DALLAS—When it comes to premium office space, creative firms are doing what creative types do best: driving change, according to JLL's 2017 Skyline Report. Skyline is JLL's annual look at trophy office space in some of the tallest buildings in 57 North American markets.
The report shows the eighth straight year of occupancy growth are contributing to record rents and a landlord-friendly market. In downtown Dallas, capital investments in assets are attracting the attention of prospective tenants and investors alike.
“Investments within downtown Dallas are a tale of two cities,” said Jack Crews, managing director, JLL capital markets. “Assets along Ross Avenue in the CBD and to the north in nearby Uptown, have taken on a higher profile with strong development and redevelopment of buildings and parking lots, with new street-level retail, along with hotel and residential uses. This may lead to be the most dynamic development area over the next five years. While not directly part of our skyline, recent developments in the southern part of the CBD along Main Street and its adjoining streets are being noticed by investors after being positioned to become part of the area's growing dynamic 'live, work, play' environment. Users here seem to seek lower economics, so the rents and corresponding investments have a lower profile, value-add perspective.”
Skyline vacancy remains steady at around at 25%, with vacancy in trophy buildings at 19.3%. Rents within Dallas' newest skyline buildings hit a record $50.50 per square foot, compared to an average of $29 per square foot for the Dallas skyline assets.
“Professional services, financial institutions and law firms are the main drivers of leasing activity within skyline buildings,” said Walter Bialas, JLL Dallas research director. “To compete with new offerings, owners are reinvesting in downtown assets to attract the new and future generations of employees.”
And, the construction pipeline remains healthy, but shows some signs of slowing within the downtown. This equates to 1.4 million square feet of Dallas skyline office space remaining in the construction pipeline. The delivery of these projects by the end of 2018 or early 2019 and a tightening in construction lending may point to a slowdown in construction within downtown Dallas. JLL expects the skyline to shift to tenant-favorable territory for landlords and tenants by 2019.
“Dallas skyline properties are evolving into a new 'live, work, play' environment, with new developments and capital improvements to established assets generating strong interest in the CBD and nearby Uptown for perspective tenants and investors alike,” Brooke Armstrong, executive vice president, JLL Dallas, tells GlobeSt.com. “Our solid economic fundamentals, strong employment pool and continued job gains are driving demand.”
In Dallas, skyline acquisitions were up to $1.1 billion in 2016 and investors are increasingly looking to secondary markets for skyline acquisitions. Offshore investment increased to 40.3% of total skyline volume in the first quarter of 2017. In 2016, 42 trophy assets were traded, including five in Dallas, increasing volume by $7.2 billion year-over-year.
Net absorption jumped to 8.3 million square feet–more than five times what it was a year ago. However, JLL expects eight straight years of skyline occupancy growth to ease soon as the market prepares for several large blocks of space to become available.
Tenants still want that skyline caché, which is why rents are at $28.91 per square foot on average in Dallas. In those coveted few trophy spaces, that premium goes to $33.57 per square foot. By comparison, New York stands above all others with an average skyline rent of $87.90.
“There have been some very positive things happening downtown. Competitive office rates in downtown Dallas are enticing tenants to explore relocating or establishing a presence within the Dallas skyline,” said Jeff Eckert, managing director, JLL agency leasing. “Owners are investing capital in downtown assets, revitalizing workspaces and adding attractive amenities for employees. The Uptown area continues to provide a premium product as vacancy remains tight.”
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Lisa Brown
Lisa Brown is an editor for the south and west regions of GlobeSt.com. She has 25-plus years of real estate experience, with a regional PR role at Grubb & Ellis and a national communications position at MMI. Brown also spent 10 years as executive director at NAIOP San Francisco Bay Area chapter, where she led the organization to achieving its first national award honors and recognition on Capitol Hill. She has written extensively on commercial real estate topics and edited numerous pieces on the subject.
