Category: News

One-Quarter Of All U.S. Office Construction In The Past Decade Was In Texas

July 8, 2019 Kerri Panchuk, Bisnow Dallas-Fort Worth

Texas metropolitan areas have been leading the nation in office construction and have no reason to pump the brakes on future construction projects since demand only continues to grow, a new report from CoStar says. 

“The Texas miracle still has lots of steam,” CoStar Group Director of Market Analytics Paul Hendershot said. “We continue to be on top of the list in terms of best places to do business. We also have a highly skilled labor force and favorable tax conditions. I would say it is a combination of things that are driving the Texas economy.” Texas’ top three office markets — Houston, Dallas-Fort Worth and Austin — housed roughly 104M SF of the 430M SF of new U.S. office space that came online during the last decade, CoStar data shows. In totality, Dallas-Fort Worth, Austin and Houston accounted for 24% of the nation’s new office construction pipeline during the 10-year span running from 2009 onward.  DFW in particular is keeping that pace up: Roughly 7M SF of office space is under construction in Dallas-Fort Worth, with 4.7M SF scheduled to deliver in the second half of 2019, Younger Partners Co-Managing Partner Moody Younger said.  Corporate relocations from other states, alongside intermarket moves from older to newer properties, have kept the office construction pipeline robust in Texas.  In the past 10 years, DFW alone welcomed corporate heavyweights such as Liberty Mutual’s 1.1M SF campus, Blue Cross and Blue Shield of Texas’ 1M SF campus and the JPMorgan Chase and Toyota North America headquarters.  That heavy allocation of build-to-suits and large corporate relocations has meant new supply is absorbed quickly. Of the 7.1M SF underway in DFW, 69% already has a user lined up, Younger said.

“On a regular basis, I get asked why we are building so much office product in the Dallas/Fort Worth market,” Younger said. “Our total vacancy rate typically runs twice or more the national average and yet our construction pipeline is greater than almost every other major office market in the country, any given year, for the past 40 years.” He explained this dichotomy by looking at the actual amount of new space available when compared to 1980s or 1990s office products.  “If you look at the inventory of available space and where it is concentrated, you quickly see that DFW doesn’t have so much of an overbuilding problem as it does of a demolition problem,” Younger said. “Unlike most large office markets (which typically have substantially higher land prices) we don’t tear down old inventory, we just expand northward and build more new product.”

While the DFW market appears to be drowning in office supply, data from Younger Partners shows that there are limited new-build big blocks of office space available that are 50K SF or larger. Many of the larger available office spaces are 1980s products — those represent a whopping 47% of the big office blocks available in DFW. Office product that is five years old or less represents only 3% of the local DFW market. “Given this low availability of new construction, developers have little incentive to pull back,” Younger said. “In fact, most seem to have a sense of urgency to capture the existing demand for new space. Almost every office developer currently has a project underway or has announced plans for additional projects to begin construction within the next year.”  The underlying fundamentals support this rush, and analysts expect construction to continue apace in Texas, and particularly DFW.  “DFW is projected to continue trending positively in employment growth, and office jobs are forecasted to hover around a 1.5% to 2% increase on a year-to-year basis over the next 10 years,” Cushman & Wakefield Research Director Ching-Ting Wang said. “With this increase in office employment, new office construction is likely to continue, albeit at a slower pace compared to the past few years.”

Younger Partners’ Kathy Permenter and Robert Grunnah serve on the NTCAR Hall of Fame Committee and saw the past year’s work come to fruition on April 30 at the Hall of Fame induction ceremony. Here are snapshots of them with their CRE colleagues at the event which honors DFW CRE pros for their outstanding contributions to the North Texas brokerage community and the commercial real estate industry as a whole. Photos by Alexandra Olivia. To see more about NTCAR’s Hall of Fame Committee, go to https://www.ntcarhalloffame.org/about-us

By Steve Triolet, Younger Partners Director of Research

As we close in the end of the second quarter of 2019, I’d like to show a chart which shows a larger, longer term look at the DFW office market and where some key fundamentals stand.  Currently the total vacancy rate is at 16.5%, which while not unhealthy, puts the market back to where it was back in 2013.  Back in 2013, is really when the DFW office market turned the corner from the previous recession and the market began to experience a boom in net absorption and new construction that resulted in very high rental rate growth over the past six years. 

Over the past year and a half, however, net absorption has begun to decline as several large tenants have downsized their real estate footprints as they opt for newer properties with on average, new record high rental rates.  These have primarily been technology related companies, but other industries (healthcare, professional services, finance) seem to adopting this trend as well.

As you can see in the chart, this existing supply, along with the construction pipeline (currently just over 7 million square feet), points to the vacancy continuing to rise moderately for the foreseeable future, as net absorption (demand) has been trending down over the past two and half years and is not keeping pace with new construction deliveries.

The key point, which is still unknown, is when the rise in the vacancy will push asking rates down (which remain at all-time highs).

Younger Partners Broker Garrett Marler was selected as a recipient for the 2019 Bob Edge Scholarship.

