Velocis, a private equity real estate fund manager, is adding to its speculative construction pipeline in the Lone Star State, betting on the strength of the industrial market at a time of new supply.
The fund manager, based in Dallas, also is preparing to raise another industrial fund upward of $500 million by next year to invest in speculative ground-up industrial development in major Texas cities and select U.S. markets, furthering its bullish outlook on this sector of the real estate industry.
"We've had to become very selective and choosy in the deals we do, with them being harder to underwrite," Paul Smith, a partner at Velocis and head of the firm's industrial practice, told CoStar News in an exclusive interview. "The yield on costs today to develop [is] higher than it was two years ago, with rising debt costs and higher property taxes."
Velocis has four deals totaling more than 2 million square feet of industrial space left in its more than $250 million initial industrial fund. Velocis Industrial Fund will have a total of 10 deals upon its completion, Smith said, with the firm and its partner, KBC Advisors, recently completing construction on its sixth deal, a two-building, 851,033-square-foot speculative industrial project called Mercantile Logistics Station within the Mercantile Business Park in Fort Worth, Texas.
The fund manager is banking on the new hub's proximity to major thoroughfares and the size of its project hitting what it sees as ongoing demand from middle-market tenants, Smith said. Mercantile Logistics Station is less than two miles from Interstate 35W and Interstate 820 with direct access to the TEXRail commuter train line, the company said, giving it a leg up, compared with other industrial projects in having an avenue for additional access to labor.
The two industrial buildings, one spanning 391,228 square feet and the other measuring 459,805 square feet, are divisible with truck courts and parking. The buildings have access to "heavy power," with the ability to add additional transformers if needed, the company said.
The newly completed industrial hub is one of two projects Velocis has underway in this part of Fort Worth, with the firm and its partner, KBC, recently beginning another four-building, 650,000-square-foot speculative industrial project just north of Mercantile Logistics Station at the southeast corner of Interstate 820 and north Beach Street. The project, called Mercantile 820 Logistics Park, is scheduled for completion in the first quarter of 2025.
Velocis has leaned on its lending relationships to secure capital as there is uncertainty in the financial markets and deals are harder to pencil out, Smith said, adding, "We've passed on a ton of deals and have had to be selective in funding deals." Without those long-standing relationships, Smith said the firm would be hamstrung and unable to move forward on these projects. Negotiating land sites also has become an important ingredient in getting deals underway, he added.
"Right now, it's really hard to access a site or just tie it up," he said. "Landowners have gotten pretty proud over the last few years."
Often, he said, Velocis has patiently waited on the sidelines as other deals have fallen apart or a tenant has backed out of a deal, leaving a site up for grabs. The ongoing partnership with KBC Advisors has helped secure prime land sites, Smith said.
Two of the deals in Velocis' construction pipeline stem from land sites secured by the firm after the original buyer was unable to close a transaction, he said. Besides the Fort Worth project, the firm has two projects in Central Texas, with one in Bee Cave, Texas, near Austin and another in Hutto, Texas. The last project in its first industrial fund is for a site in Houston being secured now, Smith noted.
The initial fund's remaining deals are expected to be completed by next year, Smith said, leaving Velocis with plans to raise its second industrial fund that could double in size to upward of $500 million.
Looking ahead, Smith said Velocis plans to stay away from what he called "bombers," or massive distribution facilities, which seem to be lingering in the Dallas-Fort Worth market. Instead, the company will focus on meeting middle-market tenant demand. For its second industrial fund, Velocis will likely have a "hefty" focus on Texas, with other select Sun Belt markets, including Atlanta, Phoenix and Nashville, emerging as potential options.
"We have been and continue to be very selective about any go-forward deals," Smith said. "We are selecting only those [deals] with good tenant prospects, a compelling location, a good basis and good labor stories. We are building to the middle of the market where the best tenant activity and strong rents are evident."
For the Record
KBC Advisors is marketing the properties for lease. Bob Moore Construction is the project's general contractor. Ware Malcomb is the project architect. Westwood is the engineer.