DFW Office Market Report | Q2 2017

by CoyDavidson on August 4, 2017

DFW Office Market Report Q2 2017

Optimism still high in DFW office market

The flight to quality continues to be a trend throughout the market. As the U.S. economy continues slow, steady growth tenants are taking advantage of the opportunity to restructure and refresh their space. For some, this means consolidating space in a higher-quality building by creating open office
concepts or eliminating storage, causing negative market-wide absorption for Class B in the first half of the year. Examples of this include EnLink Midstream, who recently moved from Class B space in Uptown to One Arts Plaza, and Pioneer Natural Resources, who was in Class A space in Williams Tower but was optimistic enough to kick-start its new headquarters in the mixed-use Hidden Ridge development in Las Colinas.

Also during this quarter, we saw the fulfillment of Legacy West’s vision. Legacy West Urban Village held its grand opening in June with most of its 300,000 square feet of space leased. For the office market, Toyota moved its first batch of employees into its new campus and will continue moving people in throughout the year. Gaedeke’s big bet of speculative space in Far North Dallas paid off with the move-in of NTT Data. However, there are still concerns about traffic and lack of public transit options to attract retail workers who cannot afford rising costs in the northern suburbs.

A Look Ahead

  • Rental rates will continue to rise in key submarkets as landlords shift the rent structure to triple net, raising the overall cost to the tenant. While Uptown began this trend, it has rippled into other markets such as Preston Center and Far North Dallas and is beginning to catch on in Las Colinas. Expect overall rental rates to rise 5-7% in major submarkets over the next year.
  • Sky-high land prices in Uptown will discourage future office developers — The Union may be the last large office project in the submarket for this cycle. We will continue to see reinvestment in the areas adjacent to Uptown such as the Arts District and Dallas CBD.

Market Highlights

  • The pace of DFW’s job growth slowed slightly, but the metroplex still added 317 jobs per day. Labor force saturation is starting to be a concern with DFW’s unemployment rate at 3.8%, 0.3% below the national average. However, this is not slowing corporate tenants’ hiring spree. People continue to move to DFW for jobs and companies continue to move for the labor.
  • The construction pipeline remains split between build-to-suits and spec office space. Spec properties that delivered in Q2 2017 were 54% leased at the end of the quarter, and of the 11 million square feet under construction, 65% were leased.

VACANCY

The vacancy rate continued its gradual climb. Vacancy increased slightly from 15.2% in Q1 2017 to 15.4% in Q2 2017. Class A vacancy increased 0.1% to 17.2%, and Class B vacancy increased 0.2% to 14.7%.

Far North Dallas and the Fort Worth CBD both saw a 0.6% improvement in overall vacancy rate from Q1 to Q2. New developments continue to see high activity in Far North Dallas as new projects saw significant absorption this quarter, including The Star in Frisco (67,000 SF), Legacy West (66,000 SF), and One Legacy West (NTT Data – 126,000 SF). Despite several large move-outs, the Fort Worth CBD still improved its overall vacancy rate largely due to the Aloft hotel taking 100,000 square feet out of the market in One City Place, the old Radio Shack building.

New Supply,  Absorption & Vacancy Rate

ABSORPTION & DEMAND

Net absorption for Q2 2017 was 509,727 square feet, one-third of the prior quarter’s absorption level. Year-to-date net absorption stands at 2 million square feet, 800,000 square feet ahead of this time in 2016. With several large properties still expected to deliver by year-end, the market continues to be on track for a record year.

Far North Dallas saw the highest absorption level, bolstered by Toyota starting its move to its North American Headquarters, occupying 400,000 square feet of its 2 million square foot campus. Mid-Cities saw the largest negative absorption, as CoreLogic, who moved into its new Hackberry Creek headquarters last quarter, vacated 220,000 square feet at Solana. While many submarkets showed strong positive absorption in the quarter, Las Colinas, Mid-Cities, and Northeast Fort Worth all had approximately 100,000 square feet of negative absorption, significantly lowering the market-wide level.

RENTAL RATES

Rental Rates continue to break records as rates rose to a new overall high of $25.13. This is the first time the DFW market has topped $25 overall. Class A rental rates almost broke a new barrier, reaching $28.99 overall.

Las Colinas saw the greatest increase in average asking rates of all the major markets increasing 5% to $25.61. East Dallas has also seen a 29% leap in rental rates from the prior year due solely to the start of construction and leasing for The Epic, whose asking rates of $35.00 triple net seem more in line with Uptown than artsy Deep Ellum. Class A rental rates in Uptown continue to hold steady, increasing only 0.8% quarter-over-quarter and 4.2% year-over-year, a decline from large jumps seen in 2015.

▸ Click here to download the full report as a PDF.

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