The Bob Edge Scholarship Fund promotes the profession of real estate while honoring Robert T. “Bob” Edge, who was one of the most active brokerage professionals in the country. The Bob Edge Scholarship Fund was established in 2004 to recognize Bob Edge for his significant contributions to the Dallas/Fort Worth real estate community and assist emerging North Texas commercial real estate professionals with their educational development.

“What sets some candidates apart from others? We awarded two scholarships this year, one was to Kathy Mulgew and the other to Garrett. Two very different needs. We were very impressed with Garrett and the drive and passion he has to grow his career,” says Liz Trocchio Smith, founder and CEO of The Trocchio Advantage and chairwoman of the Bob Edge Scholarship Fund.

“We try to look at each situation as Bob Edge would and think ‘What would Bob do’.  In Garrett’s case, we saw a young professional who was committed to growing in both his personal and professional career.  Bob was very passionate about mentoring and helping the younger generation and Garrett fit everything the scholarship represents,” Trocchio adds.

Scholarship funds provide recipients the necessary tuition to gain industry designations as CCIM, SIOR, MAI, as well as other qualified educational opportunities, Trocchio says.

Marler plans to use the scholarship funding to earn his Certified Commercial Investment Member (CCIM) designation. He started his commercial real estate career at Younger Partners in 2014 as an analyst before moving into brokerage. He graduated from the University of

Kansas in 2014. He served on the 2019 TREC Fight Night Committee and helped launch the Young Professionals Board for Folds of Honor, North Texas Chapter. He now serves on that board of directors. He was a Younger Partners Top Producer for 2018.

“Garrett is an outstanding broker,” says Younger Partners Co-Founder Moody Younger. “He’s eager to learn and we’re seeing him develop and improve every day. Being one of our 2018 Top Producers is quite an accomplishment so early in his career and we see Garrett as a future leader in our firm and within the industry.”

Trocchio says Kathy Mulgrew of Spencer Consulting was also a 2019 scholarship recipient. The scholarships are administered by Communities Foundation of Texas. For more information about the scholarship: http://bobedgescholarship.com

One of the lesser used metrics of a market’s overall office fundamentals is the level of discount that sublease space needs to be reduced in order to compete with direct space, says Younger Partners Director of Research Steve Triolet.

This discount rate can vary dramatically by submarket, with the overall vacancy and the number of large blocks of space (both direct and sublease) having the greatest impact, which is most evident in both the Dallas CBD and Fort Worth CBD.  In the Dallas CBD, for example, the total vacancy rate is 22.2% and there are several large blocks of space available, one of the largest being a 570,000-square-foot sublease at Energy Plaza for $9.50 (FSG) per SF.  This is a 62% discount below the average CBD direct asking rate for direct space.

Today we #LightItUpBlue for #WorldAutismAwarenessDay.

The YP crew sported blue to show our support for increasing understanding and acceptance of people with autism.

We also wear blue to support creating a more inclusive world for people like, Dylan, the son of YP’s Tonie Auer.

Younger Partners Property Services was awarded two new assignments at the 61,000-square-foot Forest Central 1 in Dallas and the 142,000-square-foot 800 W. Airport Freeway in Irving. Effective date of takeover was March 1.

“We are continually expanding our relationships with owners,” says Greg Grainger, president of Younger Partners Property Services. “These two new assignments are part of an expansion of our relationship with a local entrepreneur. They bring us up to managing six buildings for this owner. We also manage Empire Central, a 155,000 square-foot two building office complex, the 91,000-square-foot Chase Bank Building in Garland as well as the 221,000-square-foot Promenade Tower in Richardson. Our leasing team also recently picked up the leasing assignment at Promenade.”

These new assignments bring property managed by YPPS up to almost 4 million square feet of local property managed. YPPS moved up to No. 17 (from No. 21 in 2017) on Dallas Business Journal’s 2018 list of North Texas Commercial Property Managers ranked by total local commercial square feet managed.

“Four years ago, we weren’t even on the list. Today, we are No. 17 on the DBJ list,” Grainger says. “We continue to grow around core clients who are entrepreneurial owners; we grow our portfolio as they grow theirs. They appreciate the quality service that we provide.”

YP’s Co-Founder Moody Younger is bullish on the Dallas CRE market because of the pro-business environment, ease of starting and growing a business here and the inbound demographic growth. He was among a top-notch panel of CRE experts at NTCAR’s quarterly membership meeting today at the Frontiers of Flight Museum.

Moody says while the office market is slowing just a bit, the industrial market is off the charts. However, he says office landlords are getting longer-term leases – from 10 to 15 years — as a trade-off to offset higher TI expenses. Newer office buildings are all about added services, noting that some new buildings feel more like a hotel than an office lobby.  

Here’s Moody, far right, with Granite’s David Cunningham, CBRE Urban’s Jack Gosnell, Cushman & Wakefield’s Brad Blankenship and Structure Tone Southwest’s Vincent Gallagher.