No Red Flags Flying Over Construction Pace

Although bean-counting methods differ, office groups say the sector's vacancy citywide is 20%, putting Dallas in the third highest slot in the US. Nonetheless, the absorption--pushing above three million sf for two consecutive years--is predicted to happen again this year. And, they say, the Uptown and Downtown projects in Dallas and Fort Worth are welcome sights to a large degree because so much class A space has been absorbed.

Likewise, industrial movers and shakers say the 15 million sf that's underway isn't destined to create turmoil with vacancy, which is now averaging 10% in the region. The only difference between the two sectors is rent growth, but the prognosis is that industrial will tick up just slightly again this year. Office rates rose 6.5% in the past year.

The positive reading came from a NAIOP panel at its monthly meeting at the Dallas Country Club in Highland Park. The featured attraction, moderated by Bill Cawley of GVA Cawley, had Randy Cooper, executive director of Cushman & Wakefield of Texas Inc. and Phil Puckett, managing director of CB Richard Ellis, taking the pulse of the office market and Tom McCarthy, executive vice president of Staubach Co. and Rick Medinis, executive vice president of NAI Robert Lynn, giving the industrial reading.

The average office rents in regions and CBDs show there's room for growth when pitted against the national average. On a regional basis, DFW is $18.28 per sf while the US is $23.33 per sf. The Dallas CBD is $18.20 per sf while Fort Worth's scarcity of product has pushed its rate considerably higher and is more in line with the $27.97 average for CBD space nationwide.

But, the office duo says there is room for concern because on the face Uptown alone is generating a three-year supply. Uptown's new buildings, with rents pushing $35 per sf to $40 per sf, are putting significant pressure on Downtown buildings in several ways: newer floor plates, higher efficiencies and skilled owners who know the lay of the land. Puckett says the telling, though, is in the preleasing as more and more CBD tenants are tempted to shift, regardless of rate, to get a spot in one of trend-setting high rises rising in Uptown and being able to cut space in the process due to more efficient floor-plate designs.

Downtown buildings not only are older, but Cooper says he is concerned about the crop of new buyers. "Tenants are looking for landlords to be landlords," he says. "A lot of the new money flowing in doesn't really have a lot of real estate experience."

Industrial construction too is practically at an all-time high. "Everyone has a building going up and," Medinis reports, "they have people looking at it." The second half of 2006 accounted for 90% of the double-digit absorption, which ranges from 12 million sf to 16 million depending on the brokerage house that's doing the calculation.

McCarthy points out that the new wave of space, though, is "cutting edge construction." Clear heights are higher, truck courts are larger and so is the trailer storage area--all must-haves in today's world of trucking regulations.

The change in warehouse designs and rising construction costs are having their impact on quotes. "The days of $2.80 and $2.90 per sf bulk rates are over," McCarthy says.

McCarthy predicts existing rents will hold steady for the balance of the year because of the amount of options in new and old product. "Good credit tenants will get the best rates," he adds. "We are negotiating TI packages more than anything else."