The Far North Dallas Submarket Leads Leasing Activity and Construction in Q3

EXECUTIVE SUMMARY

Q3 In Review
By the end of Q3 2023, the overall vacancy rate in the Dallas-Fort Worth (DFW) office market rose 20 basis points, from 24.0% to 24.2%. Net absorption increased to 116,102 sq. ft., rebounding from -369,660 sq. ft. the previous quarter. Tolleson and Sewell Automotive move-ins contributed to the third quarter’s positive absorption. Year-to-date, net absorption is at -1.6 million sq. ft. Tepid demand continues in DFW’s office market as firms evaluate their need for office space. Leasing activity is at 3.0 million sq. ft., 13% down from 3.5 million sq. ft. the prior quarter. Meanwhile, construction rose 19% quarter-over-quarter to 2.9 million sq. ft. The Far North Dallas submarket accounted for 60% of Q3 construction starts, which included a 5-story, 500,000-sq.-ft. office building (TIAA Frisco Corporate Center) along Dallas Parkway in August. In addition, deliveries increased to 869,914 sq. ft.—nearly tripling from the prior year’s 328,145 sq. ft. Year-to-date, deliveries are at 2.0 million sq. ft. Lastly, the average asking rent stood at $29.48 per sq. ft.—a record-high for DFW’s office market.

Dallas-Fort Worth Economic Update
The DFW unemployment rate increased to 3.9% in August 2023, slightly up from 3.8% in July 2023. The metro’s jobless rate was higher than the nation’s rate (3.8%), and lower than the state’s rate (4.1%). As of August 2023, total employment in DFW was 4.2 million. DFW private hourly earnings dipped to $33.69 in August 2023 from $34.92 in July 2023.

MARKET OVERVIEW

Dallas Office Deal & Broker Spotlight
Dallas Investment Sales experts Hanes Chatham Jr. and Graham Dressel arranged the sale of a 4,539-sq.-ft. office building located at 3216 W. Arkansas Lane in Arlington, Texas. Mr. Chatham Jr. and Mr. Dressel represented the buyer, Real Greek Apparel, in the transaction.

Positive Net Absorption in Q3 2023
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.

Far North Dallas Dominates Construction
Office construction in DFW reached 2.9 million sq. ft., at the end of Q3 2023. Quarter-over-quarter, construction increased 19% from 2.5 million sq. ft., and increased 5% year-over-year from 2.8 million sq. ft. The Far North Dallas submarket contributed 1.7 million sq. ft.—or nearly 60%—of construction starts in Q3 2023. A notable project underway in the Far North Dallas submarket is a 5-story, 500,000-sq.-ft. Class A office building (TIAA Frisco Corporate Center) at 3951 North Dallas Parkway, which started in September. In addition, construction of an 8-story, 200,000-sq.-ft. Class A office building (Auspire at The Gate-Phase 2) along Dallas Parkway started in August. Located in Frisco, these two properties have a projected completion date of September 2026 and June 2025, respectively. Although down 25% quarter-over-quarter (1.1 million sq. ft. in Q2 2023), deliveries nearly tripled from 328,145 sq. ft. in Q2 2023 to 869,914 sq. ft. in Q3 2023. Year to-date, deliveries registered at 2.0 million sq. ft.

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%).

Leasing Down 13% From Prior Quarter
Quarterly leasing velocity—which is comprised of new leases and renewals—stood at 3.0 million sq. ft. —down 13% from 3.5 million sq. ft. in Q2 2023. Year-to-date, leasing activity totaled 9.9 million sq. ft. The Far North Dallas submarket accounted for 21% of leasing activity in Q3—which included The Haskell Company inking a deal for 25,845 sq. ft. of office space at 2591 North Dallas Parkway (Frisco) in July, and Alkami Technology, Inc. extending their lease for 83,939 sq. ft. of office space at 5601 Granite Parkway (Upper Tollway/West Plano) in September.

Investment Sales Trends
Year-to-date, CoStar Capital Market Analytics reports the cumulative 12-month sales volume for 2023 at $1.1 billion in DFW’s office market. With 610 deals completed thus far in 2023, the average transaction price currently stands at $218 per sq. ft. with an average cap rate of 6.9%. A recent acquisition in Q3 2023 included ATCAP Partners selling Gramercy Center—two office buildings totaling 256,155 sq. ft.—to Winhall Management Company in September. Gramercy Center South (134,400 sq. ft.) and Gramercy Center North (121,755 sq. ft.) are located at 18451 North Dallas Parkway and 18583 North Dallas Parkway, respectively. In addition, America’s Capital Partners sold Signature Exchange—two office buildings totaling 458,482 sq. ft.—to USAA Real Estate at 14755-14785 Preston Road also in September.

Record-High Asking Rents
DFW’s full-service average rate currently stands at $29.48 per sq. ft.—a record-high for the metro’s office sector—increasing slightly from $29.44 per sq. ft. the previous quarter. Asking rates for overall Class A and Class B space are at $32.91 per sq. ft. and $23.52 per sq. ft., respectively. On the quarter, submarkets with the highest asking rates include: Uptown/Turtle Creek at $44.01 per sq. ft., followed by Preston Center at $43.53 per sq. ft.

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