Contributor: Walter Bialis
JLL recently released a report examining the top 50 local office markets and their development pipelines, entitled “Supply rut, or supply glut?” Reports like this can get pretty complicated as many factors are weighed to compile the final rankings. In the case of Dallas, the report concluded that the current and future supply of office space would “exceed” demand, and this would help ease market conditions, giving tenants a little more leverage in the face of rapidly rising rents.
I think a little bit of explanation is needed to clarify the report’s message beyond the basic headline of “exceeds”. Dallas rises to the top of the list because it has one of the highest office development pipelines. Looking back over the last business cycle, North Texas came through the recession in pretty solid shape, so while our market slowed, it did not see the same level of downturn noted in a handful of the other markets. This is still weighing on other markets, as the report points out. For example, the hard hit Atlanta and Florida markets still have limited office development pipelines. Atlanta, in particular, has less than 1 million square feet under construction, despite its growing job base.
In contrast, Dallas’ office pipeline is at 7.6 million square feet. But – this must be balanced against North Texas’ economic and job dynamics. Few locations in the US have shared the same growth during our recovery. In fact, since the end of the recession we’ve added close to 600,000 jobs. That translates into a 21% expansion in the job base. Dallas has also been at the top of office absorption nationally for a few years now, with 15 million square feet absorbed thus far in this expansion cycle.
That raw economic power is significant because it is priming all of the property markets. Unlike in past cycles when spec construction accelerated very quickly in Dallas, today developers and underwriters are remaining prudent. Because of this, our pipeline is still generally in sync with demand. In addition — and this is very important — our level of pre-leasing is solid — and one of the highest in the US at 57%. This is especially evident when put against big pipelines in locations like Austin (32%), Denver (24%), Seattle (35%), or San Francisco (35%).
For North Texas, our construction numbers are, and have been, greatly influenced by build-to-suits for companies such as Raytheon, FedEx, The Richards Group, and State Farm (last year and coming this year), as well as upcoming users like Toyota and Liberty Mutual, or even 7-Eleven. This will continue to be the case through 2017 as other companies continue breaking ground. This is why our preleasing – and our net absorption – numbers have been so strong.
I do not see our economic engine shifting dramatically over the near- to mid-term. While there will always be quarter-to-quarter fluctuations as leasing ebbs and flows, our overall economy is poised for continued expansion for the foreseeable future. One key driver here is the number of outside companies looking for locations in DFW. These companies will likely keep our development pipeline full, and our pre-leasing strong. At the present we have 24 million square feet of tenants looking for space – and the regional chamber continues to track a record number of companies exploring DFW.
This is not to say we will not see a gradual uptick in vacancy as this business cycle continues, but rather that we are in a more balanced supply-demand position. The most significant observation with the “exceeds” categorization for Dallas is that if our market continues to see above-average absorption, additional speculative office projects may get triggered. If this happens, there could be supply and demand imbalances that emerge in some submarkets over time. Let’s be straight here, though, no one’s crystal ball is perfectly clear. As always, we will watch these numbers to see if a mismatch is growing, but for now, our market remains pretty balanced.
To see the national report, click here.