Savills Studley Report Dallas/Fort Worth office sector Q4 2018 Savills Studley Research Dallas/Fort Worth SUMMARY Market Highlights LEASING DECLINES Quarterly deal volume fell for the second quarter in a row, dropping from 3.5 msf (million square feet) to 3.2 msf. Tenants leased just over 14.3 msf in 2018, a sharp increase from the 13.5 msf leased in 2017. AVAILABILITY FALLS The region’s overall availability rate dipped by 30 basis points, declining to 24.7%. The continued flight to quality pushed the region’s Class A availability rate down by 60 basis points to 24.2%, the second quarter in a row with a decrease of this amount. LITTLE CHANGE IN RENT The overall asking rent was essentially unchanged, ending the year at $24.23, but jumped by 2.5% year on year. The average Class A asking rent rose to $26.64 and has jumped by 2.3% year on year. SALES DOWN Office property sales during the first eleven months of 2018 totaled $3.8 billion, a 11% decrease compared to the same period of 2017. "The Metroplex’s economy and office market seem to show few signs of losing momentum. A steady influx of companies from other markets and strong local growth have kept activity aloft. The housing market is starting to lose traction, though, as supply starts to outstrip demand and the capacity of households to afford down payments and interest." Frank McCafferty, Executive Managing Director
LEASING DECLINESQuarterly deal volume fell for the second quarter in a row, dropping from 3.5 msf (million square feet) to 3.2 msf. Tenants leased just over 14.3 msf in 2018, a sharp increase from the 13.5 msf leased in 2017.
AVAILABILITY FALLSThe region’s overall availability rate dipped by 30 basis points, declining to 24.7%. The continued flight to quality pushed the region’s Class A availability rate down by 60 basis points to 24.2%, the second quarter in a row with a decrease of this amount.
LITTLE CHANGE IN RENT The overall asking rent was essentially unchanged, ending the year at $24.23, but jumped by 2.5% year on year. The average Class A asking rent rose to $26.64 and has jumped by 2.3% year on year.
SALES DOWNOffice property sales during the first eleven months of 2018 totaled $3.8 billion, a 11% decrease compared to the same period of 2017.
"The Metroplex’s economy and office
market seem to show few signs of losing
momentum. A steady influx of companies
from other markets and strong local growth
have kept activity aloft. The housing market
is starting to lose traction, though, as supply
starts to outstrip demand and the capacity
of households to afford down payments and
interest."
Frank McCafferty,Executive Managing Director
02
Savills Studley Report | Dallas/Fort Worth
Businesses Beat Well-Worn Path To Dallas
The Dallas/Fort Worth region continues to see robust leasing as the flow of businesses from California and West Coast shows little signs of stopping. The residential and commercial development proliferating across West Plano and Frisco, and continued growth of Uptown and nearby Arts District, can be attributed largely to major business movement to the region. In the last couple of years, Las Colinas and Plano have also captured extensive movement.
The overall regional economy and office market stayed on a steady path of expansion during 2018. The Metroplex gained 109,000 jobs in the last 12 months, a 3.0% increase. The region added 37,800 office-using jobs (a 3.5% increase) during the same period. Both rates were well above more anemic national growth.
Dallas lost out on the Amazon stakes, but it may have taken little notice as the flow of firms into the region remained steady. McKesson Corp., the nation’s largest pharmaceutical distributor, recently announced that it will relocate its headquarters from San Francisco to Irving in April. This is just the latest in a steady stream of moves from California to Texas. The company, which delivers prescription drugs and medical supplies, has more than 75,000 employees globally. Revenue totaled $208 billion last year. It ranks sixth on the Fortune 500 list and pushes Dallas-Fort Worth's roster of Fortune 500 company headquarters to 22 companies. Additionally, global medical tech firm DJO is relocating its corporate headquarters from California to North Texas.
Development Spreads
West Plano and Frisco have captured much of this movement by West Coast firms. The two towns have seen a combined total of 14.1 msf in new construction delivered since 2010 and still have another 2.0 msf underway. Now that the Toyota, Liberty Mutual, and JPMorgan Chase campuses (all in Legacy West) are complete, the next round of build-to-suits include facilities for American Airlines (Fort Worth), Pioneer Natural Resources (Irving Las Colinas), Charles Schwab (Westlake), and AmerisourceBergen (Carrollton), to name a few. Excluding single-tenant buildings, 2.2 msf is underway with 50% pre-leased.
