Q2 2012 Dallas, Texas Office Submarket Trends

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Q2 2012 Dallas, Texas Office Submarket Trends

Central Area: Uptown

  • The 8.8-million-square-foot Uptown submarket, adjacent on the north to the larger Dallas Central Business District (CBD) market, has been the leader in metro area office development in the recent term. (The CBD is reviewed in the following section.)
  • It also has been a leader in recent leasing, as reported by industry sources. Studley, Inc. cites “particularly strong deal volume in recent quarters.”
  • Thus, space searches have become “a little more challenging for tenants.” In addition, “tightening supply is encouraging some larger Uptown tenants to renew their leases.”
  • Uptown is one of a handful of submarkets driving the recovery of the market and the improvement in Class A rent growth. “Much of the demand [for metro area office space] remains concentrated in the Far North Dallas and Uptown submarkets,” states Jones Lang LaSalle.
  • Uptown’s latest construction cycle, adding 1.9 million square feet from 2008 through 2010, ended with the delivery that year of Granite Properties’ 361,500-square-foot 17Seventeen McKinney office tower (a.k.a. Park Seventeen) at 1717 McKinney Street.
  • No new space delivered in 2011 or year-to-date in 2012. No projects were under construction per the date of this report.
  • Net absorption for the first half of the year was strongly positive at 245,000 square feet, up from the 79,000-square-foot total recorded for all of 2011.
  • Second quarter vacancy was 20.1%, down 170 basis points from a quarter earlier, down 470 year-over-year.
  • Respective average lease rates for the quarter were $29.65 psf and $22.69 psf, asking and effective, each up 0.2% for the quarter, up 1.4% and 1.7% year-over-year.
  • A new project? Hillwood Investment Properties is “reportedly considering” the development of a 200,000-square-foot build-to-suit at 3000 Turtle Creek Plaza “for some of the Perot companies,” reports Studley, Inc. “This is one of the last remaining undeveloped parcels in the Turtle Creek section of Uptown.”
  • Estein & Associates USA Ltd. and partner KDC have announced plans for a 23-story project in the 75-acre Victory Park mixed-use redevelopment, GlobeSt.com reported earlier this year. Reis reports Two Victory Park at Victory and Wichita avenues proposed at 600,000 square feet.
  • The 691,180 square feet of existing office space at One Victory Park and Victory Plaza was 95.0% leased as of May, as reported previously reported.
  • Not far away, at McKinney and Olive, 400,000 square feet of office space are planned for a 600,000-square-foot mixed-use development. Reis reports groundbreaking scheduled for December 2012 with completion to follow in June 2014. Crescent Resources is the developer.
  • Studley, Inc. reports a 100,000-square-foot, 18-year lease renewal by McKool Smith at 300 Crescent Court during the second quarter.
  • In a reduction of occupancy, Baron & Budd P.C. leased 50,000 square feet during the quarter at 3102 Oak Lawn Avenue, down from the 170,000 square feet occupied previously.
  • Outlook. Reis expects a small negative net absorption total for the second half of the year; vacancy should rise to 20.7%. Jones Lang LaSalle explains: as Uptown is able to offer fewer options for large blocks of space, absorption could shift to other areas, including Las Colinas, Richardson-Plano and North Central Expressway. Reis projects gains of 1.4% and 1.9% for the asking and effective average lease rates for 2012 all told, off 2011’s pace.

