Overall Dallas Fort Worth Office & Warehouse
Market Situation Report
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.
WELCOME TO THE BOOM-TOWN!
Massive change has occurred in the DFW commercial real estate market since the terrible decline of 2008. We have settled into a big boom to be sure. Boom to bust cycles are the hallmark of commercial real estate. There has been a ton of equity money on the side lines waiting to get busy. The A-Team is off the bench now and on the field buying DFW commercial real estate like crazy. Big institutional players are swarming the market picking up huge portfolios and key trophy assets. Many of the hard lessons learned from the bust of 2008 have been long forgotten and the heat is on and big buyers are in town now placing money in a big way. Record prices paid and high values are the order of the day. The days of a “10” cap are a joke today so fasten your seat belt and get ready for “5” caps! Good luck finding anything short of an aged dowdy mini-warehouse or dilapidated car wash in a far flung suburb for something that low.
Current lease rates for office and warehouse lease space remain at a record all time high and going higher in all of the better Dallas Fort Worth sub-markets due to raging demand and lack of available inventory. The market is on fire, rocked by record demand and terrific absorption. Occupancy rates are very high as well reinforcing the record lease rates. 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.
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!
DALLAS / FORT WORTH OFFICE MARKET OUTLOOK
Construction activity of new multi-tenant projects is rising fast. The days of low rates and high vacancy rates are long gone. Many well-occupied sub-markets, such as Preston Center and Plano Legacy are enjoying record lease / occupancy rates that will trend up. 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 will 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. Don’t be fooled or left behind.
Small boutique buildings serving the needs of specialized users have grown in popularity in many of the well-occupied sub-markets in DFW. In addition, office condominium construction has started again catering mainly to medical users in the far flung sub-markets. Financing for purchase and finish out of condo spaces has become much easier to obtain since the crash of 2008.
Construction of significant new multi-tenant office space will continue for some time to come as demand for this new space has out-stripped available inventory – especially in the better sub-markets like Plano Legacy and Uptown. Sublease inventory is way down and expected to decline even more going forward.
DALLAS / FORT WORTH INDUSTRIAL MARKET OUTLOOK
New construction and delivery of bulk warehouse facilities continues at a fevered pace. 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.
Vacancy overall has increased 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 is going strong. Sublease inventory will continue to shrink and will contribute to further increases in the market rate.
DALLAS / FORT WORTH COMMERCIAL FORECLOSURE OUTLOOK
At this point, until the market turns down again, and it will, as we have witnessed in our 34 year tenure in this business, this is really not a factor anymore like it was after 2008.
We are tracking this but find no meaningful data to report at this time given the booming market. Stay tuned once the fire dies down and this metric changes.