Is Dallas Still a Secondary Market for CRE Owners?
Dallas has become one of the fastest growing markets in the country for office space, thanks in large part to stellar job growth. Yet that appetite for space also unleashed a wave of construction that the market is now scrambling to absorb.
98,700 new jobs
The big story in Dallas is jobs. Not only has the metro area grabbed attention for being one of the national leaders for employment growth, but it also has enjoyed success in nabbing a number of high-profile corporate expansion and relocations ranging from Toyota to FedEx. The Dallas-Fort Worth MSA currently ranks third in the country for its job growth with 98,700 new jobs created year-to-date through September, according to the Bureau of Labor Statistics. DFW also boast an unemployment rate of 3.9%, which is below both the state and national averages of 4.4 and 5% respectively.
As that job growth suggests, the city’s economy has been booming along. The Brookings Institute has recognized the Dallas MSA as one of the 75 fastest growing economies in the world. The metro area boasts 21 Fortune 500 companies and 41 Fortune 1000 companies, as well as more than 650 headquarters operations that employ at least 1,000 globally. Added to that, Dallas has escaped the brunt of the blow from the drop in oil prices with a diverse economy that has only a small percentage of its overall base devoted to oil and gas.
Deluge of new space
Those economic stats certainly create an attractive backdrop for the DFW office market that currently spans about 127 million square feet. So much so that ULI named it as the top market to watch in 2016.
Unfortunately,it’s not all smooth sailing. The office market is facing a deluge of new space amid a building boom that has included both new corporate campuses and spec office projects. DFW is expected to deliver about six million square feet of new space this year, which is up from the 3.7 million square feet that was completed in 2014, according to Marcus & Millichap.
Most real estate firms can agree that the Dallas market has a healthy appetite for that space with strong leasing activity and absorption. However, while the market is booming, the construction increase might be a little too large: overall numbers remain elevated with third quarter estimates ranging between 14.9 to 16.5% and more new space in the pipeline.
Several major build-to-suit projects have been completed this year or are under construction, notably new corporate campuses for State Farm and Raytheon in Richardson, as well as a new FedEx headquarters in Plano. Those completions will spark some reshuffling and bring added space to the multi-tenant market as companies relocate from existing facilities. For example, State Farm is expected to vacate about one million square feet of temporary office space in Richardson.
It remains to be seen how much of a toll that construction will have on vacancies as the market works to absorb the new space. Although vacancies are almost on par with the national office vacancy rate, which reached 16.5% in third quarter, it is important to point out that the DFW market continues to see healthy rent growth. Class A asking rates rose 5.9% to $27.88, which is an all-time high for the market, according to Cushman & Wakefield.
On the map for investors
The rent growth and strong economic outlook have put DFW firmly on the map for investors. Dallas reported $2.8 billion in office sales during the first three quarters of the year, which is up slightly from the $2.5 billion in transactions that occurred during the same period a year ago. Major trophy properties that have sold this year include the 2100 Ross Tower in Downtown Dallas, which sold for $131 million by Cousins Properties to a local buyer. The 1.2 million square-foot Plaza of the Americas also is reportedly under contract and expected to close by year-end.
Dallas does have good momentum that will likely continue into 2016. The metro has been enjoying robust leasing activity with overall net absorption for the first three quarters of the year at 4.0 million square feet — a 51% increase over the same period a year ago, according to Cushman & Wakefield. Major leases signed during Q3 included GEICO and MetLife among others. Yet the chief task ahead for DFW will be to continue to chip away at the new supply of space that has been added — and is still on its way.