‘Understand The Pressure Points’: Discuss Financing Industrial Assets At Bisnow’s Nov. 7 Dallas Industrial Conference

Dallas-Fort Worth investors who are looking to get involved in the industrial market may be inclined to proceed with caution, given the mixed fundamentals.

A third-quarter Matthews Real Estate Investment Services report found that although the past year saw 63M SF in construction project deliveries — a “new record for completions in the market” — new construction has been idle due to increasing interest rates as well as the high cost of debt.

When coming up with a financing strategy in a period of economic uncertainty, Timber Hill Vice President of Capital Markets Martin Siegel suggests, as a general rule, that investors communicate with their lenders to learn more about the challenges they may be facing. This can help both parties structure terms together to ensure investors are minimizing their risk at the onset.

“Ask a lot of questions about their platform and what's important to them, and then view each of those risks from the lender's perspective,” Siegel said. “Take into consideration the pressure and pushback they might be getting internally from their credit committee or from their capital source. Understanding those pressure points helps you structure the deal and mitigate those risks within the initial negotiation.”

Investors can learn how to navigate high interest rates while decreasing their risk at Bisnow’s Nov. 7 Dallas Industrial Conference. Click here to register. 

Siegel will be speaking at the Interest Rates and Development: Mitigating Risks and Maximizing Returns panel at the conference and representing Timber Hill, a private equity company specializing in industrial assets. While the company is based in Chicago, it has held industrial outdoor storage assets in DFW since 2019. 

In a conversation with Bisnow, Siegel discussed trends in the industrial market as well as Timber Hill’s interest in and contribution to the DFW IOS market.

Bisnow: What are some of the recent trends in the industrial market that have stood out to you?

Siegel: The most relevant trend is inactivity. The underlying fundamentals for both the short term and long term seem good. There's still a strong job market. The debt that lenders placed over the last few years wasn't overextended like in previous economic downturns. The issue right now is primarily interest rates and the higher cost of debt. 

There are too many mixed signals in the market to have a clear picture of what to expect over the next three to six months. Supply is growing due to completions, but there's not a whole lot of new construction activity. New activity is constrained, and while there's a lot of capital on the sidelines, lender liquidity is an issue. Fewer loans are being paid off, but more are extending. Buyers are looking for cap rates that are debt-neutral, but sellers are unwilling to transact at those levels. All of these aspects are leading to inactivity.

I think that until people view interest rates as stabilized, or at least accepted as the new normal, this trend is going to continue for a bit. At some point, if an investor believes in a long-term positive outlook for the asset, they're going to start to make bets on that trend, accepting tighter deal terms on the front end, and you'll see some activity pick up. 

Another trend is the tangible growth of nearshoring and onshoring. There are a bunch of potential risks out there right now, whether they be a worldwide pandemic, geopolitical conflict, labor disputes or environmental issues. All of these can potentially disrupt the supply chain. 

Having multiple points of sourcing and nearby supply chain connections are critical to industrial users. These are structural changes to the supply chain; they're not just a cyclical change. The repositioning of the supply chain points will lead to the expansion of industrial demand in the long run. 

Bisnow: What should investors be mindful of when financing an industrial project during a period of economic uncertainty?

Siegel: It all starts on the front end. For developers or investors, this means financing modeling with reasonable assumptions and then flexing those to make sure your investment can withstand the unexpected. There could be timeline issues, meaning you didn't get the permits when you thought you would and your timeline gets extended, or construction costs can go up.

If you’re waiting to address any issues in the middle of a loan, it's often too late. For us, the way to be mindful when financing is to really look at the investment from a number of different angles on the front end and flex a lot of these potential risks, see how it affects performance of the investment.

The name of the game right now is having a lender that’s willing to structure terms that provide both of you with the best opportunity to be successful and negotiate proper mitigations for risks.

Bisnow: What attracted Chicago-based Timber Hill to the DFW industrial outdoor storage market? 

Seigel: DFW is a great market, which checks a lot of boxes for us. It has a high population and job growth, which go hand in hand. It’s emerging as a consumption zone, with more people buying and using goods within the market. It has a great interstate system, connectivity to the coast and intermodal rail terminals. The region has an excellent inland port location with direct lanes to the seaports. 

There has been a ton of industrial real estate development, specifically distribution centers. There’s a pro-business mindset within the local and state government as well as reasonable real estate taxes, all of which are huge pros for us.

Bisnow: What industrial projects has Timber Hill completed in DFW? What is the company working on now? 

Siegel: We have been bullish on DFW for a long time, which is evident in our focus on IOS. In 2019, Timber Hill developed a truck parking yard and stabilized [it] to 100% occupancy before eventually selling to a user three years later. 

In 2021, we created TH Logistics Fund I, and over the next 18 months, we acquired $170M of IOS real estate, with one-third of this portfolio consisting of assets in DFW. Our first acquisition was a 40-acre IOS site. We were able to build out additional usable area, and the property has been at full occupancy since acquisition.

We recently completed development of a 40-acre Class-A concrete outdoor storage yard in Hutchins, Texas, at the entrance to the UP Dallas Intermodal at I-45. This site is operated under our National Truck Parking brand as NTP South Dallas. It allows for container stacking and was designed with 70-foot truck parking spaces and wide-drive aisles. We are really excited to bring this to market at a rental rate comparable with surrounding gravel yards. 

Our third fund project in DFW will be a new truck parking outdoor storage facility in the Alliance submarket in Fort Worth. 

Outside of the fund, we broke ground this month on an 82-door build-to-suit truck terminal for an international logistics firm in Haslet, Texas, also in Alliance.

Bisnow: What do you look forward to most about attending the Dallas Industrial Conference and speaking on the Interest Rates and Development panel?

Siegel: The worst mistake anyone can ever make is to think they're the smartest person in the room. I’ve never had that problem. I feel like I learn something from every conversation. 

The amount learned is dependent somewhat on the quality and intelligence of the people you're speaking with and listening to. I’m certain that I'm going to gain a lot of insight on this panel. 

This article was produced in collaboration between Studio B and Timber Hill. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to [email protected].