Dallas Office Market Opens 2017 With Accelerated Leasing, Absorption
The $70 million renovation to Fountain Place in Dallas represents the property upgrades that are driving leasing activity in the metro's office market.
Much like the overall U.S. economy, the Dallas-Fort Worth (DFW) office market is statistically trending upward and will experience continued growth in 2017 as indicated by first quarter numbers.
Overall, the marketplace is experiencing sustained growth thanks to small- to medium-sized businesses expanding at a rapid rate, investors selectively chasing higher yields and market cores shifting to suburban areas.
According to Stream’s first quarter 2017 data, the market experienced cautious growth in the latter half of 2016, with stagnations that are common during election years. Yet the report indicates 2017’s outlook is very promising. With 75 percent of the metro’s office markets posting a decrease in vacancy, we have much to look forward to over the remainder of the year. Only submarkets with heavy volumes of speculative office construction have not seen as much in the way of decreasing vacancies.
Kicking off with a bang, the Dallas office market saw leasing activity ramp up dramatically to begin 2017. With quarter one in the books, we can project continued job growth, a robust local economy and heavy deal activity.
Noteworthy Dallas Developments
Similar to 2016, buildings that primarily focus on improving parking availability and walkable retail options will have the best chance to attract and retain leases.
Downtown Dallas is moving in this direction with Lincoln Property Company’s project on 1900 Pearl, a 25-story, 260,000-square-foot office development currently under construction, and 2000 Ross, a mixed-use project aimed at bringing restaurants, a boutique hotel, multifamily space and abundant parking to the Arts District.
During the last quarter of 2016, downtown Dallas’ leasing activity remained strong thanks to commitments from WeWork, Wells Fargo, the Dallas Morning News and AT&T.
As for the first quarter of 2017, the Arts District stole the spotlight. Baker Botts LLP chose to renew its lease at Trammell Crow Center, while Goldman Sachs relocated from the suburbs to Trammell Crow Center in anticipation of the renovations coming to the building and surrounding area.
Uptown and Turtle Creek continue to stay competitive with new developments under construction, such as Metlife and Trammell Crow’s Park District project, which will feature 19 stories of office space, residential units and ground-level retail. With the delivery slated for late 2017 or early 2018, absorption is not expected to shift until product is delivered.
In the first quarter of 2017, we saw more than 1.5 million square feet of positive absorption in the DFW metroplex, which equals 60 percent of the total space absorbed during all of 2016. The Upper Tollway and Los Colinas submarkets accounted for the majority of this uptick, representing 1.7 million square feet of DFW’s nearly 2.0 million square feet of new construction.
In general, the outlook for both the Upper and Lower Tollway remain positive, as new product in the Legacy/Frisco area draws demand and the completion of the LBJ Freeway has once again renewed the Tollway/LBJ corridor as the epicenter of business in Dallas. Recent buzz surrounding Plano makes Legacy West a top destination for corporate relocations and regional consolidations, despite the alarming lack of housing for relocating employees.
The city of Richardson currently has the highest rental rates the sector has seen, yet expects a decline due to scarce large-block demand. However, Richardson has seen a slight uptick in tenant demand in this department since the start of 2017, creating a situation that warrants monitoring for the remainder of the year.
As one of the most expensive submarkets, Preston Center continues to have the lowest vacancy rate in Dallas thanks to its proximity to the city’s most affluent neighborhoods, as well as a plethora of walkable retail options for tenants. This echoes a trend evolving over the past five years: companies are relying more on lifestyle factors when it comes to site selection of office spaces.
An Optimistic Outlook
The pulse of the Dallas-Fort Worth office market is stronger today than it was at any point in 2016. With an inventory of 206 million square feet, new speculative construction representing a small percentage of the market, absorption on the rise and a 15.4 percent vacancy rate, we foresee the Dallas office market remaining strong.
Expect significant deal activity fueled by the expansion needs of small- to medium-sized companies to continue at a vigorous pace. Given all the positive factors at play, expect robust demand for office space to continue throughout 2017.
— By J.J. Leonard, Managing Director, Stream Realty Partners. This article first appeared in the June 2017 issue of Texas Real Estate Business Magazine.