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Market ReportsTexasTexas Market Reports

Dallas Office Market Benefits from Increased Demand, Strong Submarkets

by admin

Improvement in Dallas Dallas office market fundamentals has been supported by economic concentrations in the finance/insurance, energy and technology sectors, as well as the amenity-driven desirability of infill submarkets, namely Uptown and the Arts District. Yet, any discussion of Dallas area office expansions must begin with State Farm Insurance. The firm has accounted for a significant portion of activity, leasing more than 2 million square feet of office space in Richardson and Las Colinas in the past year.

Banks and financial firms, including Frost Bank, Wells Fargo, Capital One and USAA, are expanding as improving economic conditions support lending and investment activity. With a 500,000-square-foot expansion by Denbury Resources in Plano and the growing presence of Crosstex Energy and Alon USA in Dallas, it is clear that the new energy boom is a positive for North Texas offices too. Leasing activity among technology firms is strong with Ericsson’s new building underway at its Plano campus being the most notable, although smaller software and telecom companies are also expanding, such as Hawkeye Communications in Uptown Dallas.

Overall office vacancy in Dallas/Fort Worth has fallen 210 basis points (bps) from its peak in 2010. While this is certainly a strong recovery, it belies the strength of the city’s top five submarkets: Uptown/Turtle Creek, Richardson/Plano, Las Colinas, Far North Dallas and Preston Center, which have all seen vacancy declines of 300 bps or more in just the last 15 months with Uptown/Turtle Creek leading the pack at 640 bps. The previously discussed expansions go a long way to explain improvement in the corporate campus-heavy submarkets of Richardson/Plano, Las Colinas and Far North Dallas and Preston Center is typically tight given its prestige and limited inventory.
Uptown is emerging as a top office location on the intersection of two key themes: office employees increasingly want an infill, live/work/play environments and tenants are looking for high-quality, efficient space. Expanding Arts District offerings and the Klyde Warren Park are quickly adding amenities to attract office tenants and residents, which total 35,799 people, according to the 2010 Census, up 27 percent since 2000. Uptown also added about 2.5 million square feet of new office space during the same period, which has attracted tenants not only for higher quality space, but also for efficiency in terms of layout and energy usage. For further evidence of the trend toward quality space, Class A properties have led net absorption across the Metroplex.
With leasing uneven across quality segments and submarkets, overall rents have been relatively stable during the past few quarters, despite movement in Class A rents. Uptown/Turtle Creek rents are moving quickly as availability dwindles and, along with Preston Center, leads the market with the highest average asking rents. Far North Dallas is also beginning to gain traction in rental rates.
The strong performance in fundamentals has awakened investor interest on the acquisitions front, particularly within the strongest submarkets that exhibit core location characteristics. Legacy and Preston Center have each seen significant properties trade and institutional buyer interest in them has been very strong. Pricing has been robust, as buyers underwrite expected rental rate appreciation and the favorable debt environment aids in leveraging desired returns.
The remainder of 2013 is expected to continue along the same trajectory as we have seen so far this year. Continued improvement in the market fundamentals will track expected employment gains in the area. A liquid capital markets will remain focused on the core submarkets in Dallas, but should begin to pay attention to the better quality suburban assets that offer attractive risk-adjusted returns. As long as the development cycle continues to be muted, the Dallas office market will likely outperform many other parts of the country.
— Gary Carr, vice chairman; John Alvarado, senior director; and Sara Rutledge, director of research and analysis, all with CBRE Dallas.

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