector, is that going to impact your business?
JONES: I remember having this discussion 10 years ago with a friend asking if brokerage is going to be extinct.
NAPPER: I go back to when the brokers had a fiduciary responsibility between the owner and the user, and they worked both sides of the deal. It wasn’t until the 1980s where you ended with tenant rep and landlord rep.
JONES: Let’s compare it to VRBO. I mean, I can go down to Austin, and I can call a hotel and book a room, or I can get online and book a room and just go — find a house and go down there with more enjoyment, right. It’s more recreation. For a company that is building and selling widgets every day, for them to then stop their business developments and sales to focus on real estate needs—I expect it a little bit harder to do. Autonomous driving for vehicles and trucks, and robotics in the warehouse—we’re in the infancy stages. It’s a very fashionable thing to talk about as far as the way buildings are being developed. But I think we’re still a ways off before we see how much that’s going to impact what we’re doing every day.
GRIFFIN: The brokers are not going to be extinct, or even obsolete anytime in the near future. I’ve got teen-aged kids, and they’ve talked to me about going into the real estate business. And I wouldn’t hesitate to tell them to follow that career path. If you’re not a market expert, then you’re not a good broker. Also, there’s a psychology and emotion involved in selling, which you can’t really do just on a computer.
STRUCK: To me, tenants have become more sophisticated. They know what they want from the column spacing to the speed bays. Brokerage has become more sophisticated. It’s not just about going and finding 500,000 square feet and negotiating the best rate. They are expecting you to analyze labor, incentives, taxes, and traffic patterns. As long as you’re a broker who is providing those types of services, that’s something that can never be provided by a computer.
NAPPER: I agree. The expertise is the factor that makes all the difference.
GRIFFIN: I would like to hear Terry’s opinion on autonomous trucking.
POHLEN: Look at how companies are structuring their supply chain trying to get very high velocity through their facilities. They can’t just sit on the inventory because of the obsolescence. You need the inventory to turn. To find a facility that will support that technology—that’s what’s driving a lot of this new construction. Whatever you look at in logistics, labor is your number one expense in terms of the operations. If you look overall, it’s transportation. So what they are going to be doing in the warehouse is trying to figure out how minimize that critical component of labor with a lot more automation. That’s why you see robotics, especially in parcel picks. You cannot get that pick wrong and have a return. So you are going to see a lot more robotics to get accuracy. We are going to see artificial reality playing out in the warehouse: When a box comes, it’s scanned. Then a device, maybe a pair of glasses, tells me what the item is. I would have laughed five years ago at the thought of autonomous trucks. Now, I’m taking it a lot more seriously. I believe what we’ll see within the next five years is truckable platooning, where your trucks are connected wirelessly and lead drivers will run a convoy at separations of 6 feet between trucks. TxDOT is already looking at the corridors [to put that in.] It’s coming. But I think where we’re going to see most of the automation will be inside the facility.
GRIFFIN: Your point is well made. Users are combining different uses inside the same box. Before, they just had an e-commerce facility and a separate distribution facility. Now, we’re seeing users go to an operation that’s one-third e-commerce, one-third fulfillment, and one-third distribution.
CASSAVECHIA: Do you think this technology is going to replace jobs? Will there be the same number of people working in the warehouses?
POHLEN: It could result in head-count reduction, but I think you’re primarily going to see people moving to value-added roles. There’s probably going to be more light assembly, finishing, and postponement. You see some of that shifting going on now: I can put a human workforce where I will get the most value added. Having somebody walk up to a warehouse, pick an item, and then bring it back to a shipping bay doesn’t have a lot of value. We’re going to see a conversion. Another technology that’s going to have a major effect on supply is 3D printing. Combining that technology with last-minute customization is where [we’ll] get a human element.
GRIFFIN: Every tenant in the market wants to know where the available labor is: Where is the new labor coming from? How do we attract more labor?
POHLEN: We have a lot of people moving to the area, but the challenge is the sophistication [that’s needed] in warehouses. We’re expecting people in the warehouse to perform a variety of functions. People are going out farther from the Dallas-Fort Worth area [and we’ll ] try to get people to commute into those distribution centers. We’re going to have to get creative in how we move people from one area to the industrial locations.
JONES: I think labor is our biggest issue right now, and that’s no surprise. It costs companies more for hiring. Readily available skilled labor—what if they’re repurposing?
