Category: News

After skipping a year, the Younger Partners annual Family Day event returned even bigger than before with four homeruns, more $1 hot dogs than we can count, a Rangers win and lots of camaraderie.

By Steve Triolet, Younger Partners Research Director

Recently, we looked at current leasing volume trends in comparison to the historic norm. I thought it might be helpful to take a look at the construction delivery pipeline and what it likely indicates for the future market fundamentals for the DFW office market. The construction pipeline remains elevated at 6.4 million square feet. The majority of this construction was started in 2019 and is scheduled for delivery in the second half of 2021. While more than half of the construction pipeline is accounted for between pre-leasing and built-to-suits (58%), there is still almost 2 million square feet of vacant space scheduled for completion before the end of this year. This surge of new vacant construction in 2021 has the potential to move the total vacancy rate up roughly 40 basis points (preliminary numbers show the second quarter total vacancy rate will be 20%).

For 2022, the amount of new vacant space is less than 400,000 square feet, but it is worth noting that the dynamics of Uber at the Epic. The Epic Phase 1 was built in 2019, but most of the project is currently largely available for sublease (115,995 square feet of Uber space), direct space (68,785 square feet) or via co-working space (42,862 square feet). The Epic Phase 2 is 469,000 square feet and scheduled for delivery in mid-2022. The Uber Air division was supposed to be based in Phase 2 and be the primary pilot program for the company. In December 2020, Uber Air was officially discontinued and the app technology behind the division was sold to Joby Aviation. Given the current uncertainty of Uber and its near term growth, there is a high probability that all or a large portion of phase 2 will be placed on the sublease market (similar to what we have seen with Liberty Mutual). Still, even if the Uber space is placed on the market the amount of new unaccounted for space should be about 800,000 square feet or less.

The tapering of construction is expected to accelerate in 2023, with the majority of the pipeline accounted for by Christus Health (456,000 square feet) and Haynes and Boone (125,789 square feet at Harwood 14).

Note: Data is all currently under construction office properties over 15,000 (excluding medical).  The larger projects are listed by name within the chart, with largely vacant projects in the red and the larger built-to-suits and spec projects with significant pre-leasing in the gray columns.

By Steve Triolet, Younger Partners Research Director

DFW office asking rates, overall, continue to look largely unchanged from one year ago.  This is especially true in some of the top office markets like New York City and San Francisco, which have seen double-digit rate declines. Rates are a lagging indicator and previous cycles show that most of the downward movement in rates don’t typically impact the overall average until 12 to 18 months after the economy goes into a recession. So far, effective rates have decreased, mostly in the form of free rent.

One major trend that has taken place over the past year is moderate rate increases for Class-A properties. This is slightly misleading as most of the increases have been driven mainly by the newest construction been delivered to the market. Existing stock, especially in older properties are seeing pressure on rates. Class-B rates have remained flat from an asking rate perspective. With 6.3 million square feet currently underway (95% of which is classified as Class A and quoting an average a $41.95 FSG per sf asking rate), this trend is expected to continue while the construction pipeline remains elevated through 2022.

Over the past seven months, the 9.5 million square feet of sublease office space available across DFW has been largely stagnant. However, there has been an increasing amount of movement over the past two months. We’ve discovered a few primary trends that have been keeping the total flat.  

First, there have been short-term subleases with expiring leases rolling over to direct vacant space. Second, some tenants have decided that they want to re-occupy their own space like NTT Data at One Legacy West and PLH Group at Canal Centre. Meanwhile, other tenants continue to put additional sublease space on the market such as Securus Technologies, RealPage, Mitel, PwC and Lockheed Martin.

Four submarket account for the vast majority of sublease space available (Far North Dallas, Las Colinas, the Dallas CBD and Richardson/Plano).  These four submarkets account for 69% of all sublease space currently available.

By Steve Triolet, Younger Partners Research Director

Near the beginning of the year, I shared some info from Kastle Systems on office usage for the top 10 office markets across the country.  Back then and now, DFW remains the top market for office usage (office workers being physically back in the office on at least a hybrid model).  

To date, the usage numbers have not moved much this year, but several recent announcements (Microsoft, Google, Morgan Stanley, PwC, Fannie Mae, FDIC) all point toward improvement over the next few months, with post-Labor Day being the most common soft return date for several large corporations.  This date seems to be the consistence because of the start of a new school year and the end of summer.

