TEXAS SNAPSHOT, JANUARY 2006

Dallas Office Market

The Dallas office market has a very positive outlook coming into 2006, according to Zaya Younan, chairman and CEO of Younan Properties. “There will be significant office employment migration into the Dallas market, which will strengthen the positive absorption momentum and increase occupancy going forward,” he says.

There is a significant migration of major national firms to Dallas. “The city is extremely popular with corporate America because of its low cost of living and great infrastructures for doing business,” Younan says. “We've seen significant organic growth, with existing tenants expanding, as well as significant positive momentum with financial institutions and the high-technology sector.” The North Central submarket — with the completion of the Dallas High Five Interchange Project, the largest North Texas construction project in the 75-year history of the Texas Department of Transportation — is now one of the strongest markets going forward, with a notable migration of tenants.

The construction of new office product is currently slow in Dallas because the market is still soft, and construction costs have increased by more than 28 percent during the past year, according to Younan. “Not much is likely to take place in the near future because of the high cost of construction materials and the fact that lenders are finding it difficult to justify construction financing when so many properties are selling below their replacement cost,” he says.

There is no significant migration of new developers to Dallas, and new developers aren't expected to enter the market until late 2006. “All the lenders have learned their lesson from past soft monetary allocation, so they are very cautious,” Younan says.

Class A rental rates have increased recently and are now between a low-$20 to mid-$20 per square foot range. Depending on the market, vacancy rates in suburban markets have hovered around the mid-teens.

“Dallas is a market that has been oversold in the past, but is now stabilizing,” Younan says. “Today it's one of the few primary office markets in the country where fundamentals are ahead of pricing, which will create an upside for investors.”

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