TEXAS SNAPSHOT, NOVEMBER 2010

DALLAS OFFICE MARKET

From an overall economic perspective, Dallas is one area of the country that is expected to outperform its peers in the short and long term. From a population growth and job growth perspective, Dallas-Fort Worth had the highest population growth of any major metropolitan area over the past year (from 2009 to 2010 according to the United States Census Bureau) and job growth has been positive every month since January 2010 (Texas Workforce Commission). The local unemployment rate at 8.2 percent is far below the national rate of 9.3 percent. Despite all of these positive trends, the Dallas office market still lags many of its peers on office fundamentals in the first half of 2010. Year-to-date net absorption has been sharply negative at 810,133 square feet, and the total vacancy rate remains high at 24.2 percent.

There has been improvement on some fronts, however. Companies such as Oncor, Universal Technical Institute and Health Management Systems have opted to purchase properties in lieu of leasing, pushing the total vacancy rate down a tenth of a percent. Elm Place, a functionally obsolete property in the Dallas central business district was recently shuttered and is expected to be converted to residential use. This removed an additional 1.1 million square feet of vacant office inventory from the market and decreased the total vacancy rate another tenth of a percent.

Average asking rates, which have been trending downward since late 2008, are flattening out, having decreased less than half a percent since the beginning of the year. If you take a look at the chart below, you will see that Jones Lang LaSalle data shows that the market is at or near the bottom of the market and is forecasting a recovery to begin in the second half of 2010. The total vacancy rate is expected to continue to decline, and asking rates should begin to rise slightly by the end of the year.

For tenants with leases expiring in next two years, now is the perfect opportunity to be in the market to lock in favorable lease terms while the tenants still have a great deal of leverage.

The dynamics of individual submarkets in the Greater Dallas area vary greatly. The Richardson/Plano submarket has been ground zero for negative net absorption for the first half of 2010. Hewlett Packard, AT&T, and Tektronix all consolidated operations and gave back large blocks of space. These three tenants alone recorded over 600,000 square feet of negative net absorption. All told, the Richardson/Plano submarket has accounted for approximately 93 percent of the all of the negative net absorption in 2010 (year to date). In contrast, Far North Dallas has recorded 133,821 square feet of positive net absorption for the same time period and is expected to add to this total as several companies have committed to large leases that will go into effect before year-end (the largest being Denbury which will occupy approximately 325,000 square feet at The Campus at Legacy).

Despite the mixed market fundamentals, the outlook for the Dallas office market is good. Leasing activity has increased in both the first and second quarter (total leasing activity is up approximately 20 percent from last year), while the total vacancy rate has declined slightly. Total net absorption has been negative for the same time period, but with the last major speculative office project competed in the second quarter, market fundamentals are expected to show steady improvement in the latter half of the year. The nascent recovery currently under way has not translated into increased rents; rents have flattened out in recent quarters, decreasing less than half a percent since the beginning of the year. Most economists are currently forecasting positive job growth for the market, which should result in positive net absorption and a further decreasing total vacancy rate. As a result, effective rental rates are expected to increase before year-end as landlords become less aggressive in regard to concessions.

— Steve Triolet is a research manager for Jones Lang LaSalle in Dallas-Fort Worth.

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