Industrial Evolution

Diverse growth keeps demand for spec, warehouse space strong

By Debra Wood

The Dallas Fort Worth Rail Terminal, above, can offload 84 cars full of ethanol.

Demand for distribution centers and manufacturing facilities continues across Texas, although the faltering national economy has some industry experts watching the sector carefully.

“Texas seems more resilient than other parts of the nation, and our top cities are doing great, with local job growth, low unemployment, increasing population and corporate relocations,” says Jack Fraker, vice chairman for real estate services company CB Richard Ellis in Dallas. He considers Dallas, Houston, San Antonio, Austin and El Paso the top industrial markets in the state.

“For distribution, we are in the middle of the United States, and we have an excellent highway infrastructure – the country’s most important north-south and east-west freeways,” Fraker says. The state also boasts a good rail network and the Port of Houston, which makes it “an excellent logistical place to distribute nationally, and that is driving our industrial real estate demand,” Fraker adds.

Even with all of the positives, Fraker is expecting a “little slowdown” in activity.

Doug Johnson, senior vice president and regional development manager for Industrial Developments International, a real estate company based in Dallas, says, “Texas is doing better than other markets because of the energy sector.

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Johnson adds that manufacturing warehouse and distribution continues to be strong, especially in Dallas.

Johnson does see a softening of the capitalization rate as the price of fuel has escalated. Capitalization rates reflect the return on investment and are generally expressed as a percent of the net rental or operating income divided by the project’s sales price.

John Ferruzzo, principal of industrial brokerage services for NAI Houston, a real-estate services firm in Houston, says instead of a slowdown in activity, “deals are taking longer, whether a purchase or a lease. With oil prices so high, it is starting to affect other industries.”

Ferruzzo adds that construction costs have increased, making it harder for developers to make the numbers work. He estimates a 20% to 30% increase in cost while lease rates are not keeping up with that pace.

Ron Hamm, principal and sales director at Speed Fab-Crete in Fort Worth, notes a decline in industrial activity, something he attributes to “unchecked inflation of building materials.”

“We’re getting to the point where clients will say, ‘I cannot afford it, and I’m not going to build it,’” Hamm says. “As good as the interest rate is, they cannot borrow enough.”

C.F. Jordan has built three warehouse buildings at the Dallas Fort Worth Trade Center and recently started a fourth.

Speed Fab-Crete expects to begin construction soon of a new 60,000-sq-ft precast concrete distribution center and warehouse for Frank Kent Motor Parts/Accessories in Fort Worth.

Denis Gee, executive vice president of the Dallas office of C.F. Jordan, reports industrial activity has already “gone through a lull” with a shift away from 600,000-sq-ft or larger buildings to those with 200,000 sq ft to 400,000 sq ft. The company recently completed three buildings, including a light manufacturing facility.

The smaller structures are leased, while the 600,000 sq ft facility sits empty. Despite a tempering of the economy, the company bids on one to two industrial projects each week.

C.F. Jordan has completed three industrial buildings at the DFW Trade Center for IDI and recently started a fourth, 248,000-sq-ft building.

Dallas-Fort Worth Fraker estimates developers have added 10 million to 12 million sq ft of speculative industrial space in the Dallas market during the past three to four years, all of which has been absorbed, mostly by corporations expanding locally or companies consolidating distribution operations formerly spread around the country.

3i Construction of Dallas and MYCON General Contractors of McKinney have recently completed for the Allen Group of Dallas two LEED-certified speculative warehouse buildings at the Dallas Logistics Hub, a 6,000-acre multimodal logistics park in Southern Dallas County. The developer also plans to build 196,000 sq ft in three buildings for an auto-auction center at the hub.

“What drives that project is the rail, intramodal and highway infrastructure,” says Jon Cross, spokesman for the Allen Group. “We’re able to help companies maximize speed, minimize cost and increase flexibility within their supply change.”

U.S. Development Group of Pasadena recently opened the Dallas Fort Worth Rail Terminal, an ethanol handling and distribution center in Arlington. The facility features 5.4-million-gallon storage capacity; an 84-car, high-speed offloading center; and outbound truck and pipeline capabilities.

SpawGlass is building a $75 million intermodal yard for Union Pacific in San Antonio.

