TEXAS SNAPSHOT, MARCH 2012

DALLAS OFFICE MARKET

2011 was a good year for the Dallas office market with above average demand, minimal new construction and two quarters of rising overall asking rates. If you look at the Dallas office market since 2001, a typical year net absorption is usually about 800,000 square feet. In 2011, the Dallas market recorded more than 1.6 million square feet. New construction (excluding owner-occupied properties) averaged 2.5 million square feet for that same time period, but a little more than 200,000 square feet was completed in 2011.

Still, the overall total vacancy rate remains higher than normal at 22.5 percent. Keep in mind that Dallas, with its abundance of land and pro-development climate, rarely dips below 20 percent vacancy. The average total vacancy since 2001 is 21.4 percent. Typically if it nears 20 percent, the construction cycle picks up again and more new product is brought to the market.

That’s about where the market is headed at this point. Developers have not made any official announcements for new construction yet, but more than a few are prepared to break ground on potential projects in a few submarkets (Far North Dallas and the Dallas CBD being two of the more likely submarkets).

Unless there is a substantial weakening in demand for office space, the first speculative project is likely to begin construction near the end of the year. Office properties typically take a couple of years to complete, so any new construction on the horizon will likely not impact market fundamentals until 2014 or later.

In the meantime, look for a further segmentation of the primary Dallas office submarkets.

For the nine primary Dallas submarkets, they can be currently segmented into three tiers from a market fundamentals standpoint. The three submarkets in the top tier (Far North Dallas, Uptown and Preston Center) have higher occupancy and rental rates than the metro average (they also have a higher concentration of Class A product). They’re currently driving the market from a rent rate growth perspective. As they reach higher occupancy rates, look for rates to rise and demand to shift to alternative submarkets (especially for large occupiers which will have fewer options for space to lease).

The next tier is Las Colinas, Central Expressway and Richardson/Plano. Rates are largely flat at this time for these submarkets, but should begin to rise in the next few quarters. There is limited availability of space in Central Expressway, but look for Richardson/Plano and Las Colinas to have strong net absorption in 2012.

The last tier includes the Dallas CBD, LBJ Freeway and Stemmons Freeway. These submarkets face long-term challenges, and in most cases will need further capital improvements before rental rates are likely to rise significantly. For LBJ, the timeline is the next 5 to 6 years, when the freeway construction project is completed. For the Dallas CBD, it’s likely shorter. Stemmons, outside of the medical district, really doesn’t have a timeline tied to it.

Almost all indicators point to a measured, methodical improvement in market fundamentals until additional new product is brought to the market. With only a single project currently under construction (Encana’s build-to-suit in Far North Dallas), the market should be shifting from a tenant-favorable market to more neutral conditions for the short term. Longer term, the market is expected to see moderate rental rate growth until speculative construction is delivered, which should be somewhere in the next 24-36 months.

— Steve Triolet, Research Manager at Jones Lang LaSalle in Dallas

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