Dallas – Fort Worth Office Market Report | Q3 2017

by CoyDavidson on October 31, 2017

Large Corporate Relocations Propel DFW Absorption

Large corporate relocations continue to generate buzz in the Dallas-Fort Worth real estate market. So far, Far North Dallas has seen more absorption in 2017 than the whole market had in all of 2016. After delivering their 2.1 million square foot headquarters in June 2017, Toyota has occupied the space, accounting for 70% of Far North Dallas’ YTD absorption. 2017 has already exceeded 2016’s annual net absorption by 1.1 million square feet. Multitenant office product has accounted for only 20% of the total net absorption and is lagging behind the same period in 2016 by almost a million square feet. Corporate relocations have been the fuel for this DFW real estate boom, but will this continue?

In September, Amazon unleashed a flurry of speculation by announcing it will build HQ2 — a second headquarters located in another major North American metro. The announcement sparked hundreds of proposals from cities and developers across the metroplex hoping that they have what it takes to attract one of the largest, most innovative companies in the nation. While prices have increased and the labor market is tightening, DFW still compares favorably to many competitors. Amazon already has an office presence in Galleria Towers and over 8 million square feet of warehouse space. Could Amazon be DFW’s next big Toyota?

A Look Ahead

  • Major corporate move-ins will boost 2017’s net absorption significantly higher than in 2016. To keep this from being the peak, DFW will need to woo more corporate relocations, as in-market expansions are insufficient to maintain such high demand.
  • Construction activity will continue to taper, as major corporate campuses deliver and new groundbreakings slow. So far in 2017, 49 buildings totaling 2.5 million square feet have broken ground, just over a quarter of the 8.8 million square feet that broke ground in 2016. Barring
    any major corporate announcements, expect construction starts to slow as vacancy is higher than in 2015 and lenders are skittish about being caught at the end of the cycle.

Market Highlights

  • Job growth slowed slightly in DFW, as the metro added less than 100,000 jobs from August 2016 to August 2017. Year-to-date Fort Worth has outperformed Dallas, with employment growth at an annualized 1.6% to 1.1% respectively. The unemployment rate in Dallas increased slightly to 3.9% but continues to trail the nationwide rate of 4.5%. Manufacturing and Mining and Construction led the metro with over 3% employment growth each, while office-using sectors experienced modest 1-2% growth.
  • The market delivered 870,000 square feet in Q3 2017, and approximately 40% was leased. After the Toyota North American Headquarters delivered in Q2 2017, the construction pipeline after Q3 was about 57% multi-tenant speculative office, and the overall pipeline was 60% leased or owned.

VACANCY

The overall vacancy rate was flat at 15.5% from Q2 2017 to Q3 2017. The vacancy rate has held steady at 15.5% throughout 2017. Class A vacancy decreased 0.2% to 17.2% from Q2 to Q3, Class B vacancy remained the same as last quarter at 14.7%.

Far North Dallas saw the largest improvement from the prior quarter, dropping from 14.1% in Q2 to 12.7% in Q3 as several new projects saw significant move-ins. LBJ Freeway has the highest year-over-year improvement, lowering the vacancy rate 2.4% to 21.9%. It is likely this trend will continue as tenants experience higher rental rates in the Far North Dallas area, Preston Center, and now along Central Expressway.

New Supply, Absorption & Vacancy Rate

ABSORPTION & DEMAND

Net absorption slowed in Q3 2017, totaling less than 500,000 square feet. The 2.1 million square foot Toyota North American Headquarters registered as being fully occupied in Q2 2017, raising Q2’s absorption total to 2.5 million square feet. Although market-wide absorption is strong, eight of the seventeen submarkets have negative year-to-date net absorption. While there is significant overall growth, it is disproportional in Far North Dallas (3 million SF YTD) and Las Colinas (1 million SF YTD); all other submarkets have seen less than 300,000 square feet of absorption each.

While Class A net absorption is reaching levels not seen since the early 2000s, Class B net absorption shows the opposite trend, with only 116,000 square feet through Q3. This is the lowest total seen in the first three quarters since 2003.

RENTAL RATES

Rental rates continued to climb faster in 2017 than they had in 2016. Overall rates rose 1.5% from Q2 to Q3, reaching $25.47 overall — 5.4% higher than this same time in 2016. Class A rates were up 1.5% as well, rising to $29.45 overall, and Class B rates broke $21 for the first time.

Central Expressway saw the highest increase in rates from $27.21 in Q2 up 10.1% to $29.97 in Q3. Preston Center saw overall rates jump 7.6%, due to the start of construction on Park Plaza at 6517 Hillcrest Ave. The only office building in the elite University Park neighborhood is asking rates of $55 triple net for the 119,000 square foot property. This pushed Preston Center’s Class A average to $42.17, surpassing Uptown’s average of $40.78 for Class A space.

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