Central Area: Downtown

  • The 26.1-million-square-foot Dallas CBD submarket has been weak for a number of years, due in part to the relocation of corporations to the Plano area rather than to downtown Dallas and to competition arising from the adjacent Uptown submarket.
  • As recently reported, several CBD tenants have been considering relocations to the Uptown submarket.
  • No competitive general purpose space has delivered to the CBD since Billingsley Company’s $125 million, 24-story, 425,000-square-foot One Arts Plaza completed in 2007 at 1722 Routh Street. It was, moreover, the first major tower built in downtown Dallas in 18 years. Full occupancy was recently reported. The companion 442,000-square-foot Two Arts Plaza remains in the pipeline.
  • No general purpose space will complete in 2012; none was under construction per report date.
  • Total first half 2012 net absorption was negative 13,000 square feet. The total for second quarter alone, however, was positive 47,000 square feet.
  • With downtown unable to generate strong demand and losing tenants to relocation, extraordinarily high vacancy has been a longstanding issue.
  • The second quarter rate was 27.3%, down 10 basis points from the quarter before, down 20 year-over-year.
  • Rent growth has been unsteady. At $19.57 psf and $15.51 psf, second quarter average asking and effective rates were down 0.3% for the quarter following gains of similar proportion the quarter before.
  • Elm Place, the $135 million mixed-use redevelopment of the 52-story, 1.3-million-square-foot 1401 Elm Street building is among the city’s more visible redevelopment projects. An 80,000-square-foot office space component is included. Turkey-based Polidev International LLC is the developer. Reis cites a January 2014 completion date.
  • One solution. The empty 18-story, 190,000-square-foot office building at 211 N. Ervay Street is under contract by an investment group led by Turkish developer Mike Sarimsakci of Alterra International, the Dallas Business Journal reported in May. Plans call for conversion of the property to a 250-room hotel.
  • More. The cost of the redevelopment has been estimated at $30 million. Alternatively, the building would be razed by the city and replaced with a park.
  • A shrinking market. A CBD inventory reduction on the order of 143,000 square feet is reported by Reis for the third quarter of 2011. Earlier reductions occurred as well. Indeed, the current CBD inventory count is down 3.1 million square feet from 1995.
  • Alterra also has acquired the 101-year old 500 S. Ervay building (a.k.a. Butler Brothers Building). Plans reported earlier for the property include 80,000 square feet of office and retail space.
  • Foreclosure sale. The 844,000-square-foot 2100 Ross building has been acquired from foreclosure, GlobeSt.com reported in August 2012. See the Transaction Analytics section of this Reis Observer for more information.
  • Another. In another foreclosure sale, which closed in June, the 850,000-square-foot KPMG Centre at 717 N. Harwood was acquired at auction for $42 million by KPMG’s lenders. See Transaction Analytics.
  • More. KPMG Centre had $64 million in listed debt, “even though it’s appraised for $44 million,” according to data from Addison-based Foreclosure Listing Service Inc.
  • As reported previously, One Arts Plaza, cited above, also has been put up for sale.
  • Outlook. Additional occupancy should be slowly siphoned off over the remainder of 2012 as the vacancy rate rises to 27.5% representing 7.2 million square feet of vacant space. Rent growth rates below 1.0% are projected for the year. The year 2013 should be similarly anemic.

Northern Suburbs: Plano/Allen, Frisco, North Dallas Corridor

  • Collectively, Dallas’ far northern suburbs, including Plano and Frisco in Collin County, have been the star of the metro area office market over the years for their success in attracting numerous major corporate expansions and relocations. They also host a large portion of the region’s state-of-the-art high-tech office campus inventory.
  • Big blocks. According to Studley, Inc. West Plano is one among a few areas in which space searches have become “more challenging” for tenants as “a rush on the biggest blocks of prime space [gathered] momentum.”
  • More. “Robust activity in West Plano and Frisco has depleted the supply of big blocks of space and forced larger space users to search farther down the Tollway.”
  • Relocation. “West Plano and Frisco, and the Legacy section of Plano in particular, have been very popular with companies relocating from other markets,” adds this source.
  • In addition, some Metroplex-based firms “are targeting West Plano and Frisco for their local expansion.”
  • The 3.6 million square feet that delivered in the Plano/Allen submarket during the four-year span 2006-2009 did so at a diminishing pace. No competitive space has delivered since.
  • Total first half 2012 net absorption in Plano/Allen was positive 57,000 square feet. The total for second quarter 2012 was 95,000 square feet.
  • Second quarter vacancy was 21.1%, down 50 basis points for the quarter, down 100 year-over-year.
  • At $20.93 psf and $15.48 psf, second quarter asking and effective average lease rates were up 0.5% and 0.6% psf for the quarter and were up 2.1% and 2.3% year-over-year.
  • Development has increased. Once again the Plano/Allen submarket leads metro Dallas in office space construction—in several guises but mainly single-tenant. The three largest projects underway metro wide are located in Plano.
  • Spec. Heady Investments’ $26 million, six-story, 164,000-square-foot Headquarters I building, the first 100.0%-speculative development since the recession, is underway at Legacy Town Center. Construction began in November 2011 and will complete this December.
  • The 281,600-square-foot headquarters facility for EnCana Oil and Gas, also at Legacy, delivered in July. The EnCana building is the first phase of a $1 billion, three-phase complex for the company.
  • A 90,000-square-foot corporate headquarters for Traxxas is underway for a December 2012 finish in the Craig Ranch master-planned development in McKinney.
  • 2013: Three single-tenant headquarters projects with a combined total of 636,548

square feet are underway for delivery in 2013, as follows:

