Dallas: How Will Falling Oil Prices Affect the Dallas Commercial Real Estate Market?

By Greg Langston

In recent months, we’ve seen many negative consequences from falling oil prices on the overall health of the Texas economy. While Dallas seems to have fared better than most of the state in this regard, it’s important to analyze the effects this trend could have on the Dallas commercial real estate market.

Dallas remains more insulated to falling oil prices due to its strongly diversified local economy. While Dallas has a roughly average number of oil workers compared to other regions in Texas, it has a much higher concentration of white collar workers, limiting the effect that falling oil prices has on the local economy. On a similar basis, Dallas’ ability to attract out-of-state workers helps as well: according to the Dallas Morning News, DFW attracts more out-of-state workers than any other region in Texas.

Of course, many Dallas industries that rely on the oil industry can’t help but be affected. For example, the Dallas Morning News points to the business services sector as one that could be potentially harmed by continued low oil prices. On the other hand, there are plenty of Dallas businesses that benefit from low oil prices, as it reduces transportation and manufacturing costs--not to mention freeing up extra cash from consumers.

That being said, Texas as a whole will weather this storm. Richard Risher, president of the Federal Reserve Bank of Dallas, argues that Texas is not likely to fall into a recession due to falling oil prices. The state will certainly see an economic downturn, but with Texas’ economic indicators above most of the nation, this will only bring the state back towards the national average. Similarly, recent weeks have seen a slight uptick in oil prices, though this is mostly due to reduced production throughout the US.

Though falling oil prices have had a negative effect on the Texas economy, Dallas remains relatively insulated from the fallout.

Dallas Leads Nation in Industrial Real Estate Construction

By: Greg Langston (Dallas)

Dallas’ nation-leading industrial real estate construction numbers point to a sustained period of growth for the market segment.

According to a report by The Dallas Morning News, DFW’s industrial real estate market is growing faster than anywhere else in the country. There are over 16 million sq-ft of industrial real estate currently under construction in North Dallas--the highest number the region has seen in over a decade. Though analysts expect construction number to remain strong, many expect this construction boom to reach its ceiling over the next several years.

These impressive numbers can be attributed to a variety of factors. First, this construction boom is in large part a response to pent-up demand from the recent economic recession: to contrast, there was only half-a-million sq-ft of industrial space under construction in 2010. Similarly, one must also credit strong overall economic fundamentals in DFW for this marked growth.

However, the rise of e-commerce is playing a significant role as well. According to BisNow, half of all retail purchases are expected to be made online by 2020, which means that large corporations have already begun the shift to e-commerce based businesses. As a result, we’re seeing a lot more large industrial real estate deals for e-commerce use. When this trend is combined with Dallas’ growing status as a major tech hub, it’s easy to see how e-commerce growth could fuel the Dallas industrial market for years to come.

Ultimately, Dallas’ impressive industrial real estate construction figures are the result of many different factors, from pent-up demand, to strong economic fundamentals, to increased interest from major corporations. Regardless, we can expect e-commerce to be the market’s main driving trend in the years to come.

Foreign Investment in Industrial Assets Levels-Off, SteadyDemand and Higher Pricing Ahead

by Erik Foster (Chicago)

Foreign investment in the U.S. industrial real estate sector remained historically high, yet dropped to a more sustainable level in 2014, following a very solid 2013.  A new report by our National Industrial Capital Markets Group shows investment in corporate distribution spaces and other industrial assets totaling $2.4 billion in 2014, down from a record level $3.1 billion in 2013, but close to the $2.51 billion in 2012. 

Among the top buyers in 2014 were: Canada ($677.7 million); Norway ($450 million); Bahrain ($193 million); Germany ($187.8 million); and Mexico ($177.2 million). By the end of 2014, foreign investors had purchased 185 industrial properties in key markets across the country, a decrease from 213 in 2013. Among the top markets in 2014 were: Chicago, IL ($178.3 million); Jacksonville, FL ($137.7 million); Greenville, S.C. ($133 million); San Francisco’s East Bay area ($119.7 million) and Cleveland, OH ($92.2 million).

The report was based on an analysis of data from Real Capital Analytics from 2007 through March of 2015. Please contact me directly to obtain a copy.

Foreign investors have been on a buying spree for several years in the U.S. and the trend will continue, especially in light of geopolitical issues and waning European and Asian economies. Investors continue to see the U.S. as a safe haven.  They recognize that there are opportunities to buy stable assets that can provide stronger, and more dependable, yields than those found in their own or other foreign countries. The decrease in volume in 2014 is not a surprise, as we move toward a more stabilized investment volume that likely will be sustained for years to come; the first quarter of 2015 showed similar sales volume and signs that activity will remain strong.  In fact, we believe that there will continue to be more platform and entity acquisitions in the days ahead too, very similar to GIC and their recent purchase of IndCor.

