DALLAS—The Texas office market had a rather slow fourth quarter, with dollar volume and average prices both falling below the levels of the previous years. Dallas-Fort Worth and Houston were the most active markets during the final three months of the year. Nevertheless, Yardi Matrix office data shows that, while the Lone Star State recorded a less-than-stellar quarter, the whole of 2017 showed average prices reach a five-year peak, as buyers competed to grab quality office assets.
Yardi's year-end analysis also shows that Dallas-Fort Worth remains the top target for new office construction in Texas, even if office properties in Houston fetch much higher prices. The DFW market welcomed nearly 6 million square feet of new office space during 2017, and is scheduled to deliver an additional 9 million square feet by the end of 2018.
Dallas net absorption was positive for 2017. Under construction has dropped for two reasons: stabilizing vacancy with new supply and the wait for the final decisions on the 2018 tax bill and its impacts. Yardi Matrix believes the current 2018 tax legislation will have a positive effect on commercial real estate in general and there will be a resumption of property transactions activity. Average asking rents and concessions continue to be positive.
Following a weak third quarter, with 33 deals closed for a mere $990 million, the Texas office market bounced back in the final three months of 2017, checking off a lower number of deals but a much higher dollar volume compared to the previous quarter: 58% higher, to be exact. Nevertheless, even though the 28 office deals that closed between September and December 2017 amounted to a combined volume of $1.56 billion, the market recorded the weakest fourth quarter since 2014 and marked a 29% drop in sales volume year-over-year. The most popular Texas market in fourth quarter was Dallas-Fort Worth, which recorded the highest number of transactions (16).
Zooming out to look at 2017 as a whole doesn't paint a brighter picture: the Lone Star State concluded the year with just 131 office transactions closed for roughly $5 billion, marking the weakest year for the market since 2014, when the total dollar volume stopped short at $4.7 billion. However, this steep drop in the overall number of transactions and the total sales volume did not drag the average price per square foot down. The past year actually had average prices for office buildings reaching the highest level in five years, a clear signal that buyer interest is not waning.
“The elephant in the room for Dallas is the potential for the reward of Amazon's new headquarters,” Doug Ressler, director of business intelligence, Yardi-Matrix, tells GlobeSt.com. “Amazon would mean a dramatic upside in office employment growth and office growth for two to three years. One caution, however, is a small trend of net immigration outgrowth to other western regions such as Arizona, Utah and Seattle. Technology, mixed use and co-working office activity was very active in fourth quarter 2017, which we believe will continue and drive a significant segment of the Dallas office growth. Co-working will see especially strong growth based on a demand for smaller work spaces.”
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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.
