A rising tide lifts all boats. So the saying goes. But is it true in office building rents? Definitely. As demand for office space increases, landlords start testing the waters by increasing rents. Eventually, that demand and those rents get to a point that justify new buildings.
New always commands the highest rents especially in the most desirable locations – think Uptown near the Klyde Warren Park or west Plano in the Legacy Business Park.
As the best and newest raise their rents, the next lower step in building class follows suit and raises their rent, but maybe not quite as much. That continues all the way down the food chain.
But in any market, you still have the areas and buildings where people just don’t want to be. Those buildings still offer very cheap rent which can create great opportunities if you are willing to be in those areas and in those kinds of buildings.
One other phenomenon of a market with strong demand is that some landlords will try to compete for occupancy and higher rental rates by renovating and updating their buildings. The Dallas Fort Worth area has seen a great deal of that activity – 40 million square feet (SF), in fact, over the last 10 years according to a recent article from Costar, a commercial real estate research firm. That’s more than 4 million a year in over 400 buildings.
Some of the renovations are of the lipstick-on-a-pig variety – very little substance just to say they did something. But many buildings spend huge amounts. Park Central 7-8-9 on LBJ Freeway spent over $7 million and it was spent very wisely. That’s a far better property than pre-renovation. We represented a tenant to lease 19,000 SF before the renovation started with rental rates in the high-teens. The landlord projected that they would be charging low-20’s post-renovation.
About 8 months after the renovation was complete, we toured another tenant through the project and were quoted a rate of $26-$28. The market obviously validated the quality of the renovation and was rewarding the landlord handsomely.
The Fountain Place project downtown Dallas was already a class A building, but it spent $70 million. Of course, that included adding a whole new parking garage. Trammel Crow Center is spending $135 million. That includes a new parking garage, new retail space, and common area upgrades throughout.
While a strong economy results in higher rental rates, it’s far better than low rental rates. That’s because low rates are almost always a result of a weak economy where businesses are laying off workers, not hiring them. They don’t need as much office space if they aren’t hiring.
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 that lease or buy office and warehouse properties.