Class A net absorption turns positive, but Class B continues to drag the market down

EXECUTIVE SUMMARY

Q2 2024 in Review
The Dallas-Fort Worth office market continues to face challenges with rising vacancy rate (25.6%) due to negative net absorption and new construction deliveries outpacing leasing demand. While the Dallas CBD struggles with high vacancy, the Fort Worth CBD remains resilient. Despite a decrease in construction deliveries, the under-construction pipeline remains substantial, primarily concentrated in Uptown and Far North Dallas. Leasing velocity declined, but notable large deals were signed. Net absorption remains negative, primarily affecting Class B properties, while Class A properties demonstrate positive performance. Investment sales volume is moderate, with a focus on repositioning office space. Rental rates are flat overall, with Class A rates increasing and Class B rates declining.

Dallas Economic Update
Employment in DFW rose 2.4% in May after climbing 4.8% in April. Job growth was mixed across the major sectors, with strong gains seen in construction, finance, and trade, transportation and utilities. Employment held largely steady in the education and health services and leisure and hospitality sectors but declined in information, professional and business services, and other services. The unemployment rate in DFW was unchanged at 3.8%.The Dallas–Fort Worth economy expanded in May. Employment growth remained strong but moderated from April’s brisk pace. Average hourly earnings held steady, above year-ago levels, and inflation ticked up in May. Home sales dipped in May, and home prices rose in the first quarter.

MARKET OVERVIEW

Vacancy Rate Continues to Increase
Net absorption—move-ins minus move-outs—emerged from negative territory at 116,102 sq. ft. in Q3 2023, up from -369,660 sq. ft. the prior quarter. Class A office space noted 415,354 sq. ft. of positive absorption, whereas Class B office space recorded -240,068 sq. ft. of negative absorption. Third quarter move-ins contributing to this increase include Tolleson occupying 26,496 sq. ft. of office space, and Sewell Automotive filling 27,557 sq. ft. of office space at 8111 Douglas Avenue. On the other hand, Haynes & Boone, LLP vacated 49,117 sq. ft. of office space at 2323 Victory Avenue, and Petroleum Club vacated 29,788 sq. ft. of office space at 777 Main Street (Fort-Worth) by the end of Q3. Year-to-date, net absorption is at -1.6 million sq. ft.

Construction Deliveries Decreased by 50% over the past year
Construction deliveries for the quarter came in just over half a million sq. ft., this is down 50% from the 1 million sq. ft. completed in Q2 2023. The under-construction pipeline remains high at 4.9 million sq. ft., but most of that space (65%) has been pre-leased. Almost all that construction is concentrated in two submarkets (Uptown and Far North Dallas) at 1.7 million sq. ft. and 2.2 million sq. ft., respectively.

Vacancy Rate Increases To 24.2%
The overall vacancy rate in DFW’s office market rose to 24.2%, increasing 20 basis points from the prior quarter (24.0%). Only 30% of year-to-date deliveries have been fully leased, contributing to the increase in the overall vacancy rate. Class A and Class B properties have vacancy rates of 26.8% and 22.0%, respectively. Class A submarkets with the greatest quarter-over-quarter increases include: Las Colinas (26.4% to 28.8%), Lewisville/Denton: (38.7% to 40.6%), and East Dallas (52.8% to 53.8%). Class B submarkets with the greatest quarter-over-quarter increases include: CBD Dallas (24.5% to 26.9%), Central Expressway (15.4% to 17.2%), and Lewisville/Denton (19.5% to 20.5%).

Overall, Net Absorption Remains in Negative Territory
Net absorption—move-ins minus move-outs—recorded a negative 315,597 sq. ft. for Q2 2024. Through the first half of 2024 net absorption has been a negative 1 million sq. ft. Almost all of the negative absorption in 2024 has been concentrated in Class B properties (1,050,511 sq. ft.) while Class A has recorded a positive 48,366 sq. ft. Recent notable move-ins include Inform Diagnostics taking 96,500 sq. ft. at 1111 Freeport, ScaleAI moving into 41,268 sq. ft. at Varispace Southlake and JPMorgan Chase expanding by 36,000 sq. ft. at Hunt Consolidated Tower.

Investment Sales Trends
CoStar Capital Market Analytics reports the cumulative 12-month sales volume at $94.4 million in the DFW office market. With 134 deals completed, the average transaction price currently stands at $115 per sq. ft. with an average cap rate of 8.3%. Notable recent sale transactions include Slate Asset Management purchasing Comerica Bank Tower from a joint between Pacific Elm and Trigate Capital. The purchase of the 1.7 million sq. ft. office property is part of a broader plan to convert millions of sq. ft. of office space in the Dallas CBD into about 1,100 residential units. Also, Brookfield sold Churchill Tower to TXRE Properties. The 277,187 sq. ft. office was 77% occupied at the time of the sale.

Rental Rates Flat as Class A Rises and Class B Falls
The annual rental rate for the DFW office market is $30.10 per sq. ft., up 0.6% year-over-year from $29.92 per sq. ft. Class A and Class B rates have been moving in opposite directions for quite some time now, with newer Class A at or near record highs, while commodity type Class B properties continue to see moderate rate declines. The delta between the two is expected to widen over the coming quarters with Class A rates currently at $33.53 and Class rates at $23.72 per sq. ft.

Steve Triolet
SVP of Research and Market Forecasting
tel 214 223 4008
[email protected]