  • MedAssets signed a 15-year lease in March to occupy a new four-story, 224,548-square-foot build-to-suit office campus in Legacy Business Park. Construction began in January 2012 and will wrap up in January 2013, reports Reis. Trammell Crow is the developer.
  • Trammell Crow is constructing a 270,000-square-foot corporate headquarters for telecommunications company Ericsson Inc. in the Legacy park. Reis cites a July 2013 completion date.
  • A 142,000-square-foot, two-phase owner-occupied building for Tyler Technologies is underway in Plano for completion by mid-2013.
  • In addition, Emerson Process Management’s Regulator Technologies business has broken ground for a $25 million, three-story, 128,000-square-foot global headquarters building in the Gateway development at US 75 and the Sam Rayburn Tollway, McKinney, TREC reported at the end of July. A late 2013 finish is planned.
  • In an area of Frisco outside the current submarket boundary, 100,000 square feet of competitive space are underway for completion in April 2013 at the Frisco Square development at Main Street and Dallas North Tollway.
  • New plans. Westcott LLC and JaRyCo Development LLC have begun the design process for a $150 million, three-building, 750,000-square-foot, Class A office park “in the highly desirable Legacy submarket,” the Journal reported in late July.
  • More. Preston Bend One, its first phase, will be “an expandable, three-story, 109,988-square-foot office building…fronting Preston Road north of Hedgecoxe Road.”
  • “Plans for a new office tower in west Plano have been unveiled in hope of attracting more jobs to the Legacy Town Center area,” TREC reported in April. Trammell Crow Company and One Liberty Properties will build the 13-story, 341,000-square-foot Legacy Tower I at Legacy Drive and Dallas North Tollway, Plano. An early 2013 start and an 18-month construction timetable are cited.
  • “Several recent move-outs in West Plano and the Legacy area will provide some relief to companies looking for quality spaces in these areas,” reports Studley, Inc.
  • Case in point: “AT&T plans to vacate the 245,482-square-foot Legacy Corporate
  • Center and redistribute employees across its many regional offices.”
  • In a larger evacuation, T-Mobile USA will close its Frisco call center at Duke Office Park, laying off 615.
  • “These moves, combined with previously announced relocations by Nexen Petroleum at Granite Park and Safety-Kleen, which is moving to Richardson, will eventually open up some big blocks of space.”
  • More. Nexen Petroleum USA will move headquarters from 5601 Granite Parkway,
  • Plano, to Houston leaving 104,000 square feet vacant, sources report. Nexen hopes to have its space fully subleased by the end of the year, the Journal reported in June.
  • A total of 365,000 square feet in two buildings at Capital One’s headquarters campus had been completed by April 2012 at Hedgecoxe and Dominion Parkway, Plano. Two others with a combined total of 400,000 square feet are planned.
  • A large lease. A 123,716-square-foot lease by Denbury Resources Inc. at the 1.1-million-square-foot Campus at Legacy within Legacy Business Park brings the firm’s occupancy to 500,000 square feet, Collin County Business Press reported in June. Occupancy is planned for fall 2012. Safety-Kleen currently leases the space.
  • Outlook. Construction is an emerging theme. The new projects may struggle in the near term to find their tenants, however. Reis expects vacancy to add 60 basis points over the remainder of this year while rents see growth in the range of 1.5% to 1.8%, all told in 2012.

Northwestern Suburbs: Las Colinas, Irving

  • The 12,000-acre Las Colinas master-planned community in Irving has been a magnet over the years for Class A office tenants, including high-tech tenants. With a substantial high-tech tenant base, it also has been vulnerable to bouts of oversupply.
  • No space has completed construction in Reis’ 12.8-million-square-foot Irving submarket since 224,000 finished in 2008.
  • Las Colinas, with 7.6 million square feet of standing inventory, has seen no deliveries in more than 15 years.
  • No buildings were under construction in either submarket per the date of this report.
  • In the Metroplex’s largest second quarter lease as reported by Studley, Inc. VHA signed up for 280,000 square feet at 250 E. John Carpenter Parkway, Las Colinas.
  • The Ethos Group took 32,000 square feet at 5215 N. O’Connor Boulevard, Las Colinas, during the quarter.
  • Cushman & Wakefield reports a 153,457-square-foot Class B second quarter lease by Nationstar Mortgage LLC at 4000 Horizon Way, Las Colinas.
  • United Health leased 76,400 square feet during the quarter at 5150 Regent Boulevard, this source reports.
  • Irving: First half 2012 net absorption was negative 277,000 square feet following positive 178,000 all told in 2011.
  • Vacancy ended the latest quarter at 23.0%, up 130 basis points for the period, up 110 year-over-year.
  • At $18.53 psf and $14.39 psf, mean asking and effective rents for the quarter were up 0.4% and 0.3% for the period following small losses the quarter before.
  • Las Colinas: First half 2012 net absorption was positive 114,000 square feet following a total of positive 31,000 all told in 2011.
  • Second quarter vacancy was 21.5%, up 40 basis points for the period, down 160 since second quarter 2011.
  • At $20.43 psf and $16.17 psf, second quarter average asking and effective rents were up 1.5% and 1.8% from a quarter earlier following first period’s smaller gains.

Other

  • The 45,000-square-foot University Park project is underway at Preston Road and
  • Northwest Highway in the North Dallas submarket. A December finish is expected.