Meg Martin, spokesperson for U.S. Development, says ethanol will come to the facility from the Midwest by rail and within 24 hours it will leave via tanker or pipeline to go to gasoline producers. The majority of the fuel-grade ethanol in northern and central portions of the state will flow through the terminal. She says the company chose the Dallas location due to its proximity to blending facilities and the pipeline.

Houston “Houston is going gangbusters,” Johnson says. “Houston has tripled its rate of construction in leased warehouse space from five years ago. It’s all oil, gas and port related.”

The Port of Houston continues to add container yards and wharf space. Fraker predicts the planned widening and deepening of the Panama Canal will further boost Houston’s industrial market. He says ships coming across the Pacific will bypass California ports in favor of offload to rail in Houston and its central location.

“It’s less expensive to get to the rest of the country, and there’s a population base for goods,” Fraker says.

Ferruzzo cautions that Houston is about one year behind the national economy and could see a slowdown by the end of the year. He expects high building costs to postpone new starts.

Steve Jaggard, president and CEO of real estate broker Vantage Cos. Houston Division, says the industrial market remains healthy, and while it may slow down a little, he doesn’t think the energy activity will stop.

“We’re not immune,” Jaggard says. “But even if it downturns, it won’t be as severe as in other places.”

The CB Richards Ellis First Quarter report for the Houston industrial market indicates that during the first three months of this year, 33 new buildings with 2.1 million sq ft came online, with 5.9 million sq ft still under construction. The vacancy rate was 6.42%, slightly higher than 6.06% in the prior quarter.

“We benefit from the Port of Houston, a major driver in our industrial warehouse market,” says Tamara Bayles Hancock, executive director of Associated General Contractors of America Houston Chapter. “Another driver is the energy industry, particularly oilfield equipment and supply companies that use that type of space.”

Bechtel/Jacobs Joint Venture, a partnership between Bechtel Corp., which has an office in Houston, and Jacobs of Pasadena, Calif., is managing a $7.1 billion expansion project at Motiva Enterprises of Houston. It will increase crude oil refining capacity by 325,000 bpd.

Austin Austin’s industrial market differs from the rest of the state, Fraker says. It tends to have more high-end product, more offices with light manufacturing, research and development and technology than the other cities. The buildings are smaller, but growth continues in the region.

According to CB Richard Ellis, more than 2.2 million sq ft of industrial office space was under construction in the first quarter of 2008, with construction activity up 53% since early 2007. The industrial vacancy rate is 12.09%, 8.9% in the warehouse/distribution center and 19.14% in manufacturing.

San Antonio San Antonio’s rail service to Mexico and locations along Interstate 10 support continued industrial growth in the region’s market, Fraker says.

SpawGlass of San Antonio expects to complete a $75 million intermodal center for the Union Pacific Railroad in southern Bexar County in November. Construction of the new railroad container yard on the 385-acre site includes site development; paving more than 82 acres; and constructing a water treatment plant, maintenance and gate buildings, three dual railroad bridges and an automobile overpass.

The Port of San Antonio has converted the former Kelly Air Force Base into a multimodal logistics hub. The port has built office and warehouse space and expects to finish an air cargo handling facility by October, says Rafael Aviles, public information officer for the port. Rail shipments can pass the border from Mexico and undergo custom inspections upon arrival in San Antonio.

Santa Barbara Realty Development of San Antonio recently completed a 96,000-sq-ft warehouse at the port, leased by Fiesta Warehousing and Distribution, and has started a second building.

A May 2008 report from the Institute for Economic Development at the University of Texas at San Antonio indicated that the economic impact of the Port of San Antonio and its tenants for 2007 was $2.5 billion.

In 2008, the port will add a Boeing 787 Dreamliner completion and assembly facility, bringing 440 jobs, and the Air Force plans to increase its presence by about 2,400 jobs. The additions should boost the economic impact by $808.4 million, a 32% increase over 2007.

El Paso As a border city, El Paso ranks high as a trade center with Mexico. A 2006 study from the Real Estate Center at Texas A&M University says that about 18% of all United States trade with Mexico passes through the El Paso-Juarez border and forecasts that to increase 6% to 8% within three years. The report also states the region is the third-largest manufacturing center in North America, behind Los Angeles and Chicago.

“Manufacturing takes place in Juarez, and raw materials and finished goods are stored and distributed from El Paso,” Fraker says. “So the El Paso industrial real estate market is a good one in Texas. Our team specializes in industrial real estate, and Texas has been one of our best markets.”