DFW Office Market Faces Rising Vacancy and Diverging Class A & B Trends Amid Flight to Quality

EXECUTIVE SUMMARY

Q4 in Review

The Dallas-Fort Worth office market remained stable in Q4 2024, with the total vacancy rate unchanged at 25.2%, though up 20 basis points year over year. The flight to quality continues to shape market dynamics, as tenants favor newer, amenity-rich properties in Uptown and northern suburban submarkets over older buildings in areas like the Dallas CBD, Mid-Cities, and LBJ Freeway, which have some of the highest vacancy rates. Leasing activity held steady at 3.8 million sq. ft., with notable leases including Halff’s 84,000 sq. ft. lease at Galatyn Commons and GI Alliance’s 52,265 sq. ft. lease at Cedar Ridge Office Park. However, net absorption turned negative for the quarter at -132,955 sq. ft., driven by ongoing weakness in Class B properties, which saw -842,152 sq. ft. of absorption for the year, in contrast to the 1.1 million sq. ft. of positive demand for Class A properties.

Construction deliveries for the quarter totaled 682,531 sq. ft., down significantly from the previous quarter, reflecting a broader decline in the development pipeline, which now stands at 2.9 million sq. ft., down 49% year over year. Rental rates remained essentially flat at $30.85 per sq. ft., with Class A rates near record highs at $33.79 per sq. ft., while Class B rates continued to decline, now averaging $23.90 per sq. ft.

DFW Economic Update

Employment in DFW dipped in November after holding steady in October. Job growth was sluggish (1.0% annualized growth, or 11,000 jobs) but broad based across the major sectors for the three months ending in November. The strongest gains were in financial activities and information, while employment slipped in manufacturing and professional and business services. The unemployment rate in DFW was unchanged at 4.0% in November. The Dallas−Fort Worth economy slowed in November. Employment fell slightly, and unemployment held steady at 4%.

MARKET OVERVIEW

Due to muted deliveries and a pull back in demand for the total vacancy rate unchanged for the quarter at 25.2%, but has increased 20 basis points over the past year. Submarkets with generally older inventory like the Dallas CBD, Mid-Cities and LBJ Freeway have some of the highest vacancy rates (31.6%, 27.8% and 25.5%, respectively) as tenants have gravitated toward newer properties with more amenities, which are more highly concentrated in Uptown and other northern suburban submarkets.

Construction Deliveries were Elevated for the Quarter

Construction deliveries for the quarter came in at 682,531 sq. ft., this is down 62% from the 1.8 million sq. ft. completed in Q3 2024. The under construction pipeline has been declining over the past few quarters and currently stands at 2.9 million sq. ft., this is down 49% over the past year. Most of the under construction pipeline is concentrated in Uptown (66%) and the most of the remainder is in the northern suburban submarkets (Far North Dallas and Richardson/Plano).

Leasing Down Largely Unchanged for Both Quarter and Year Over Year

Quarterly leasing velocity—which is comprised of both new leases and renewals—stood at 3.8 million sq. ft. during Q4 2024—this was only marginally below (-0.2%) below last quarter and little changed from Q4 2023 (down 1.7%). Notable lease transactions in late 2024 include Halff signing a 84,000 sq. ft. lease at Galatyn Commons, GI Alliance signed a 52,265 sq. ft. lease at the Cedar Ridge Office Park, and Paul Hastings LLP signed a 37,000 sq. ft. lease at 3311 Knox St.

Net Absorption Turned Negative for the Quarter, Flight to Quality Continues

Net absorption—move-ins minus move-outs— was a negative 132,955 sq. ft. in Q4 2024. For 2024 as a whole, net absorption totaled 228,752 sq. ft. Flight to quality was a continued trend through most of 2024, with Class A properties having over a million sq. ft. of positive absorption (1,070,904 sq. ft.), while Class B properties continued to see negative demand, posting a -842,152 sq. ft. Notable move-ins in late 2024 included Foot Locker taking 47,361 sq. ft. of sublease space at Cypress Waters Office Park and Dynamic SLR taking 33,388 sq. ft. at Campbell Creek Pavilion.

Investment Sales Trends

CoStar Capital Market Analytics reports the cumulative 12-month sales volume at $277 million in the DFW office market. With 195 deals completed, the average transaction price currently stands at $118 per sq. ft. with an average cap rate at 8.3%. Notable recent sale transactions in late 2024 include Real Capital Solutions purchased the Tower at Park Lane, the property is a twenty-story 509,818-square foot office building that sold for $129 per sq. ft. and was 54% leased at the time of the sale. Also, Provident Realty Advisors purchased the Lakeside Campus. This 807,354 sq. ft. portfolio was 69% leased at the time of the sale.

Overall Rental Rates Flat as Class A and Class B Rates Continue to Move in Separate Directions

The annual rental rate for the DFW office market is $30.85 per sq. ft., up 0.4% over the past quarter and essentially flat year over from $30.82 per sq. ft. from Q4 2023. 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 $33.79 and Class rates at $23.90 per sq. ft.

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