Business Relocations Springs Hope for Dallas Office Market

It will not come overnight and will not be as strong as in past cycles, but recovery is underway in the Dallas area office market. The year 2012 will allow additional time for recovery as demand remains positive and the volume of new supply remains small. Vacancy, while still notably elevated, is on an overall downward course. Rents, pressed somewhat by the overall low occupancy level, show positive but modest gains. Previous trends of business relocations to the area are now being seen again, although the pace is moderately reserved. Some relocating firms, meanwhile, are opting to acquire buildings rather than rent their spaces. Perhaps no sign is more persuasive, however, than the return of construction, including some speculative activity. Still, this too is proceeding slowly as development retains its prudent profile.

High Vacancy Trend Continues

Dallas’ confident development profile with its large speculative component and a willingness to build new buildings during periods of high vacancy, have made high vacancy rates common, if not the definitive feature of this market. The return of negative net absorption during first quarter 2012 stalled the downward movement seen during the previous two quarters as the quarter-end rate duplicated the rate for year-end 2011. The huge volume of vacant stock, most recently counted by Reis at 36.6 million square feet, would seem to make the Dallas area market ideal for the “flight to quality” trend commonly seen in stressed markets.

Temporary Hinder in Absorption

The Dallas general purpose office market had a strong performance in 2011 with more than 1 million square feet of positive net absorption, although first quarter of 2012 was followed by a modest negative 122,000. The stall is temporary according to Reis’s latest analysis which calls for 668,000 square feet of positive net absorption over the remainder of the year. Attractive affordable spaces particularly in the greater Plano area in the suburban north have been the key to the market’s success in attracting out-of-area expanding and relocating businesses.

Sluggish Rent Growth

While small gains in both asking and effective rents for the market as a whole recently have been seen, growth rates remain low; there is after all, a large volume of vacant space pressing down on any number of landlords. ”The overall market continued to shift further from tenant-favorable to neutral conditions for most submarkets,” according to a first quarter report on the Metroplex market by Jones Lang LaSalle (JLL). At $19.53 and $15.09 psf, mean asking and effective lease rates for the first quarter were each up 0.3% for the period, despite the negative absorption, and were up 1.2% and 1.3% year-over-year. Modest gains are expected for the remainder of 2012.

Market Highlights

After a prolonged period of sluggishness, single-property sales volume leapt to $392 million for four deals in the first quarter, more than doubling the dollar sum accumulated in 2011 and is the greatest single-quarter total since the fourth quarter of 2006. The average selling price for the latest quarter’s transactions was $167 psf, well above 2011′s $46. With sales volumes running low, average cap rates measured by the quarter have been erratic. The latest quarter’s 6.2% was the lowest since the first of 2010. The 12-month rolling cap rate has been somewhat steadier at 8.2%, down 10.2% and 8.9% one and four quarters prior.

Photo Credit: Dallas skyline (Photo: dph1110/471774454)