POHLEN: When the job market isn’t that strong, and wages aren’t that high, I’ll be a truck driver. With all of the construction that we are going to need after the hurricanes, most of those people working construction also have a [commercial driver’s license]. They shift wherever they make more money. Then we have electronic logging devices that are going to be mandatory in December (2017). We don’t know how much cheating is going on with these small trucking companies. And 94 percent of trucking companies out there have six or fewer trucks, and there are over 600,000 trucking companies in the United States; 400,000 [companies] in the long-haul market. So if they’ve been cheating, and now all of the sudden you have to have an electronic device, you can’t cheat. That’s going to take capacity out of the market. ... And if the economy gets above two and a half percent [GDP growth] and stays there, that’s going to pull these drivers out [of the trucking workforce]. That’s why I think South Dallas and Alliance — and being near those inner mobile facilities— is going to be critical.
NAPPER: Some of the new companies coming in are looking at the demographics of Texas. Everything seems to be south of Dallas-Fort Worth. It’s been a real positive to be in the southern sector because stuff coming out of Mexico gets here — especially with the electronic monitoring of these trucks. My boys at Alliance—they’ve got to travel through the Metroplex to get through to the north. That may take them another hour at 4 o’clock in the afternoon, whereas if they hit the southern sector, I-20 corridor, it’s possible.
JONES: We’ve had quite a few clients that have talked specifically about that: “I’m leaving Laredo. I can come right up, and in about eight hours I’m right there in South Dallas.”
NAPPER: Right. Whereas if I have to go to Plano, that’s another two hours.
POHLEN: Because you can just about hit off the Mexican border within the hours of service limitations. When you look at the importance of that border to South Dallas, 80 percent of the trade that comes off of the Texas/Mexico border comes through Dallas-Fort Worth. Having that flow—South Dallas is very well positioned to take advantage of that.
JONES: You look at Laredo as a port. If you compare it to the ports of the East Coast and West Coast, it’s astonishing how much inventory they handle coming through Laredo.
Will potential changes to NAFTA impact warehouse and fulfillment facility placement?
JONES: I think it’s very real. A couple of clients of mine over the past year have had to make some decisions. Because there’s quite a bit of uncertainty as to what will happen … for a couple of these specific instances, they’ve had to make decisions based on its business as usual. It’s real, but it’s hard to say what will happen.
STRUCK: The larger tenants are driven by the intermodals. Overseas shipments are really where the majority of them are, so they’re not affected by that. It might hurt a little, but I think we’re still poised for a lot of growth.
Where is the most interest right now, and for what size range?
GRIFFIN: It’s on both ends of the spectrum. We see a lot of activity for requirements for 200,000 square feet and below—both companies growing organically and new companies coming to town. Then we also have several large requirements of 700,000 square feet and above. Where we haven’t seen a lot of deal activity is between 400,000 and 600,000 square feet. That’s been the hole in the donut for two or three years now.
JONES: There is a ton of organic growth in the infill sites. A lot of companies are smaller users. These 50,000-square-foot users are signing a five- or seven-year lease and calling us the second year asking to expand. The issue becomes about getting creative on how to solve that expansion because they want to be next door.
CASSAVECHIA: We’ll go in and acquire a 100,000-square-foot multitenant building. When we talk to all the tenants before we acquire, every single one of them tells us they want to grow. And we just bought 100 percent of these buildings, so we’re sitting here thinking someone has to go, and someone has to expand in that space.
GRIFFIN: And rent’s going up.
CASSAVECHIA: It’s a jigsaw puzzle. It’s all positive from what you guys are saying. These big deals, big buildings, and big trades dominate the market and all the stats. But there’s so much competition on the smaller ones, it just doesn’t move the needle.
So, picking up on that, what’s going on with the multitenant market?
CASSAVECHIA: Extremely robust. And not many people are building it. We are, and we hope our competitors are trying to build them.
GRIFFIN: They want to, but it’s hard to find good sites.
CASSAVECHIA: Extremely hard.
NAPPER: Typically, the smaller tenants, they want to be infill. They want to be in GSW or where their labor is. They don’t want to move too far from an existing facility where they might have labor, so a guy in GSW doesn’t want to move to South Fort Worth or Wilmer. Finding sites there becomes a challenge.
Construction costs are up, but so are rents, and so is demand. What used to be a $4 [per square foot] rent rate is now a $5 [per square foot] rent rate. Instead of giving them $3.50 in [tenant improvements (TI) per square foot], you give them $5 in TI. You just see that pushing up — who would think you would also be selling them at $70, $80, or $90 a foot? It’s a good thing.
