By: Walter Bialas
We are in a period where rents are rising fast. Based on our quarterly stats, Class A rates are up 6.4% in the last year for Dallas overall. While that’s an amazing number, it is even higher in some of the popular submarkets (like 8.1% in Uptown).
JLL Senior Vice President Brooke Armstrong made the observation that Uptown has been moving particularly fast and that the buildings delivered at the end of the last cycle (let’s call them the “newer” buildings) are leading the charge in rate increases – even ahead of the rates in properties now under construction.
The chart below lays out a bit of Uptown’s office history. Specifically we looked at the newer buildings (like 1717 McKinney, Rosewood, and Saint Ann) that were delivered at the end of the last cycle and how they have performed compared to Uptown’s remaining Class A properties. Clearly, after initial lease-up, these newer properties have set the market in terms of rent, achieving a substantial $8-premium over the remaining Class A stock. Of course, vacancy is also very tight in these assets.
What is not as apparent from the quarterly numbers, is how fast rates are actually moving. In fact, based on recent proposals, rents continue to skyrocket in these premier, existing assets – and are now coming in at around $52 per SF (on a full service gross basis). In comparison, fully loaded rents in projects now under construction are typically in the $48-$49 range.
Interestingly, this positions the buildings delivered late in the last cycle commanding a rent premium over new construction. This is not a common occurrence and raises the question of what is driving this trend…
First, we must emphasize that these existing buildings are not run-of-the-mill Class A properties – they are the premiere players in the submarket. They also are essentially full in terms of occupancy, so limited space options exist. Combine that with the need to wait for 6 to 18 months for the new properties to be completed, and you have a unique situation where existing tenants and renewing tenants have few top-tier location options. And, add to that the high cost for simply moving between buildings and reconfiguring space today and you have the ingredients in place to drive rents.
So, what’s the outlook here? With a continued strong local economy for the next 2+ years, there is no sign of rents plateauing in high-demand locations / assets in Uptown or the CBD. As long as our construction deliveries generally match demand, we should see gains of 4-5% annually, even as vacancy may gradually creep higher, especially as under construction projects are delivered.
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