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D-FW is Top Office Leasing Market

by Scott Buie, Dallas, December 2018

 

Dallas-Fort Worth was the number one office leasing market in the nation, with more than 4.7 million square feet net leasing in the 12-month period ending in the third quarter. The Metroplex came in second in the construction of new office buildings, behind New York. The trends point to increased office property values for at least the next year.

 

Demand

 

Employment gains have been widespread throughout North Texas. Dallas-Fort Worth added 114,900 jobs over the past year with the largest gains in professional and business services, according to Transwestern.

 

With more office workers, D-FW recorded its 29th consecutive quarter of positive absorption in the office market during the third quarter. The submarkets with the largest positive absorption included the Lower Tollway (431,108 sf), Denton/Lewisville (404,072 sf), DFW Freeport (302,241 sf), Frisco/The Colony (193,300 sf), and Allen/McKinney (125,158 sf).

 

New office construction remains hot at 7.7 million square feet. Notable office product currently underway include American Airlines Corporate Campus (1.7 msf) in the Mid-Cities, Pioneer Natural Resources (1.1 msf) in Las Colinas, and Charles Schwab Corporate Campus (500,000 sf) in Westlake/Grapevine. All of these projects are 100% leased.

 

Rents/Sales

 

Asking office rents edged up in D-FW by 0.3% over the quarter and 1.5% over the year, finishing the period at $25.64 psf. Class A rates ended at $28.97 psf and Class B rates were $21.35 psf. The submarkets with the highest gross rents were Uptown/Turtle Creek ($39.29 psf), Preston Center ($37.22 psf), Frisco/The Colony ($32.59 psf) and Northeast Dallas ($31.68 psf).

 

Dallas-Fort Worth recorded sales volume of approximately $1.3 billion across 40 transactions in the third quarter. Pricing on a per-square-foot basis averaged approximately $289 psf, considerably higher than the $230 psf recorded in the prior 12 months.

 

Cap Rates

 

The average cap rate increased to 7.3% for area office properties, ranging from a low of 6.5% to a high of 7.9%. The trend toward rising cap rates is important to note because higher cap rates equate to lower values.

 

In current market terms, a percentage point change in the cap rate amounts to about a 15% change in value. Properly exploiting the increasing cap rate trend will maximize the potential for property tax savings in a market that continues to experience significant positive growth.