CASSAVECHIA: The obsolete sites and infill markets are where we’ve seen some people need traction. If you do it right and have the right price, it will be successful because a lot of these markets haven’t seen new product. There’s literally no site unless you overpay for something and demolish it, and then the other rents there are going to go up.
JONES: We see some of that up in Northwest Dallas in Valwood. It’s not about just having what everyone else has. It’s about who can be more creative.
How is industrial as an investment class?
GRIFFIN: Most stable.
CASSAVECHIA: It’s the least capital intensive, good steady cash flow. The real estate in general capital is flowing with real estate and pension funds and have increased their allocations to the real estate sector. We go with product lines. It’s fascinating to see industrial being the top choice and top performer. And it’s the hardest asset class on which to actually place the capital. It’s a lot easier to go place one hundred million, two hundred million in an office building. Much harder in an industrial. It’s the supply and demand effect. That’s really been astounding to watch.
POHLEN: Everybody is looking at Wal-Mart and Amazon, and they are trying to figure out how they got competitive advantage. They got it through managing their supply chain as efficiently as possible and working out those relationships across the supply chain. They’re willing to make more and more investments into industrial real estate and into logistics to get that competitive advantage.
How does customer demand impact e-commerce companies and how they plan? Going further, how does that impact what distribution product comes to the market?
JONES: E-commerce is the big tag line for all of us in this room. When you look at the percentage of retail sales of e-commerce occupiers and users [compared] to overall sales, it’s astonishing. What is it—7 or 8 percent?
JONES: A real example — this week there’s a household name retailer that signed a letter of intent in another submarket for a-million-square-foot facility, solely for e-commerce. Three percent of its retail sales are online. Only 3 percent! And they are sitting there saying we are missing the boat. This is a product everybody has in their house, and they’ve never had an e-commerce facility.
Where do manufacturing and factories fit into the DFW industrial market?
GRIFFIN: Our market is predominantly a distribution market. Probably 80 percent of the deals we see are primarily distribution. Some companies are doing production, but from a heavy manufacturing standpoint, we don’t see a lot of that.
NAPPER: Mountain Creek is a bit of an exception. We have a lot of manufacturing there because of the labor availability and 24-inch water lines. We’ve got Niagara and Nestle both bottling water down there. American Leather is producing furniture. We got 3,300 employees working in Mountain Creek, which is a ridiculous number for the distribution side. It’s only 6 million square feet. But we’ve got Chewy, and we’ve got the Atlas. We do have the e-commerce effects, too, which just adds to the employment.
STRUCK: I’ve gotten a couple of opportunities from when the political environment changed and some overseas companies felt like they needed a U.S. presence for manufacturing, and they zeroed in on Dallas. It remains to be seen if these companies go through with their plans, but they are considering.
GRIFFIN: I think labor is going to constrain the manufacturing capacity that we see coming to this market.
So, where are the opportunities in the industrial sector?
NAPPER: Continued e-commerce growth. As Kurt said, you’ve got a lot of these guys who are just doing it inside the warehouse right now. And a lot of them are saying, “I can’t comingle that. We’ve got to have several facilities.” Having several facilities makes our market thrive. All of the sudden, we’re seeing more and more of it come here because we have such a great reputation with the MO [manufacturing only] facilities in Alliance, South Dallas, as well as DFW airport. We’ll continue to see e-commerce growth that will add to our normal distribution growth.
JONES: Continued population growth. We’ve been a very fortunate recipient of that, and people are still coming here. That’s driving more and more demand.
GRIFFIN: Dallas is well-positioned too. We don’t have a regional competitor. Dallas is a regional distribution area. We don’t compete with Houston. We don’t compete with Oklahoma. We don’t compete with Kansas. Our nearest competitor is probably Atlanta or Memphis. We’re fortunate to be positioned where we are.
POHLEN: Another thing that is going to greatly shape and drive the future will be intermodal. We essentially have five intermodal hubs in this area. We can bring freight from the West Coast, marry it up with freight from Mexico, and distribute it out of here. We’re also seeing the global supply chains [becoming] a lot more innovative at the intermodal hubs.
Given that, are there companies that might be looking through the windows and knocking on our doors, wanting properties that fit the intermodal needs?
STRUCK: We’re a consumer-driven market. Any company, such as a plastics or cotton company, likes being here because that gives them a lot of cars where they can send it back out. Those types of companies will continue to come here because other markets don’t have such a strong inbound intermodal.
