Dallas-Fort Worth has more commercial real estate space underway than anywhere else in the country. We might not be number one in every category, but when you combine office, industrial, retail, multifamily, and other specialty properties (like hotels and data centers) we certainly are. That’s why you’ll be continuing to see all of those articles on which markets have the most construction cranes in the U.S., and details on what all those various projects are.
When you look at the DFW office market and what we’ve built—so far—this cycle, how does it compares to previous cycles? And what does it all mean for market fundamentals like vacancy and rental rates?
First, DFW is the fourth most active U.S. market (behind New York City, D.C. and San Francisco) when measured by the current 9.6 million square feet of office underway. This includes both built-to-suit projects (like American Airlines’ 1.8 million-square-foot campus in Fort Worth) and speculative projects. The highest concentration of construction is still in the Far North Dallas submarket, with Mid-Cities and Las Colinas not far behind. All three of these submarkets have more than 2 million square feet of office space underway each. While Mid-Cities has not been one of the more active submarkets in recent years, both Far North Dallas and Las Colinas have already had millions of square feet of new projects completed recently. Since 2013, DFW has delivered more than 24 million square feet. In the previous boom period between 2006 and 2010, DFW completed less than 20 million square feet. So, to date, we’ve already surpassed the past cycle and have at an additional 10 million square feet that will be completed by the end of 2019. Still, both of these numbers are far below the boom between 1997 and 2002 when more than 46 million square feet were built or the “crazy ‘80s” when, between 1981 and 1986, almost 100 million square feet of space was completed.
Let’s take a quick look how the speculative projects performed when the last cycle ended. The last few large spec construction projects were One Legacy Circle, Two Addison Circle, Saint Ann Court, and 17Seventeen McKinney. All of these projects were completed with little to no pre-leasing and took between 2.5 and 3.5 years to reach full occupancy. 17Seventeen McKinney was the last delivered in mid-2010 and its occupancy topped 95 percent in late 2013. This lease-up time is less than desired, but still shows solid performance and tenant demand for higher quality space even during a downturn. Today, all four properties are fully leased or have very limited direct vacant space.
So far this cycle, similar spec projects completed include KPMG Plaza at HALL Arts, Tollway Center, McKinney & Olive, and 9111 Cypress Waters. These four spec projects this cycle have been able to reach healthy occupancy numbers in less than two years. There is some concern, however, as some recently delivered spec projects like 3400 City Line and The Terraces at Douglas Center have had little to no leasing activity to date.
Outside of spec construction, there are some signs that the market has peaked and that a slowdown is on the horizon. Net absorption for office properties was far above the norm in 2017, and yet, construction deliveries outpaced the demand and the vacancy rate rose slightly. This wasn’t just last year; this same pattern has been playing out over the past three years and the construction pipeline is higher now than it was a few quarters ago, while the known pending move-ins and move-outs point to far less absorption in 2018 than the past few years. Still, in the aspect that matters most to the majority of tenants—rental rate—the market is at an all-time peak, far above what we’ve seen over the previous peaks of past cycles. Average asking rates steadily increased over the past five years and are just now showing the first real signs of flattening out over the past two quarters. Rental relief pressure is important if DFW is to remain a top market for relocations and expansions in the years ahead.
Steve Triolet is the research director at Younger Partners.