I saw a headline this week that the DFW office market is trending up. Again? We just had this conversation a few weeks ago. How is it different this time around? Listen to today’s podcast to find out! The article I referenced was from D Magazine’s CRE edition written by J.J. Leonard at Stream Realty Partners.
J.J. is a good guy and he did a good job of slicing and dicing the data to reach that conclusion. Yes, the data in the article leads you to the conclusion that the market is trending up. However, I’m not sure the numbers from CoStar would agree. First, J.J. states that suburban markets are dominated by small and medium-sized businesses whereas downtown normally appeals to larger, national tenants. He correctly points out that national companies typically make policy that applies everywhere in the country and they are slow to change. Small and local companies can be more nimble in their decision. This just gets back to local control – the smaller the firm, the more control. And that appears to be what is driving the deal activity mentioned in the article. It says that absorption was positive for the first time in four quarters at the end of the 2nd quarter. CoStar says we’ve had 5 quarters of negative absorption.
To reach his conclusion, J.J. acknowledges that his numbers were fueled by Charles Schwab moving into its million SF campus. He also says that numbers all over the metroplex were trending positive. He says that if you remove JC Penney’s bankruptcy-driven move-out of its 1.2 million-square-foot campus in Plano in the 1st quarter, absorption would be only slightly down, and Class A absorption would be over 600,000 square feet positive. But you can’t do that, of course. If you keep Schwab in the mix, you have to do the same for Penney’s. So what sounds like good news may not be.
Although I will say, the article says the 2nd half of 2021 will have positive absorption, and in that regard, CoStar agrees. In fact, CoStar is predicting that 2021 will end the year with 2.7 million SF of positive absorption and remain positive into the future. I’m hopeful this is true but with where we’ve been over the last year and half and the current conditions of the Delta variant, I’m a tad skeptical.
So, what about rental rates? The article said they increased again and now average $29.44. I’m personally not seeing that rates are going up yet. CoStar says that overall rates fell 0.2% which means they are basically flat and that they average $27.76. But average rates really don’t tell the story. The truth is in the details. For example, I was doing some research on an area of Tarrant County the other day. This was for office condos and I found rental rates that varied from $17.50 to $28.00 for what looked like comparable buildings. An average rate of $22.75 would be very misleading because not a single building was quoting $22.75.
It sounds like it’s still a tenant market…..but it may be coming to a close.
Bob Gibbons is a Real Estate Advisor & Tenant Advocate (also known as a tenant rep) with REATA Commercial Realty, Inc. which is a tenant advisory firm based in Plano, Texas. Bob serves companies in Plano, Frisco, McKinney, Allen, Richardson, Addison, Dallas and the surrounding areas and specializes in companies which lease or buy office and warehouse properties.