Growing AND slowing?

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Dallas office absorption slowed in the first half – what’s the explanation…

By JLL Dallas, August 20, 2018

The DFW economy remains strong.  Job gains continue at more than 100,000 annually – yet office demand (aka. net absorption) slowed dramatically in the first half of 2018.  In fact, through midyear, Dallas’ net absorption totaled only 900,000 square feet – which includes the delivery of Liberty Mutual’s 1.1 million square foot campus in Q1.

That is a dramatic downshift from the consistent 2.2 to 4+ million square feet we’ve become accustomed to over the last several years.  What explains this sudden slowdown?

Well, to put this in perspective, we are not alone.  Based on JLL’s 2Q numbers, many other US markets saw a similar shift and some saw an even very dramatic slowdown.  The chart below highlights a handful of the major markets for year-end 2017 and mid-year 2018.

Clearly, Dallas’ office demand totals have been influenced by the large corporate campuses that have been opened by State Farm, Toyota, JPMorgan Chase, and Liberty Mutual during 2015 though Q1 2018. But, even after accounting for these large projects, Dallas absorption has been running 2.2 to 3.2 million square feet annually. So, what is driving the slowdown here – and elsewhere in the US.

For Dallas, there were no very large move-outs that account for this momentum shift, although Nationstar Mortgage and Signet Jewelers (Las Colinas) and Guidestone (Uptown) space did come back on the market. As we see it, three combined factors have been at work, over time – and are now being reflected in our base numbers. These same drivers are at play in all the other markets, although probably to different degrees depending on the local area.

  • The first is consolidation. While the large corporate campuses that opened felt like “new” office demand, there was also a consolidation component as existing functions were brought under the one roof at the new campus. Only Toyota was essentially all net new demand. For the other large users, the multiple locations that were given up took several quarters to work their way through the system fully and impact office demand totals – even though the move-ins took place quickly.
  • Second is the drive toward efficiency. In Dallas, and elsewhere, improving work environments to acquire and retain talent has become paramount. For all office tenants signing new leases, workplace strategies are being used to optimize space needs – which reduces office demand. In other words, as a typical 25,000 square foot tenant re-sizes into 18,000 square feet – space demand becomes “negative”.
  • Lastly is the impact of co-working. Co-working companies lease large blocks of space. This immediately adds to our “positive” absorption – essentially frontloading demand. After they sign leases, they then begin to fill their space with small and large companies, creating a drag on future net absorption, especially given their very high space efficiency levels.

In Dallas, we can see this lower demand reflected in the lease-up of recently delivered buildings. If we remove all build-to-suits (including the smaller ones like FedEx and Fannie Mae), a substantial pool of space is still available in buildings delivered in 2017 and 2018, with some higher than expected availabilities in buildings delivered in 2015 and 2016.

As we watch the market, all indicators are positive so this is not the sign of a broad market slowdown – good job growth is here in DFW and for the US, as well as solid GDP gains, etc.

The reality is, however, that there are headwinds for office demand, which may mean that Dallas and other US markets could see much lower absorption than to which we’ve become accustomed.

The most significant constraint is our “strong economy” and our extremely low unemployment rate. Quite simply, employers may take a breather as they realize it is difficult to fill vacant positions or expand. While DFW is a location that people migrate to for jobs, this will likely cause a slowing of workforce growth. In fact, the Dallas Federal Reserve issued a report this week that the remainder of 2018 and 2019 would see a slowing. In addition, the move to space efficiency will continue and become more important as rents increase, as will the move to co-working – impacting the high demand levels we’ve seen in the recent past.

For more details, please click below to download the snapshot report.