By Steve Triolet, Younger Partners Director of Research

While most numbers like vacancy, net absorption and asking rates that are reported in our quarterly reports give a current pulse on the market fundamentals, there are a few that can be leading indicators of where the market is heading in the quarters ahead.  One of those is the availability rate and its relationship with the total vacancy rate.  If spread between the availability rate and the vacancy rate is narrowing that means that there is less of pipeline of space coming to the market or as we’ve seen in 2020 and 2021 (to-date) the availability rate for DFW office market has been steadily climbing, outpacing the rising vacancy rate.  This indicates negative net absorption ahead, along with softer fundamentals like a higher total vacancy rate.

The rapid rise in the DFW office availability over the past year has been due to a combination of direct and sublease space.  While sublease has been gaining more attention in the news, the rise in direct space available (mainly due to new construction) has far outpaced the rise in sublease space.  Available sublease space and direct space have increased by roughly 3.5 million and 6 million square feet, respectively over the past year.

By Younger Partners Research Director Steve Triolet

With roughly 9.5 million square feet of office sublease space currently available, it’s important to take a look at how long the lease terms are for the various sublease spaces.  Traditionally, subleases with 2 years or less of term left are very difficult to lease unless a direct deal is also worked out (due to the high cost of moving into a new space for a short term lease).  As of February 2021, roughly 20% of the current subleases being marketed have lease terms of 2 years or less, making them likely to roll to direct vacant space before a sublessor is found.  

Among the leases with longer terms (5 years plus), several of these are concentrated in newly constructed office properties (Uber 115,995 SF, Liberty Mutual 357,500 SF, DXC 100,267 SF and HPE 71,296 SF, among others).

This year, YP collected new toys, bicycles, scooters and helmets for children from infants to teens for Toys for Tots. This organization’s primary goal is to bring the joy of the holiday season and send a message of hope to America’s less fortunate children.

Our December #YPSpotlight, Byron McCoy, is one of the nine partners at Younger Partners. He joined the company six years ago and focuses on third-party agency leasing and some sales transactions. Byron says what he enjoys most about his role is that every day, every transaction and every client is different. Getting a property to full occupancy is especially satisfying, too. He and his wife of 31 years, Deah, have three grown children – Kent, Caleb and Katherine – and welcomed their first grandchild this year, Brooks Byron.

Salesmanship has been in Byron’s blood since he was a boy: he was a paperboy for the Dallas Times Herald from the third grade until 11th grade. He was enterprising and came up with the idea to include payment envelopes with the newspapers asking for the subscription payments to be mailed in or pinned to the mailbox, The Herald took the idea citywide with the Dallas Morning News following suit. Named Paperboy of the Year twice, Byron did TV commercials for the Herald and used the money to finance his education at Baylor University.

By Younger Partners Research Director Steve Triolet

Rates are a lagging indicator, in other words, they often don’t react initially to changing market conditions. Still, over the past few quarters, DFW office asking rates have remained stubbornly high, especially in comparison to other large markets like San Francisco and New York City (which have both seen rates drop about 10% over the past three quarters). The level of distress for owners in those coastal markets is high, so their rates have reacted more quickly.

Diving into the details of what I’m seeing in DFW office rates:
*Lincoln Centre recently raised its asking rate across the business park by $2 to $32 (NNN). The catalyst appears to be the Huitt Zollars lease signing for 32,519 SF at Lincoln Centre III. Lincoln Centre is currently well leased with an occupancy rate near 90%.

On the flipside, some properties in Hall Office Park have seen some rate reductions for direct space. Property G4, for example, at 3011 Internet Blvd recently went from $23 (NNN) to $22 (NNN). The property’s occupancy is low; 82% of the property is available between a combination of direct and sublease space.

Roughly half of the submarkets recently saw a slight decrease in asking rates while the other half had slight increases, making the overall rates relatively flat.

To date, the biggest movement in rates has been for sublease space. While the typical discount between direct and sublease space remains near 15% (which is the historic norm), more than a quarter of all sublease space being marketed does not have a quoted asking rate. Still. among the individual subleases, discounts of around 50% have been quoted. Ashford at Centura Tower I is quoting $15 Plus E, while the direct space at that property was recently quoted at $30 Plus E.

In the most extreme case at Energy Plaza, there is a very large sublease for 570k SF that has over a 60% discount in comparison to direct space ($9.50 full service rate), but that sublease has only a year of term left and has been listed on the market for over three years with no leasing activity to show for it.