Tough times still ahead for Dallas office market.

by admin

“Are we there yet?” seems to be the big question with the Dallas/Fort Worth office market. The most likely answer is no, there is still tough times ahead. The Dallas/Fort Worth (DFW) Metroplex refused to participate in the recession for most of 2007 and 2008, but the fourth quarter of 2008 started a down trend that has so far continued in the first quarter of 2009. Sales volume is down, rental rates are down and vacancies are up.

National annual sales volumes for office properties peeked at nearly $208 billion in 2007 to be followed by a drop of 75 percent in 2008 according to Real Capital Analytics. Sales volume for office investments held up slightly better in the Dallas market decreasing only 65 percent in 2008 as the credit markets began tightening.

The rental rates and vacancy percentages held up much better in the DFW Metroplex than did the national averages. According to CoStar DFW hit its high vacancy rate in mid 2003 around 18 percent. Since that time it has steadily dropped with 2007 and 2008 remaining fairly stable at slightly above 16 percent. In 2007 and 2008 the Metroplex added 11,278,582 square feet of new office space yet during that same time period there was a positive absorption of 8,471,061 square feet. However the first quarter of 2009 ended 22 quarters of net positive absorption.

DFW Metroplex and Texas has a lot going for it. DFW is the fastest growing Metroplex in the nation. In the last 5 years Texas created 1.2 million new jobs and the job growth is still positive today. CNBC named Texas as the #1 state for doing business. These factors and more have kept the office market healthy up till now. The future is still bright, but there will be softening of rental rates due to the economy and a slight amount of overbuilding.

The joke in the 1980s was that Texas had a new state bird and it was the crane because everywhere you looked there was construction cranes. Today the overbuilding is nowhere near that level, perhaps because of the memories of so many see-through buildings and the years it took to absorb the empty space. We see no new construction starts on the horizon, but there is about 4 million square feet under construction today. The good news is that about 50 percent of that space is already preleased. The bad news is that vacancy rates are on the rise due to the economy and the additional space will only serve to push vacancies higher and rental rates lower.

In the last 6 months tenants have started to feel the effects of a slowing economy. Consumers are spending less, capital is expensive if even available and many companies are finding it necessary to downsize. Landlords are starting to offer concessions to get new tenants and existing tenants are asking for rate reductions on their renewals. In many cases tenants are asking for short term renewals because they are uncertain about their future or they think that rental rates will be much lower a year from now.

The DFW Metroplex is not as robust as a year ago, but investors and tenants are still finding value in the markets. In March 2009 KBS purchased Providence Towers. The 11-story Class A office tower contains 505,000 square feet, it was 87 percent leased with 47 tenants and was appraised on the county tax roles for $72 million. According to CoStar the two largest lease signings so far in 2009 include the 182,700 square foot lease signed by American Home Mortgage Servicing, Inc. at Point West in Las Colinas (Irving) and the 75,312 square foot lease signed by Texas Capital Bank in Lakeside Tower in Richardson.

Real estate always follows up and down cycles; the question is always are we at the bottom and how long will the current cycle last? The general consensus of real estate analyst and economists seem to think the economy and real estate will not get much better until 2010. The biggest problem for real estate may be the 140 billion of mostly CMBS loans coming due in the next 4 years. If the turmoil in the financial markets is not straightened out and capital made more available the real estate markets could experience difficulties for the next 4 or 5 years.

— David Cook, SIOR, is managing director of Sperry Van Ness | David Cook Company in Dallas.las.

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