Asking average rent reaches all-time high in Dallas Office market.

EXECUTIVE SUMMARY

Q2 In Review
By the end of Q2 2023, the overall vacancy rate in the Dallas-Fort Worth (DFW) office market rose 40 basis points quarter-over-quarter, from 24.1% to 24.5%. The combination of new construction, downsizing, and tenants opting to sublease their existing space contributed to the increase in the vacancy rate. Net absorption improved quarter-over-quarter, up 72% from -1.4 million sq. ft. in Q1 2023 to -389,393 sq. ft. in Q2 2023. Deliveries surged quarter-over-quarter from 25,539 sq. ft. in Q1 2023 to 1.0 million sq. ft. in Q2 2023—with the Preston Center and the Far North Dallas submarket accounting for nearly 60% of the space delivered. Quarterly leasing velocity increased 6% from 3.1 million sq. ft. in Q1 2023 to 3.4 million sq. ft. in Q2 2023. The full-service average rate stands at $29.45 per sq. ft. in Q2 2023, up slightly from $29.22 per sq. ft. and expected stay within a $29-$30 range for the next three years.

Dallas-Fort Worth Economic Update
The DFW unemployment rate increased to 3.8% in May 2023, slightly up from 3.7% in April 2023. The metro’s jobless rate beat the national rate (3.7%) but was lower than the state’s rate (4.1%). As of May 2023, total employment in DFW was 4.2 million. The DFW private hourly earnings dipped to $33.77 in May 2023 from $34.40 in April 2023. However, the DFW three-month moving average for hourly earnings ($33.99) was above the state average ($31.21) and the national average ($33.32).

MARKET OVERVIEW

Negative Net Absorption in Q2 2023
In Q2 2023, net absorption—move-ins minus move-outs—improved quarter-over-quarter, up 72% from -1.4 million sq. ft. in Q1 2023 to -389,393 sq. ft. in Q2 2023. PepsiCo’s divisional office closure (251,478 sq. ft.) at 5600 Headquarters Drive was the largest move-out for the quarter. Goldman Sachs filling a 138,851-sq.-ft. office space at 717 North Harwood Drive in April 2023, and Dickies occupying a 83,687-sq.-ft. office space at 500 Taylor Street attributed to some of the largest move-ins for the quarter.

Preston Center and Far North Dallas Dominate Deliveries
Deliveries in the DFW office market reached 1.0 million sq. ft. at the end of Q2 2023. Quarter-over-quarter, deliveries surged from 25,539 sq. ft. in Q1 2023, and year-over-year deliveries increased 70% from 628,916 sq.ft. in Q2 2022. The Preston Center (8111 Douglas Avenue) and Far North Dallas (17 Cowboys Way) submarkets contributed 618,602 sq. ft.—or nearly 60%—of the office space delivered in Q2 2023. In June 2023, a 318,682-sq.-ft. office space was delivered at 8111 Douglas Avenue. Key tenants such as Lincoln Property (approximately 65,000 sq. ft.), Sewell Automotive (27,557 sq. ft.) and Tolleson (26,496 sq. ft.) have already pre-leased space at 8111 Douglas. In addition, a 299,970-sq.-ft. office space was completed at 17 Cowboys Way in April 2023. On the quarter, there is 2.8 million sq. ft. in the construction pipeline as of Q2 2023. Over the prior three years, construction averaged around 3.0 million sq. ft. annually.

Vacancy Rate Increases To 24.5%
The overall vacancy rate in the DFW office market is 24.5% in Q2 2023, up 40 basis points from 24.1% in Q1 2023. Class A and Class B properties have vacancy rates of 27.2% and 22.1%, respectively. Class A submarkets with the greatest quarter-over-quarter increases include: East Dallas (46.1% to 52.8%), Preston Center (9.4% to 15.3%), and Richardson/Plano (21.5% to 23.7%). Class B submarkets with the greatest quarter-over-quarter increases include: South Fort Worth (13.6% to 16.4%), Northeast Fort Worth (14.3% to 16.4%), and Lewisville/Denton (18.1% to 19.6%).

Leasing Up 6% Quarter-Over- Quarter
The volume of signed lease transactions during the second quarter—comprised of new leases and renewals—was 3.3 million sq. ft., up 6% from the previous quarter’s 3.1 million sq. ft. Some of the largest leases executed in Q2 2023 include: Atos SE signing a 141,000-sq. ft. office lease in Irving in June 2023, and Texas Air Systems inking a deal for a 103,546-sq. ft. office space in Irving in May 2023.

Investment Sales Trends
Year-to-date, CoStar Capital Market Analytics reports the cumulative 12-month sales volume for 2023 at $1.6 billion in the Dallas office market. With 395 deals completed thus far in 2023, the average transaction price currently stands at $163 per sq. ft. with an average transaction cap rate at 6.9%. By year-end of 2022, the cumulative 12-month sales volume was $2.8 billion, and 1,262 deals were completed with an average transaction price of $248 per. sq. ft. and an average cap rate of 6.4%. A notable acquisition within Q2 2023 included Pacific Elm Properties closing on a 22-story, 273,217-sq.-ft. office tower at 750 N Saint Paul Street financed with a $66.7 million loan in April 2023. Sales activity in Dallas-Fort Worth has slowed as rising interest rates have pushed the cost of debt higher.

Rent Growth Trends Upward
At the end of Q2 2023, the full-service average rate for the DFW office market reached an all-time high at $29.45 per sq. ft., up slightly from the previous quarter’s $29.22 per sq. ft., and the previous year’s $28.83 per sq. ft. Overall asking rates for Class A and Class B space are $32.82 per sq. ft. and $23.25 per sq. ft., respectively. During the quarter, submarkets with the highest asking rates include Uptown at $43.70 per sq. ft., followed by Preston Center at $43.29 per sq. ft. For the next three years, rent growth in the Dallas office market is expected to stabilize, averaging around $29.70 per sq. ft. annually.

Alex Babcock
Senior Research Analyst
[email protected]
tel 713 275 9618