The boom is back: Commercial building hits new high in DFW

Recession? What recession?

Looking at the number of construction cranes popping up in North Texas, you’d never know that the area recently saw an economic downturn.

Construction of most types of commercial real estate — especially industrial buildings and offices — is now pulling ahead of where it was at the peak of the market in 2008.

And with additional projects approved for construction, commercial development in Dallas-Fort Worth should hit new highs.

Why is this happening?

“The increase in construction is due to the continued job growth virtually across all sectors of the DFW economy,” said Dr. Mark Dotzour, chief economist for the Real Estate Center at Texas A&M University. “Vacancy rates are declining, and rents are rising.

“This is a surefire recipe to call out the state bird of Texas, the construction crane.”

The region saw little or no construction at the worst of the recession.

“Yes, I am somewhat surprised at the volume of building,” said Randy Guttery, director of real estate programs at the University of Texas at Dallas. “That’s not to say the market is overheating.

“Rather, we are backfilling several years of little to no construction and filling current demand.”

Real estate industry leaders say that so far they aren’t worried about the pace of construction.

“We are not going down a path of ridiculous overbuilding like we have in the past,” said Jack Eimer, who heads the Dallas office of commercial real estate firm Transwestern. “The lenders are still making it reasonably difficult to develop speculative office space.”

More than 20 buildings with almost 6 million square feet of office space are being built in North Texas. About a quarter of the space in the more than a dozen speculative buildings is already leased to tenants.

With net office leasing in the area running at more than 4 million square feet a year, real estate brokers say the supply of new office space is reasonable. Office vacancy rates in the DFW area are at the lowest level in more than a decade.

As the first wave of buildings opens this year and into the next, lenders and investors will be closely watching leasing activity.

If the projects don’t meet expectations, “that will put the brakes on,” Eimer said.

Industrial

The response to the industrial building boom should come even quicker than in the office sector, where projects take longer to construct.

More than 16.5 million square feet of warehouse space is in the pipeline in North Texas — more than what was being built here before the recession.

About 12 million square feet of that space is in speculative projects that don’t already have tenants.

Dave Anderson, an executive vice president with commercial real estate firm CBRE Group, said the volume of industrial development in North Texas isn’t excessive yet.

“It sounds like a lot, but 30 percent of that is already committed to tenants,” Anderson said. “And last year, we did 18.7 million square feet of absorption,” or net leasing.

”The construction doesn’t worry me too much.”

About 6 percent of the DFW industrial market is vacant, well below the average 9 percent vacancy rate for the area, Anderson said.

“In this last quarter, we’ve seen a big jump in speculative construction. That’s OK because we need some product,” Anderson said. “We had a 7 million-square-foot increase of new starts in the last quarter.

“You wouldn’t want to sustain that, or you will get out of balance at some point.”

He’s predicting that the number of speculative warehouse projects coming out of the ground will slow until the current batch of projects is leased.

Apartments

Apartment builders have been the most aggressive in the current cycle, with about 27,000 rental units being built — significantly more than at the top of the previous market in 2008.

North Texas now leads the nation in apartment building, and more starts are coming, said Greg Willett, vice president of Carrollton-based apartment analyst MPF Research Inc.

“It wouldn’t surprise me if the next peak is somewhere around 30,000 units,” Willett said. “It’s an aggressive pace, but as long as we keep the high job production levels, it should be fine.

“We still feel pretty optimistic about the outlook.”

Source: http://www.dallasnews.com/business/commercial-real-estate/20140424-the-boom-is-back-commercial-building-hits-new-high-in-d-fw.ece