Among the key trends to watch in the second quarter of 2015 and beyond are:

• Canada will continue to be at the top of the list of foreign investors acquiring US industrial assets, but Canadian buying power has diminished partly due to decreased vacation in its currency.  Asian buyers will be high on the list as well, continuing their recent strong interest levels in this property sector.
• Leasing fundamentals will continue to improve, creating tangible rent growth and continued positive absorption in mosts markets across the country.
• A lack of supply will continue to push investment pricing higher, new spec construction will not come online fast enough to meet demand in most markets.
• Demand for corporate distribution space and other industrial assets will remain steady for the foreseeable future due to the stability and long term growth in this sector.

Pricing Carbon: Implications for the Real Estate Industry, Part 2 in a Series

by Amy Erixon, Toronto

According to the United Nations Environment Program (UNEP) Sustainable Buildings and Climate Initiative, buildings are responsible for over 40% of global energy use and 30% of the Greenhouse Gas Emissions.   They further estimated that buildings consume 30% of all global raw materials and 25% of earth’s water.   In urban areas the percentages are much higher.  For example, according to the Province of British Colombia, 54% of the carbon footprint of Vancouver is from building emissions.   

Mandatory carbon reporting, currently required in approximately 30 US municipalities and 2 Canadian Provinces is expected to become far more widespread in the years ahead.  Most northeast and west coast states have definitive carbon emission limits in place as do Quebec, Nova Scotia, Alberta and British Columbia.  As a result, and as a matter of good corporate governance, many best-in-class owners, tenants and developers already report on their portfolios to a benchmarking system and may include these results in their annual reports in compliance with the Global Reporting Initiative.   What used to be a "nice to have" is shortly becoming a "need to do".  

Last week President Barack Obama signed an executive order expanding the greenhouse gas emission controls to cover more US industries, including real estate.  In Canada, the Province of Ontario announced it would begin implementing a Carbon Cap and Trade program, joining the states of California, Oregon and Washington and the Province of Quebec in a unified carbon marketplace known as the Western Climate Initiative.  Cap and Trade was originally introduced in the 1990 US Clean Air Act.  It is a regulatory system that is meant to reduce certain kinds of emissions and pollution and to provide companies with a profit incentive to reduce their pollution levels faster than their peers. Under a cap-and-trade program, a limit (or "cap") on certain types of emissions or pollution is set, and governments and companies are permitted to sell (or "trade") the unused portion of their limits to other companies that are struggling to comply.  (Definition from www.investopedia.com)  In the US, cap and trade is being hailed as a "private sector" solution, although it does require set up of a regulatory entity to oversee and enforce.   

Ontario believes taking this step will increase the likelihood of achieving its commitment to a 20% reduction in Greenhouse Gas Emissions from 1990 levels by the year 2020.   Details of the program are to be developed over the course of the year and will likely have profound potential implications for builders, owners and occupants of real estate.  Step one is likely to be mandatory reporting.   Step 2 will be the debate over where to set the caps.  

According to news reports, Ontario decided against replicating the popular British Colombia model in part to avoid the optics of imposing a “tax” and in part to lend support to creation of a unified North American carbon trading marketplace.   As laid out in my February 3, 2015 blog on this topic, British Columbia puts a set “price” on carbon, and everyone pays the same rate per ton for it.  Proceeds from the tax are used to produce green energy and to offset taxes from other sources.  Critics of the carbon tax approach believe a tax alone may not be enough to achieve meaningful reductions in emissions, as well as opposition to taxes in general.  

The key criticisms of a cap and trade approach, which is far more widespread and more complicated to implement are more numerous: 1) that the limits are often set at different targets for different industries, providing flexibility where needed but detracting from the optics of fairness; 2) concern that providing a workaround for polluters rather than requiring better efficiency may also not result in reducing emissions, and will likely increase costs to consumers 3) an underdeveloped carbon marketplace could result in fluctuating prices which will not support development of green energy and could cause harm to affected companies and industries based on their scale and resources; and 4) need to create an oversight agency to promulgate regulations and enforce the system.   For a robust discussion of the merits and proponents of each approach see:  http://e360.yale.edu/feature/putting_a_price_on_carbon_an_emissions_cap_or_a_tax/2148/.