A strong regional economy has pushed direct occupancy of Class A office space to levels not since since 2006, according to a new first-quarter report from PM Realty Group. The firm says the current pace of job growth is expected to continue through the year and improve significantly in 2015—creating strong leasing demand for the many projects currently under development.
Here are more findings from the report:
OVERVIEW
• DFW’s office market recorded nearly 1.2 million square feet of direct net absorption during the first quarter of 2014, which far outpaces the 2013 quarterly average of 649,000 square feet The quarterly absorption demand was almost evenly split between Class A and Class B properties with 587,994 square feet and 608,114 square feet of direct absorption growth, respectively.
• During the first quarter, the Class A direct occupancy rate increased by 60 basis points to 83.4 percent as demand kept pace with space deliveries. Within the past 12 months, Class A direct occupancy rates have moved up 170 basis points to their highest level since late 2006. Meanwhile, Class B direct occupancy rates increased by 60 basis points to 79.9 percent during the quarter and have moved up 90 basis points within the past year.
• With the local economy expanding at a brisk pace, area businesses are increasingly confident in making longer term decisions, weighing the possibilities of relocation or renewal in order to capitalize on favorable lease terms.
• Class A full-service gross asking rents rose by $0.54 to $24.02 per square foot during the first quarter and have increased by 4.1 percent or $0.95 within the past 12 months. Class A asking rents currently remain 2.9 percent or $0.71 per square foot below their cyclical peak recorded in spring 2008.
• Class B rents rose by $0.18 to $18.24 per square foot during the quarter and have increased by 4.9 percent or $0.85 per square foot within the past 12 months. Class B rents are currently 1.7 percent or $0.32 per square foot below their peak recorded in spring 2008.
• Within the past 12 months, 18 of the 21 submarkets have experienced rent growth, but there are still ample opportunities for tenants to capitalize on attractive lease terms with incentives and concessions being offered by landlords in submarkets with high vacancy, such as the Dallas CBD, and LBJ and Stemmons Freeways.
• The office construction pipeline has skyrocketed by 375 percent within the past year to nearly 5.5 million square feet under construction (excluding owner-occupied projects), with 55 percent of this new space already pre-leased.
• Developers delivered nearly 276,000 square feet during the quarter, with an additional 2.4 million square feet of new space slated to come online in 2014.
FORECAST
• The leasing market will remain a landlord-favorable setting in the most desirable submarkets, such as Uptown/Turtle Creek, Las Colinas, Quorum/Bent Tree, and the Fort Worth CBD, as rents increase, occupancies improve, and quality space options diminish.
• As occupancy rates have reached a 10-year high, numerous speculative construction projects have kicked off across North Texas, which will provide an abundance of new, high-quality space options for tenants as the local economy continues to expand at a healthy pace.
• Office market fundamentals will steadily improve resulting from corporate relocations and expansions as companies are attracted to the metro area’s business-friendly environment with relatively lower business costs and a well-educated labor force.
