Despite the attendant job growth in office-using sectors, Dallas’ vigorous economic recovery has yet to be fully reflected in the performance of its general purpose, multi-tenant office space market. The strength of demand that emerged in 2011 has been followed by negative net absorption year-to-date in 2012. Thus occupancy, which remains weak in any case, has sacrificed some of last year’s gains. Rent growth remains positive but sluggish. Still, while some areas continue to languish, others, including popular north suburban locales and, closer in, Uptown Dallas, show considerable strength. There may be no stronger indicator that the market is turning the corner than the return of construction, including some speculative activity. This, though, is not one of those development booms for which Dallas had become well-known, but rather a prudent, small-scale movement not expected to endanger the frail health of the market or its fledgling recovery.
This report addresses the office market on the Dallas side of the Dallas-Fort Worth Metroplex (the Metropolitan Statistical Area). The Fort Worth market is tracked in a separate Reis Observer. Running at 153.5 million square feet, the Dallas-side market accounts for fully 85.9% of total existing Metroplex inventory and plays host to its most dynamic submarkets, including Uptown Dallas and the greater Plano area in the suburban north.
Dallas’ aggressive development activity, an effect in part of a strong economy and confidence in the future of demand, has resulted in a market frequently beset with high levels of available supply. Indeed, 23 of the last 30 years closed with vacancy rates above 20.0%—and often well above 20.0%. The oversupply that resulted as a result of the latest recession, accordingly, was nothing new, and was no worse than that seen in other down cycles. Indeed, Dallas has been one of the nation’s more highly cyclical markets—and the downturn suffered during the telecom-dot-com recession of the early 2000s, with its impacts on a large tech-related tenant base, treated the local market more harshly than did the 2008 recession.
The latest trend, until a small and likely temporary setback in the first half of 2012, has featured a more or less steady decline in the vacancy rate. At 23.9%, the rate for the latest quarter was up 10 basis points from the quarter before (and from year-end) but was down 40 points year-over-year. A small decline in the rate is expected over the remainder of the year as absorption again turns positive, if moderately so.
This is a large market; the high vacancy rate, accordingly, translates into a huge volume of vacant stock, counted by Reis at 36.6 million square feet as of mid-year. Of this sum, 19.2 million are categorized as Class A—and the quarter-end Class A vacancy rate was 21.7%. The conditions seem right, accordingly, for the “flight to quality” trend common in such situations, in which rental concessions in the Class A sector draw lower-tier tenants that otherwise might not seek out higher quality accommodations. While the differences were not dramatic, the Class A vacancy rate as calculated by Reis declined by 110 basis points last year while the “B/C” rate shed just 30. The general slump in absorption seen across the board in first half 2012, meanwhile, interrupted the trend.
SUPPLY AND DEMAND
With no new supply added, data for 2011 suggested a strong recovery underway: three years of negative net absorption were followed that year by a positive total of more than 1 million square feet. It did not last, however. First half 2012, again with no new supply deliveries, followed with absorption at negative 150,000 (the total for second quarter alone was minus 28,000). This is not a major setback, to be sure, however; the firm expects a positive total of nearly 500,000 square feet for the remainder of the year accompanied by a small construction completion total. Indeed, despite the recent negative absorption counts, leasing volumes have remained high, according to industry sources. The small setback aside, the market has reasserted itself as a center for attracting out-of-area expanding and relocating business, much of which, as in the past, is drawn to the greater Plano area in the northern suburbs. “Expansion by companies based in the region, coupled with a consistent migration of businesses from other markets, has supported solid demand for space,” remarks Studley, Inc. in its second quarter report on the Metroplex market. Both Citibank and PricewaterhouseCoopers are planning expansions of their local operations, this source reports.
No competitive general purpose, multi-tenant office space projects have completed construction in the Dallas area since second quarter 2010, when 362,000 square feet arrived on line. Indeed, recent activity has been dominated by medical-office projects and a number of owner-occupied developments, including the 281,600-square-foot headquarters for EnCana Oil and Gas, which completed in July in Plano. Among several other projects of this type, a 224,548-square-foot project is underway in Plano for MedAssets for a January 2013 finish and a 90,000-square-foot headquarters for Traxxas is under construction in McKinney for delivery this December.
For the competitive sector, meanwhile, Reis expects the delivery of only two projects with a combined total of 209,000 square feet this year. Significant among these is a 164,000-square-foot pure speculative undertaking in Plano, the first of this type in a long while. Three general purpose projects with a combined total of 594,550 square feet, meanwhile, were underway per the date of this report for completion in 2013 (the sum for the year could be larger if planned projects get underway). Completion volumes, in any case, are expected to slowly increase. “The sustained leasing activity and dwindling supply are pushing developers to consider moving forward with long-shelved projects,” advises Studley, Inc. A case in point as described in Submarkets is Trammell Crow Company’s plans to build in Plano.
The overall strengthening of the market has brought favorable trends to rents. “Landlord sentiment has shifted over the past few quarters as the overall occupancy has increased,” comments Jones Lang LaSalle in its second quarter report on the local market. “With multiple potential tenants touring spaces, landlords have become less aggressive with concessions.”
Measured by the year, losses in average rents in 2009 and 2010 were followed by the return of positive growth last year: Reis reports gains of 1.3% for both asking and effective averages for 2011. The same sluggish pace has continued. At $19.58 psf and $15.13 psf, mean asking and effective lease rates for second quarter 2012 were each up 0.3% for the period in the wake of identical gains the quarter before. Similarly modest gains are expected for the remainder of 2012.