Dallas -Fort Worth Office Market Report | Q4 2017

by CoyDavidson on February 7, 2018

2017: The Year of the Move-In

After years of speculation, planning, and construction, the relocations and consolidations that have been the hype of the DFW market for the last several years have come to fruition. Toyota moved into its 2.1 million square foot headquarters in June 2017, JP Morgan occupied its 1 million square foot campus in Q4, and TD Ameritrade moved to its Westlake campus in December. Absorption in 2017 was driven by single-tenant build-to-suit projects. Of the 5.6 million in net absorption for the year, 3.6 million, or two-thirds was from single-tenant buildings.

Much of the activity in the market was large tenants moving into higher-grade space. While 2017 was a strong year for Class A – with 6.7 million square feet of net absorption, the third highest year since 1982 – Class B posted negative net absorption of 835,000 square feet. One example of this is JP Morgan who consolidated offices, including its Class B Lake Vista location to their Class A build-to-suit in Legacy West. Even though over 75% of Class A absorption was single-tenant, Class A still saw positive absorption of 1.8 million in multi-tenant product verses 51,000 square feet of Class B multi-tenant absorption.

A Look Ahead

  • With no negative catalyst in sight and favorable results from tax reform for real estate and median-priced markets like DFW, we foresee another good 2-3 years in this cycle. Due to fewer build-to-suits in the pipeline, net absorption will drop off dramatically in 2018, but we will still see slow but steady rent growth and rising occupancy in the hot markets – Far North Dallas, Uptown, and a push toward Las Colinas. We may be in the ninth inning, but this expansion is heading into extra innings.
  • DFW can expect more corporate relocations, as the tax reform is likely to make companies from coastal markets consider lower priced housing markets to attract and retain employees while keeping salary costs lower.
  • The tightening labor market is pushing more companies to think about real estate as a recruiting tool, causing more migration to higher-grade amenity-rich space.
  • Job growth slowed slightly toward the end of 2017. From November 2016 to November 2017, DFW added 100,400 jobs, compared with 135,100 from the year prior to January 2017. Dallas has added jobs at an annual rate of 2.9%, versus 2.7% for Fort Worth. The unemployment rate for November stood at 3.2%, half a percent below the Texas unemployment rate of 3.7%. Professional and Business Services grew 5.2% in the year prior to November 2017.
  • Over 8.6 million square feet was delivered in 2017, the most of any year during this cycle. In Q4, 2.5 million square feet delivered, of which 67% was built-to-suit, including the 1 million square foot JP Morgan campus. The construction pipeline is down considerably by 31% from the end of 2016, with 64 properties totaling 8.9 million square feet under construction. The construction pipeline is two-thirds leased.

Vacancy Rate

Overall vacancy increased from 15.5% in Q3 2017 to 15.8% in Q4 2017, an increase of 1.2 million square feet. Vacancy is up 0.5% from the end of 2016. Class A vacancy decreased 0.4% to 17%, and Class B vacancy increased 0.9% from prior quarter to 15.5%.

Thirteen out of seventeen submarkets saw flat to increasing vacancy in Q4. The North US 75 corridor saw the greatest improvement in vacancy, decreasing from 18.3% in Q3 to 17.6% in Q4. Lewisville-Denton’s vacancy rate rose 5.8% after several large move-outs.

New Supply, Absorption & Vacancy Rate

Rental Rates

Overall gross rental rates climbed slower in Q4 2017 compared to earlier in the year, increasing only 0.2% to $25.38. Class A rates were virtually flat at $29.29, showing that while the flight to quality increases, supply and demand are more in balance and tenants are reaching the limits of what they are willing to pay. Class B rates increased 0.9% to $21.38.

Preston Center had the highest advertised rates for Class A space in Q4 2017 at $42.21, just ahead of Uptown / Turtle Creek at $40.78. Uptown’s rates were flat quarter-to-quarter and up only 0.7% from the prior year, showing that rates have flattened as predicted. Rates in Preston Center still show growth, as they are up 1.7% from the previous quarter. Central Expressway showed a 7.2% decrease in rates from Q3, but its rate of $27.77 is still up 3.5% from the end of 2016.

Absorption & Demand

Quarterly net absorption was a strong 1.4 million square feet, bringing the 2017 total net absorption to 5.6 million square feet. Class B, however, posted negative absorption of 1.1 million square feet, and Class A saw negative 276,528 square feet of sublet absorption. While significantly stronger than 2016, net absorption was 6.6 million square feet less than in 2014 and 2015.

With move-ins from JP Morgan and Fannie Mae, Far North Dallas saw 1.3 million square feet of absorption in Q4 alone, bringing its yearly total to 4.3 million square feet. However, Lewisville-Denton experienced negative 570,000 square feet of absorption from Xerox vacating 256,000 SF at 1303 Ridgeview and JP Morgan moving out of Lake Vista, however this space will be filled by NationStar Mortgage in July 2018.

Leasing Activity

Leasing activity is down from 2016 in all but two submarkets – Fort Worth CBD and Lewisville-Denton. Leasing activity in Q4 2017 was 4.3 million square feet and the total for 2017 is 17.8 million square feet.

Sales Activity

Investment activity in 2017 totaled $3.5 billion. While considerably behind the record year of 2016, 2017’s total is only 6.6% behind 2015’s yearly total. Investors continue to be interested in DFW as they seek strong, stable returns outside of the high-priced coastal markets. Nationally, office investment sales saw a drop-off of 28% from Q4 2016 to Q4 2017, signaling a slowing in the investment markets. Dallas-Fort Worth had the eighth highest sales volume in 2017, behind the major coastal markets and Chicago.

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