See the parked bulldozers? Featured

7:00pm EDT February 23, 2009

A construction slowdown caused by tight financial markets has finally hit the Dallas area. Its main impact on real estate has been to swing the negotiating pendulum from landlords to tenants.

“Having worked for a national REIT (real estate investment trust) for the last seven years, I’m amazed at how little tenants know about lease negotiations, even when they have the upper hand,” says Brock Wilson, Senior Vice President in the Dallas office of Grubb & Ellis Co. “Without tenants, a building is only worth the ‘bricks and sticks’ it took to build it.”

Smart Business talked to Wilson about the current industrial real estate market, focusing on the desirable properties around DFW airport.

What is the current institutional real estate situation regarding the area around the Dallas-Fort Worth airport?

Two years ago, if you tried to buy an existing building or developable land, you quickly realized you were not alone. On multiple occasions with my previous employer, we sent unsolicited and solicited offers on various facilities, only to end up in a bidding war.

Most notably was the old Minyard’s Grocery Distribution Facility at 777Freeport Parkway in Coppell. Twenty-six initial offers were made on this 725,000-square-foot facility with 80 acres of additional land. If the property were on the market today, there might be four offers —from all cash buyers at a 25 percent discount from the 2006 price.

Many major developers also have space available in this submarket totaling 8 million square feet. That figure is just a reflection of the economic times. These properties are very well located, some just off of the North DFW airport runways, and will be excellent long-term assets for their owners and tenants.

What other local/regional trends are you seeing?

The biggest trend comes from the world of development. With the exception of a couple of developments that were already funded or under way prior to 2009, the dirt has stopped moving.

Last year, 20 million square feet of new development was posted, with approximately 17 million of it speculative. This year, around 10 percent of that figure should be posted. Virtually every development company has decreased its staff, and some have switched to nonindustrial projects. Others have closed their doors altogether. In the meantime, owners/developers may want to disregard their underwriting assumptions if a deal comes along and ask their lender for a mulligan rather than a bailout.

The second-largest trend is the increase in sublease space. For four consecutive quarters, the number has increased to approximately 8 million square feet citywide. With this trend, it is not surprising that the bulldozers are parked.

What should corporate real estate managers expect in the near future regarding institutional real estate availability and prices?

Both availability and pricing will continue to improve across all DFW submarkets through 2009. With the capital markets still upside-down, REITs and private real estate firms are trying to hold on to as much asset value as possible. What that means for the occupants is the leverage pendulum that swung away from tenants in 2006 is squarely in their favor now.

In this market, generally speaking, tenants who have leases expiring in 2009 and 2010 are in a great position to negotiate amore favorable lease. And even leases that do not expire until 2011 or even 2012 might be worth new concessions in exchange for a longer lease commitment.

The name of the game for the landlord is keeping the space full, and savvy landlords will do just that.

What tips can you offer corporate real estate managers about how to handle real estate decisions?

Forward-minded real estate managers will capitalize on current market conditions by seizing long-term opportunities. While corporate real estate departments continue to downsize, directors should keep their eye on the future.

It is understandable that the theory in this economy is that ‘less space is better,’ and cutting costs now is essential in order to survive. But 2009 will be the year to improve your position in the real estate market. Rather than just downsizing space, the focus in terms of warehouse/distribution space should be on testing the market to see if there are better opportunities, either with an existing landlord or with other property owners.

We will see many companies ‘trade up’ in this market, capitalizing on the increasing vacancy rate and moving to a newer, more functional facility for the same or, in some cases, less cost. We will also see many companies, especially those with hefty balance sheets, renegotiate their existing leases and lock in for a better price.

Much like your personal real estate, why pay 7.5 percent on a loan when you can pay 5 percent just by shopping around? You may find that the deal you have is best for you or your company in the end, but it never hurts to explore the options.

BROCK WILSON is Senior Vice President in the Dallas office of Grubb & Ellis Co. Reach him at (972) 450-3203 orbrock.wilson@grubb-ellis.com.