DALLAS—PM Realty Group recently issued its second quarter market report for the Dallas/Fort Worth office sector. The area is characterized by significant new construction, rising asking rates and notable rent growth in more than half the submarkets.
The industry is exploding at the moment, with the construction pipeline increasing by 309% over the last year, to more than 5.4 million square feet under development. And even with all that new space, nearly 70% of the space has already been pre-leased. In this quarter alone, more than 1 million square feet of new construction entered the market.
PMRG’s EVP Kurt Cherry shared with GlobeSt.com his thoughts on the report’s findings and the current state of the local office market.
GlobeSt.com: What was the most surprising finding of the report?
Cherry: The North Texas regional economy has captured national attention as a powerhouse for economic growth as local companies expand their payrolls at an accelerated pace and corporate users relocate to the area from other markets. The recent announcement by Toyota to relocate their US sales and distribution headquarters from Torrance, CA to Plano has generated a lot of buzz, with more companies likely to follow their footsteps.
Bolstered by a strengthening job market, DFW’s office market recorded 460,495 square feet of direct net absorption during the second quarter of 2014, bringing the trailing 12-month total to 3.2 million square feet. As a result of the strong leasing demand, occupancy levels have climbed to an 11-year high and asking rents have inched up to their highest level since 2008.
The noticeably improved leasing fundamentals have prompted several developers to move forward on construction projects in recent months. The increased volume of ground breakings during the second quarter pushed office space under construction to a six year high of 5.4 million sq. ft. (excluding corporate-owned projects). Although these figures may seem high to some with construction levels currently 84% above its 10-year historical average, the good news is that roughly 70% of this new space is already pre-leased with just over half of the new projects being build-to-suit developments.
GlobeSt.com: Do you foresee these favorable conditions continuing for some time?
Cherry: The leasing market is expected to remain a landlord favorable setting in the most desirable submarkets, which include Frisco, Preston Center, Uptown/Turtle Creek, Las Colinas and Upper Tollway/West Plano. Sustained demand for quality space should result in moderate rental rate growth in the top performing submarkets as quality space options remain limited.
However, relief is on the way with much of the new construction concentrated in the northern Dallas suburban submarkets, which will begin to shift the currently landlord favorable conditions to a more balanced scenario for corporate users looking for space.
GlobeSt.com: Where do you expect to see the market in a year’s time?
Cherry: The current pace of job growth is expected to continue throughout 2014 and forecasted to improve significantly for 2015, translating into strong leasing demand for the numerous construction projects coming online.
Office market fundamentals will steadily improve resulting from corporate relocations and expansions as companies are attracted to the metro area’s business-friendly environment with relatively lower business costs and a well-educated labor force.
Even though leasing velocity has exhibited signs of slowing down in recent months largely due to tightness in the most desirable submarkets, there are a growing number of large tenants evaluating potential expansions, relocations and renewals well in advance of their lease expirations. For instance, Google is considering a 1 million sq. ft. regional office in the Dallas area, JPMorgan Chase is seeking up to 1.4 million sq. ft., Caterpillar is mulling a 1 million sq. ft. relocation, and financial services firms Charles Schwab, TD Ameritrade, and Fidelity are each looking for 300,000-square-foot regional offices (except for Schwab, which is considering relocating their headquarters from San Francisco).
GlobeSt.com: Is there room in the market for all the new construction underway and in the pipeline?
Cherry: The current construction pipeline seems appropriate to accommodate near-term demand growth projections but speculative construction activity could begin to challenge the market beyond 2015. For 2015, there is currently approximately 4.2 million square feet of new product expected to come online, with approximately 83% of this space already pre-leased. As a result, there still appears to be some room for additional new construction but in well-located areas with great infrastructure and amenities.