Uptown Dallas, one of the metro's strongest and most appealing office markets, is adding to its stock of trophy buildings. Kaizen Development Partners is building The Link at
Generational Group LLC 30,794 3400 N Central Expy Richardson Telecom Corridor
X Coworking I LLC 30,000 6735 Salt Cedar Way North Dallas Corridor
Common Desk 26,676 14555 N Dallas Pky North Dallas Corridor
Sum of Leases 502,989
Uptown, a 300,000-sf trophy office tower at the intersection of Olive and Akard streets. The 22-story building will be erected on a 0.7-acre site Kaizen purchased in October from local restaurateur Mike Karns. Uptown is one of the few areas in the region that is short on developable land. Kaizen will demolish several buildings on the site to make way for the trophy tower. The building is expected to deliver in 2021.
Active CBD
Earlier in this cycle, transplants and local firms focused largely on Far North Dallas and Uptown, but the Dallas CBD is also attracting some sizable relocations and expansions. For example, AT&T announced that it will remain at its headquarters in the CBD and hire more 1,500 employees in the next few years. Jacobs Engineering added hundreds of jobs at its Downtown Dallas location as it relocated its headquarters from Southern California. In other major moves, Goldman Sachs consolidated most of its local operations into 175,000 sf at the Trammell Crow Center, and Steward Health relocated from Boston into 67,000 sf at 1900 Pearl in early 2018.
These relocations and steady local organic growth support strong leasing activity. Deal volume has been steady in Dallas, averaging just over 3.0 msf three consecutive quarters a row. With leasing activity on par with its historical average and construction activity still elevated, availability rates are not falling as sharply as in prior quarters. The region’s overall availability rate ended 2018 with a rate of 24.8%, down from the prior quarter, but up by 20 basis points from a year ago. Availability rates are all over the map, though. The Dallas CBD has availability rates exceeding 30%, the highest in the market. In contrast availability in Uptown is below 25% and Preston Center is among the lowest at 14.2%. Tenants looking for block of 100,000 sf or more, have ample options to consider, particularly in downtown the Dallas CBD, Las Colinas and north Dallas locations.
Strong Investor Demand
With pricing in core coastal markets such as Boston, New York and San Francisco rising over the past few years, institutional investors have increasingly turned to less expensive secondary markets in search of higher yields. This continuing shift of capital has driven up pricing in the Metroplex and in
some cases set records. Fannie Mae's new 324,100-SF campus at Granite Park sold in September 2018 for $163 million – setting a
record ($503/sf) on a price per square foot basis. The buyer, Union Investment, has been active in the Metroplex, acquiring 2000 McKinney in 2016.
Housing Market Flags
The region has enjoyed a well-balanced recovery for most of this cycle with lenders and developers keeping a hold on runaway construction. In contrast to prior cycles, lenders did not overlend and developers did not overdevelop. The local market is losing some momentum. This could be a red flag for the office sector. Pricing has slipped as more buyers struggle to afford rising mortgage rates and to arrange down payments. The Metroplex has shifted rather rapidly from a market with some of the strongest appreciation in home prices during 2016 and 2017, to one with steady price declines Price reductions are occurring at multiple ends of the market, both in luxury homes and entry-level housing as well.
At the national level home sales have fallen
on an annual basis for eight straight months. This is the longest slump in four years according to the NAR. with sharp declines n Seattle, Denver, NYC, Boston and Bay Area. Pricing growth has outstripped wage growth and the capacity of homeowners to arrange financing. Rising interest rates exacerbate the affordability issues. Unless wage growth intensifies home prices in most markets probably peaked some time ago. This spells trouble for buyers who bought at the top of the market. As rates rise buyers lower their budget. Builders in turn have to lower their costs – in this case has to be land, construction costs are not falling.
In other markets, the subprime market implosion of 2007 and 2008 was a leading indicator of the financial debacle that was to follow. The woes of housing sales may in fact be connected to some maintenance of stricter lending standards. Of note, though, there is some talk in the nation’s capital of loosening those lending requirements.
