Dallas-Fort Worth Office market: Vacancy rate drops as Class A demand surges
EXECUTIVE SUMMARY
Q3 2024 in Review
In the third quarter of 2024, the Dallas-Fort Worth office market demonstrated resilience, with strong demand for Class A space driving a positive net absorption of over 1.3 million sq. ft. and reducing the overall vacancy rate to 25.2%. New construction remains robust, particularly in Uptown and Far North Dallas, where over 70% of the 4.2 million sq. ft. in the pipeline is pre-leased. Leasing activity rose by 26% from the previous quarter, with significant renewals and new leases by Amazon, Wingstop, and Jones Day. Rental rates saw modest gains overall, yet the divide between Class A and Class B properties widened, with Class A rents reaching record highs, contrasting with declines in Class B rates.
Dallas Economic Update
The Dallas−Fort Worth economy expanded in August, with employment bouncing back from the declines seen the prior two months. Average hourly earnings held steady but were above year-ago levels. Mass layoffs so far this year trail 2023 figures. Home sales dipped in August, and home prices held steady in the second quarter. In August, DFW employment increased 6.2 percent annualized after contracting for two months. Job growth was strong across the board, including in professional and business services, leisure and hospitality, information and financial services. Employment rose in every sector except government.
MARKET OVERVIEW
Vacancy Rate Decreases
Due to strong demand for space, the vacancy rate dipped in the third quarter to 25.2%. This is down 40 basis points over the past quarter, but still an increase over the past year by 90 basis points. On a submarket level, the Dallas CBD continues to struggle from a vacancy rate perspective, with the total vacancy rate being the highest in the metro area at 32%. The Fort Worth CBD in contrast has a vacancy rate of 15.2%, well below most of the suburban submarkets.
Construction Deliveries were Elevated for the Quarter
Construction deliveries for the quarter came in just over 1.8 million sq. ft., this is up 29% from the 1.4 million sq. ft. completed in Q3 2023. The under-construction pipeline remains high at 4.2 million sq. ft., but most of that space (70%) has been pre-leased. Almost all of that construction is concentrated in two submarkets (Uptown and Far North Dallas) at 2.2 million sq. ft. and 1.2 million sq. ft., respectively.
Leasing Down 9% From Previous Quarter
Quarterly leasing velocity—which is comprised of both new leases and renewals—stood at 3.8 million sq. ft. during Q3 2024—up 26% from the 3 million sq. ft. in Q2 2024. Year-to-date, leasing activity registered at just over 10 million sq. ft. Notable recent transactions include Amazon renewing their 241,618-sq.-ft. lease at Two Galleria Tower; Wingstop signing a 112,000-sq.-ft. lease for their new headquarters at One West Village; Onsemi signing a 97,496-sq.-ft. lease at 505 Millennium Drive; and Jones Day signing a 73,359-sq.-ft. lease to be the lead tenant for the yet to be built Harwood 15 in Uptown.
Net Absorption Turned Positive
Net absorption—move-ins minus move-outs—showed strong demand with 1,363,852 sq. ft. for Q3 2024. The positive net absorption was concentrated in Class A properties. Class B demand remained negative. For the year so far, Class A properties have seen 1,424,652 sq. ft. of positive net absorption, while Class B properties have recorded negative 1,062,945 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 Workbox taking 52,038 sq. ft. at Victory Plaza West.
Investment Sales Trends
CoStar Capital Market Analytics reports the cumulative 12-month sales volume at $80.5 million in the DFW office market. With 162 deals completed, the average transaction price currently stands at $128 per sq. ft. with an average cap rate of 8.2%. Notable recent sale transactions include Slate Asset Management purchasing Comerica Bank Tower from a joint venture 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, Capital Commercial purchased 750 W John Carpenter Freeway from Piedmont. The 317,714-sq.-ft. property was only 42% leased 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 $30.73 per sq. ft., up 1% year-over-year from $30.42 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 $33.66 and Class rates at $23.65 per sq. ft.
Steve Triolet
SVP of Research and Market Forecasting
tel 214 223 4008
[email protected]