Dallas Market Report

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!

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.

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 whhile 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!