Dallas Market Report
Big change impacted DFW leasing and the rest of the country due to the virus pandemic scare of 2020. The DFW commercial real estate market faces decline in starts, completions and leasing of new space. Boom to bust cycles are the hallmark of commercial real estate. The DFW office market continues to find its way forward now that many companies have required a “return to the office” stance. Work from home does have an impact in demand, a holdover of the virus fears of 2020 and beyond into 2023-24.
From the purchase side, there is equity money on the side lines waiting to get busy but await the final market bottom. Many of the hard lessons learned from the bust of 2008 have been long forgotten and CMBS debt has come to the forefront of discussion. Huge portfolio loans are and have come due and many property owners cannot cover. Record prices paid are making it hard for CMBS funded debt to find refinancing. The days of a “3” cap may be in the rearview mirror now as a mark to market occurs. Fasten your seat belt and get ready for “7-8” caps, maybe higher! Good luck finding any debt for deals, cash is once again king and those buyers that have it will make out well in the long run.
Current lease rates for Class A office and new warehouse space remain high in better Dallas Fort Worth sub-markets due to demand and lack of available inventory. The market is still hot for the better Class A property. Occupancy rates are OK but not as tight as they were in the runup to 2020. Even historically dowdy sub-markets, Stemmons for example, are enjoying record occupancy rates as tenants flee the better higher priced sub-markets due to rate sensitivity in the face of high rates for lease renewals.
What’s Important to DFW Businesses
These key issues will impact your decision to lease or buy office space and lease or buy warehouse and industrial space in the Dallas/Fort Worth area. Click on each icon to learn more.
Oil and Gas
Oil & Gas / energy sector economic concerns have stalled some sector growth but many local firms act immune of this. Massive relocations to DFW from outside Texas, Toyota Automotive among others, are key reasons for the amazing growth we are seeing here today. New business starts have been on the rise over the last two years which further sets the stage for big demand going forward and the possibility of even higher lease rates to come. A clear sign of the hot market is the lack of sublease space in the market confirming strong demand. In the past subleases were a common percentage of the overall vacancy but today that percentage is quite low. More and more when the occasional sublease does present Landlord’s are more apt to terminate the lease and then re-lease it on a direct basis than let it go as a sublease and miss the opportunity to make a deal at today’s record high rates.
Record high gasoline prices have abated and so have local energy costs. In the past, market experts usually allowed $2.50 per square foot per year (or more for older energy hog buildings) of leased area for electrical cost allocation in multi-tenant office buildings and for the office space portion of warehouse property. Today it is common to see this number at $1.50 per square foot per year or lower – especially for newer LEED certified properties that have modern HVAC systems and heavy insulation per the new IECC codes being enforced in most jurisdictions!
Full Service Lease
In years past, most Dallas/Fort Worth area landlords offered “full service“ office leases with electricity included in the base rent. Now virtually all landlords have switched to “plus electric“ leases. The reason for this is that it allows the landlord to recover its increased energy costs much faster than those recovering the increased costs via the base year expense stops in full service leases. Electrical costs are now a very serious consideration when evaluating a lease – older less efficient versus newer more efficient.
Special care must be taken to find out what each building’s contracted electrical rate is and when that contract expires as it relates to your lease. It is also important to fully evaluate the HVAC system serving the A/C portion of warehouse space because with older systems you will pay more money in utility cost and upkeep of the aged systems.
Triple Net (NNN) Lease
Another trend is the move from full service office leases to triple net (NNN) lease strategy – even in suburban sub-markets. NNN leases were typically only seen in CBD office property. This allows the landlord faster recapture of operating costs and an edge for marketing when quoting their lease rate. A bit of “bait & switch” hype. Take care to know the difference while making your analysis of lease proposals. NNN costs in days of old were often in the $6.00/ SF range and today many of those same properties now see the NNN costs at $10.00 / SF or more. As class A buildings trade, property tax costs, a key part of NNN expenses, will rise dramatically spelling unexpected occupancy costs for tenants unless they are prepared.
Given the trend of dramatically rising lease rates, in practically all of the better sub-markets, now is a great time for tenants to consider early lease renewals. Many landlords will consider an early lease renewal than risk losing you as a tenant if you go to market. If your lease is expiring in the next eighteen months, or less, contact us today for a free survey of the options. You may be surprised to see how prudent an early renewal can be. We can help you!
What’s Important to DFW Businesses
These key issues will impact your decision to lease or buy office space and lease or buy warehouse and industrial space in the Dallas/Fort Worth area. Click on each icon to learn more.
DALLAS / FORT WORTH OFFICE MARKET OUTLOOK
Construction activity of new multi-tenant class A projects in 2023 is falling. To date new office delivery has been at about 5 million square feet. Net absorption is below 1.395 million square feet. Office vacancy rates overall are in the 17.234 percent range. Rental rates are still high for the better-quality spaces. Tenants are looking for maximum amenities that Class A space offers to get their employees back in the office. Many well-occupied office sub-markets, such as Uptown, Preston Center and Plano Legacy continue to enjoy high lease rates / occupancy rates. Tenants should be mindful of their lease expiration date and act early to insure they are able to renew their lease or make a prudent move without panic caused by procrastination. In some cases, if you miss your renewal option time frame you may be out. Many owners welcome a little vacancy at the new higher rents as they intend to peddle the asset to the next owner based on further potential increases in rates. Do not be fooled or left behind.
Construction of significant new multi-tenant has fallen off since there is plenty now for the current demand. Class B and particularly Class C space are feeling the pain of the flight to quality. Sublease inventory is way up and is the harbinger for things to come, not good. Over 58% of the vacancy is attributable to buildings built in the 80’s & 90’s. Not a good sign for Class C space leasing or value for sale.
DALLAS / FORT WORTH INDUSTRIAL MARKET OUTLOOK
New construction and delivery of bulk warehouse facilities continued in 2023 but at a slower pace. Many planned projects have been put on the back burner pending lease up of existing space. DFW has become a major player in the distribution of goods. Higher clear heights, expanded truck courts, better parking, and state-of-the-art fire suppression systems found in new buildings lead as key factors desired by major tenants in the market today. New building delivery will continue in the face of high demand and little inventory available but at a measured pace. To date we have seen about 65 million square feet of new space delivered. Roughly 31.9 million has been absorbed and the overall vacancy rate is only 7.91%.
Vacancy overall has increased some compared to the last period. DFW has clearly established itself as a significant player in the national bulk warehouse & distribution game. Development and completion of the many highway projects in the area have also contributed to the success of this market. Growth and development are going strong. Sublease inventory may grow as we find our way in the 2023-24 economy.
DALLAS / FORT WORTH INDUSTRIAL MARKET OUTLOOK
DALLAS / FORT WORTH COMMERCIAL FORECLOSURE OUTLOOK
At this point, there are several major projects with questionable debt choices to refinance that may walk away and default. Some large portfolios are in bankruptcy. CMBS funding is a big reason there are so many failing projects. Many projects were underwritten at the time of 3-4 caps and now those same projects need to look at 7-8 caps to refinance. This means cash brought to the debt closing refinance table or walking away leaving bond holders holding the bag. Remember the crisis of 2008? This is the same thing again only hopefully not as bad.
We are tracking this mark to market as it happens so stay tuned as we watch the market in 2024 and beyond.
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