Area office market strong, getting strongerMay 30, 2014
A. Lee Graham
Surging construction and employment growth have pushed Dallas-Fort Worth office occupancy to levels unseen since 2006, according to a new report by PM Realty Group.
In its first-quarter 2014 office market report, the real estate development and acquisitions firm reported that demand was strong from Sundance Square in Fort Worth to downtown Dallas. But Class A office occupancy has dropped in Fort Worth’s Central Business District, continuing a trend that’s lasted almost two years.
Fort Worth CBD occupancy stands at 83.2 percent, 3.3 percent lower than the same time last year, according to PM Realty research.
But numbers can be deceptive.
“I think that’s less to do with demand than it has to do with supply because we’ve added significant numbers of Class A buildings to the downtown market,” said Kurt Cherry, PM’s executive vice president.
“Any time you add inventory to the CBD in Fort Worth, it’s going to drag down the overall occupancy level,” Cherry said.
With the Westbrook and Commerce buildings in Sundance Square Plaza offering more space, options abound for tenants looking to lease downtown.
Still, property managers battle public perception that much of downtown is leased.
“Going forward for the next several quarters, you’ll see [higher] occupancy levels in the CBD, and a lot of that is predicated on lack of available space on the west side. West Fort Worth is just as tight as it can be,” Cherry said.
Meanwhile, Dallas-Fort Worth’s office market reported almost 1.2 million square feet of net absorption in the first quarter, surpassing last year’s quarterly average of 649,000 square feet.
In Collin County, Allen and McKinney (grouped under a single geographic heading) grew by 4.7 percent to reach 90.1 percent occupancy; Richardson, by 7.2 percent to 87.8 percent occupancy; and Plano, 1.3 percent to 80.3 percent occupancy.
Dallas-Fort Worth Class A and B office space saw similar growth, at 587,994 square feet and 608,114 square feet, respectively.
As with Fort Worth’s downtown office inventory, what constitutes the two office categories remains subjective. For example, CoStar Group Inc., a real estate information resource, classifies Class A office buildings in terms of age, among other criteria, yet many downtown buildings have been renovated.
“They may still be listed as B product because of the age, but they have the amenities of an A product. I think it’s highly subjective,” Cherry said.
In the first quarter, Dallas-Fort Worth’s Class A occupancy rate rose by 60 basis points to 83.4 percent as demand kept pace with new available space. Basis points are units of measurement used to note percentage changes in interest rates, among other factors.
In the past year, Class A occupancy rates have risen 170 basis points to their highest levels since late 2006, according to the report. Class B showed its own momentum, accelerating by 60 basis points to 79.9 percent occupancy rate in the quarter and 90 basis points in the past year.
In Collin County, Richardson saw almost 284,000 square feet of direct net absorption in the first quarter. Enjoying the highest gains was the city’s Class B sector, as Kohl’s Corp. occupied a combined 230,061 square feet at the Waterview 190, north and south buildings, and Associa Inc. moved into a 62,000-square-foot space at Collins Center.
Such growth has favored landlords, who are able to charge higher rent as companies seek to expand into new office space.
Fort Worth’s Central Business District commands rents of $26.33 per square foot, up .7 percent compared with the same period last year. Rents in other parts of town vary, with South Fort Worth space going for $21.27 a square foot, up 2.5 percent, and North and Northeast Fort Worth at $16 a square foot, down 8.3 percent.
Leading all area submarkets in rental rates is Dallas’ Preston Center, commanding $32.09 per square foot, a 10.3 percent rise since the same period last year.
Fort Worth’s Central Business District ranks fifth on the top-20 list, with South Fort Worth ranked ninth and North-Northeast Fort Worth rounding out Cowtown’s presence on the list by ranking 20th in a list of submarket rental rates.
There’s much more office space available for rent, too, with almost 5.5 million square feet under construction in Dallas-Fort Worth, excluding owner-occupied projects.
More than one employment sector has driven that growth, according to Cherry.
“There’s not just one segment in the market that’s driven that significantly more than others,” said Cherry. He pointed out that Dallas and surrounding suburbs are every bit the energy industry player that Fort Worth is. For example, Exxon Mobil Corp. is based in Irving.
Still, Fort Worth has an ace up its sleeve when it comes to leasing prospective tenants.
“Overall occupancy costs are lower in Fort Worth than in Dallas, which is a bigger market with more demand. When there’s more demand and less supply, costs go up,” Cherry said.
So what’s the area’s office market forecast? According to PM Realty, leasing will continue favoring landlords in Fort Worth’s CBD, Las Colinas and other areas that are considered the most desirable submarkets as rents rise, occupancies increase and quality space options decrease.
“I think we’ve got several years to run,” Cherry said of market growth. “We’ve got a great labor force in this part of the country, good school systems and low cost of housing.”