Commercial Real Estate

CRE Opinion: The State of Dallas-Fort Worth’s Office Absorption

Can near-record demand hold, even with many of the “mega deals” being completed in 2017? 

Steve Triolet of Xceligent

This year will be a banner year for the Dallas-Fort Worth office market from a net absorption perspective. This is all tied to the office construction pipeline and the surge of built-to-suit deals signed over the past few years that will be completed this year. At this point, many of these new office construction projects will be familiar to those folks that work in commercial real estate or make it a point to keep up with the office market. We’re talking about the mega deals in Legacy West (Toyota, JPMorgan Chase & Co., Liberty Mutual), along with large deals in Las Colinas (CoreLogic), and Uptown (Hillwood, Rolex), among a few others (like Fannie Mae, Interceramic, and Kubota Tractor).

I threw out a lot of large company names, so let’s do some quick math on what the large deals likely mean for the DFW market regarding net absorption. Toyota is the largest contributor. It will directly account for just under two million square feet of positive net absorption as the company is relocating from Torrance, Calif. Toyota currently has only a couple hundred thousand square feet of temporary space in the market. Most of the other mega deals are not so straightforward. JPMorgan Chase & Co. already has several sizable locations within DFW and it will be vacating some, but not all, those current locations. For example, it will be vacating space in Lewisville, but will remain in much of its space in the Dallas CBD. Liberty Mutual, likewise, is currently in the region, but will be increasing its business operations significantly.

It should also be noted that even as the new projects are delivered this year, the residual impacts often take a couple of years to completely play out. State Farm, which had a new corporate campus built in 2015 and 2016 at Cityline, has not finished vacating some blocks of space and is currently trying to sublease some of its older space.

All told, the DFW office market is expected to have net absorption in 2017 north of six million square feet. This is a big number, far surpassing anything we’ve seen this business cycle (since the Great Recession). To put that number in perspective, the Dallas-Fort Worth market, which has consistently seen stronger net absorption than almost any other market in the country, has had average annual net absorption of 3.3 million square feet over the past six years. The concern ahead is what happens to the construction pipeline moving into 2018 and beyond. There are still some large built-to-suits after 2017 (Signet Jewelers and Brinker International), but the majority of the current construction pipeline beyond 2017 is likely to transition into a much heavier concentration of speculative development.

The trend in speculative development has been to attract tenants from existing, older buildings, for significantly less square feet on average, as the newer properties are more efficient and tenants adjust to the higher rental rates on new construction by reducing their size footprint. This can often result in sizable negative absorption, particularly on a submarket level. The other concern is the amount of speculative construction underway at this point in the business cycle. Can near-record demand hold, even with most of the mega deals being completed in 2017? Who will follow Boeing, which just announced it will be opening a new headquarters location in Legacy West for its global services division? I’ll save conversation on the spec construction pipeline in 2018 and related dynamics for a future article.

Steve Triolet is the director of analytics at Xceligent.