Is there a practical limit to the size that a facility could be?
NAPPER: I don’t think there is a limit at all. As long as the topography is flat enough, you can keep going—and even then, you could stairstep it.
JONES: Coming back to what we said earlier, it’s the exit strategy. [The size is tied to] what the capital markets want.
GRIFFIN: And it’s impacted by what Terry was talking about: Technology. Inventory turns are really important. As long as building systems and technology can keep up, we’ll continue to have high inventory turnover. That’s the thing that will impact the ultimate size.
POHLEN: You’re still constrained by how long it takes an order-picker to go out, pick something, and bring it back. Then you’re staging all those orders. That’s where you’re going to have to have a very sophisticated warehouse management system. Otherwise, you are just sitting in that staging area with a whole bunch of product. There are some physical limitations, but as the warehouse management systems become more sophisticated, it will overcome some boundaries. Until you get a lot more automation, somebody driving up a forklift to pick up that property and then bring it back — that’s a lot of time. That’s a lot of labor. I think there’s still a physical constraint, and it’s going to be driven by the size of our market. ... The e-commerce is going to be driving some of that, but even then, they’re not looking at a 2 million-square-foot facility because they are faced with that restraint. And, when you put that many people in there, you have to have all the parking to go with the facility. That’s going to be a huge constraint
GRIFFIN: We got an inquiry on a new million-square-foot [project] that has a trailer requirement of 800. That building sitting by itself doesn’t exist. People with million-square-foot spec buildings are going to need some additional land or go out and buy some to try to solve for that requirement. Amazon just did — it’s going to be signed soon — a 500,000 square foot deal in South Dallas where they have a parking requirement for about 800 folks. That developer had to go out and buy additional land to accommodate that.
NAPPER: If you go to any apartment building downtown when UPS or FedEx comes in, you’ll see all those smiling faces and boxes coming off that truck. They are supplying those people upstairs who can’t walk to a grocery store.
POHLEN: We’re going to see Amazon continue to expand. Because the challenge they face is getting enough density going to that doorstep. It’s not just bringing one item. I’m bringing your shampoo, toilet paper, food, clothes, pressed shirts, everything. That’s how they are going to make money. If I have to take one box out there, I can’t make money off of it with free shipping. I’ve got to take a whole bunch of freight out to you. Amazon’s profit margin is almost flat.
STRUCK: They’re pushing some of their suppliers to warehouse more and do it directly. They’ve built up this platform where the retailer has to come to them.
How do airports play into the e-commerce and distribution scenario? UPS and FedEx have major hubs here. That’s got to be an attractive proposition.
POHLEN: If you’re going to have a major distribution hub anywhere in the United States, you’ve got to plug and play in the global economy. For example, I want to say we had $70 plus billion in trade clearing customs at DFW Airport alone last year. That brings in the high-end electronics. It brings in the Apple products, the medical devices, the stuff that we’re going to be seeing. Airports can feed this market [with products] that wouldn’t move by rail or truck. And DFW Airport is one of the few in the country that is not completely at capacity. It’s still going to be a while before we see anything spill over to Alliance because you’ve got 50 airlines delivering freight into DFW Airport, and 250 freighters that focus on the airport. Trying to get somebody to come all the way over to Alliance and getting them occasional airplanes—Alliance needs volume, and they need to be able to do overnight shipments. That’s what all those carriers provide to you.
GRIFFIN: Even the guys at Hillwood would tell that you their growth has been primarily from intermodal, not the [Alliance] airport.
NAPPER: Last-mile delivery seems to be a major concern for all these e-commerce type users. That’s what’s reconverting a lot of the old retail strip centers, shopping centers, and malls to be local distribution hubs. We’ll see more of that. You must be able to get it—not just the intermodal facilities—but get it into the marketplace where you can supply Frisco in the middle of Frisco.
Any closing thoughts?
JONES: We’re very blessed to be where we are. There’s still a tremendous amount of opportunity and I don’t think there’s a cliff in the horizon. There will be some sort of a macroeconomic correction at some point. But the strength of this market will push us through it.
GRIFFIN: More dollars are going into industrial than office, retail, multifamily, or any other sector. It’s the most desired asset class from an investment perspective. And, it’s interesting how the perception of industrial real estate has changed over the past decade. For those of us who have been in industrial real estate for a long time, it was never viewed as sexy. Industrial real estate is actually sexy now.