Office Construction Tops 100M SF Mark

DALLAS—What does a wave of construction mean for office tenants/? In the short term, it could mean a bump in asking rents as top-tier blocks deliver, but many predict more opportunities for tenants. With office construction topping the 100 million-square-foot mark, values, concession packages, operating expenses and vacancy rates are all headed higher, according to a first quarter report by JLL.

Some other report takeaways: Entering the eighth year of this real estate cycle, Dallas-Fort Worth has shot to the top of the most in-demand office markets in the country. Case in point is Liberty Mutual adding 5,000 jobs and 1.1 million square feet to Far North Dallas, with several more large occupiers following suit.

Asking rents are up 1.6%, but that growth is being countered by higher concessions. Tenant improvement allowances increased by 3.5% during the first quarter and are now exceeding $75 in most gateway market, according to the report.

Despite the fact that rental rates are reaching 15% above pre-recession highs and unemployment is closing in on 3%, the cost to do business in DFW still remains at least 20% cheaper than the top coastal cities at $27.62 per square foot in Dallas and $22.85 per square foot in Fort Worth. In comparison, average asking rates are $74.99 per square foot in New York City and $74.64 per square foot in San Francisco, GlobeSt.com. learns.

“Texas is one of the most active states in the US for office construction and one of the most affordable for office space,” Brooke Armstrong, JLL executive vice president, tells GlobeSt.com. “Through first quarter 2018, approximately 13.2% of the total US office construction is occurring in Texas, a testament to the strong economic fundamentals and deep labor pools across the state. Additionally, as asking rental rates for office space increase across the US, Texas markets remain extremely affordable when compared to other major metro areas like New York and San Francisco. Currently, the average asking rate per square foot in Dallas is 63% less expensive than New York while Fort Worth is 69% less expensive than San Francisco.”

The DFW office market accommodated this demand by delivering more than 20 million square feet in the last three years with another 7.5 million underway. All major metros in the Texas are represented in the top 25 with respect to construction pipelines: Dallas (six), Austin (nine), Fort Worth (10), Houston (21) and San Antonio (24).

Preleasing activity also appears healthy with 69% of the space under construction already leased. However, when factoring out single-tenant build-to-suit projects, this figure drops to 35%. While this is not a new trend in DFW, its effect is felt as rental rate growth begins to wane, says JLL.

Historically concentrated in Far North Dallas, these large build-to-suit projects are beginning to appear elsewhere in the market: Pioneer Natural Resources broke ground on its 1.1 million-square-foot campus at Hidden Ridge in Las Colinas and Signet Jewelers moved into its 225,000-square-foot building in Cypress Waters. Meanwhile, American Airlines with 1.8 million square feet, Charles Schwab with 500,000 square feet and Mercedes Benz Financial with 200,000 square feet, recently broke ground on the Fort Worth side of the market.

In the future, rising occupancy costs in the coming quarters are expected to be primarily driven by higher operating expenses as appraised property values–and therefore taxes–continue to increase. To accommodate for this, base rental rate growth could further slow, especially in Uptown. While absorption will continue to be driven by large users occupying new campuses, JLL is tracking more than 100 requirements in in the 25,000- to 100,000-square-foot range, so the new multi-tenant spec space will likely get chipped away at throughout the coming quarters, even in the absence of another mega-deal.