JLL Office Insight: Dallas Still Outperforms the Rest of the Nation

A new report shows an overall positive evaluation of the region and its office real estate sector.

The latest Office Insight from JLL looks at the first quarter and shows that the Dallas market continues to outperform the rest of the nation—despite a decrease in leasing activity. Also, DFW continues to lead the nation in job and population growth, which is partly attributable to the region’s diversified economy.

According to the report:

- Job growth for Dallas-Fort Worth grew by 5.9% year-over-year through January, nearly double the national growth rate.
- Sublease availability increased by 1.1% quarter-over-quarter to 9.1 million square feet, compared to a 10% increase nationally during the same timeframe.
- Dallas continues to be among the top markets nationally for new construction, with 832,970 square feet delivered in the first quarter of this year.
- Vacancy is expected to drop by 6.1% as over 4 million square feet of obsolete office space across multiple assets will be taken off the market for conversions.

Tenant demand strong while leasing activity decreased

The company said office tenant demand continues to be strong and marked an increase over the past quarter. As of March, JLL leasing reports 48 tenants actively searching for spaces over 20,000 square feet, totaling 4.4 million square feet, marking a 12.8% increase quarter over quarter. Of this demand, 40% was for spaces in the 20,000- to 50,000-square-foot range, indicating that tenants continuously evaluate their space needs and prioritize their footprint’s efficiency.

Still, JLL noted Dallas leasing activity fell 27.1% year over year, mostly because of a delay in large-scale activity caused by economic uncertainty, the firm said.

JLL Managing Director Cribb Altman says tenants are taking their time to make real estate decisions—despite “robust” tour activity.

“Economic uncertainty has caused many companies to adopt a cautious approach and take a ‘wait and see’ attitude,” Altman said. “Additionally, several businesses are still in the process of bringing their employees back to the office, which makes it difficult for them to determine what their footprint needs to be going forward.”

According to Altman, the financial services sector has been the most active industry in terms of office space leasing, driven by the growing demand from banking and finance institutions looking to expand their market share.

“Dallas has taken the lead in the nation’s financial services job growth, which further cements the city’s status as a thriving hub for this industry,” he said.

Consistent demand for smaller leases; sublease availability increases in Q1 2023

Of leases signed in the first quarter this year, 95.1% were under 15,000 square feet, which JLL said is a consistent trend in the market with a slight but steady increase since 2019.

Sublease availability increased by 1.1% quarter over quarter to 9.1 million square feet, compared to a 10% increase nationally within the same timeframe.

Far North Dallas continues to hold the highest concentration of Dallas sublease availability at nearly 30% of the market, JLL said. It said a notable removal from the sublease market in the quarter was Reata Pharmaceutical’s 327,400 square-foot build-to-suit being pulled off the market following its first FDA approval. Spec suite activity continues to increase in tenant favorability due to high-quality finishes and ease of occupancy.

The Dallas Morning News reported last week that Reata shifted gears to occupy its completed building in Plano’s Legacy business park after initially deciding to stay in its existing location and sublease the new 20-story high-rise that was completed in 2021. Reata broke ground on the 327,000-square-foot tower on Legacy Drive in 2019 and planned to move into the building when it was finished. The decision to move in came after delays caused by the pandemic and several drug approvals.

Preferences shift to well-capitalized properties; debt maturities offer opportunities for investors

JLL Dallas Managing Director Blake Shipley anticipates a shift in tenant behavior towards properties with a reputation for being well-capitalized and offering generous tenant improvement allowances.

“New supply has always been favored, but the pricing gap between new and existing has continued to widen,” he said. “Generally, tenant’s price sensitivity is limited in comparison to their focus on the availability of capital and tenant improvement (TI).

Lately, he says, tenants have preferred properties “with a reputation for being well-capitalized and offering generous TI allowances.” Shipley expects that shift in behavior to “continue and gain momentum.”

Shipley also suggests that debt maturities and limited opportunities for refinancing “may present intriguing opportunities for investors who have established relationships within the lending community.”

JLL is in frequent talks with investors who are interested in entering the Sunbelt cities, with Dallas being a particular focus, he says. According to Shipley, these investors view the market’s distress as an opportunity to make large-scale investments while capital markets are otherwise inactive.

“Consequently, I anticipate the emergence of a new class of investors in our market within the next 24 months, with a lower basis and more capital to deploy,” Shipley said.

Top market for new construction; multifamily conversions underway

JLL said that Dallas continues to be among the nation’s top markets for new construction, with 832,970 square feet delivered in Q1 of 2023 and plans to deliver an additional 3.9 million square feet throughout the rest of the year. At Home fully leased the recently delivered 9000 Cypress Waters, while IBP has already secured 23% of its total space.

JLL said that despite the large-scale development pipeline, 55% of first-quarter delivered space is already leased or under contract. That’s in line with the national average, the company said.

JLL said that in the Dallas CBD the conversion of underperforming office products to partial multifamily is an ongoing trend. It said that once conversions begin, vacancy may drop by 6.1% as over 4 million square feet of obsolete office space across multiple assets will go off the market.

Along with decreased vacancy, JLL said that the revitalization of the urban core is expected to be fueled by population growth of over 55% along with increased amenities through retail and restaurants to attract residents and companies alike.

JLL Research has expanded its tracked inventory to include corporate owner-occupied properties as part of a continuous data quality improvement process. Buildings owned by government, educational, and medical entities remain outside of statistical inventory, JLL said.

The story was updated on May 2, 2023, with additional comments from JLL Managing Directors Cribb Altman and Blake Shipley. Quincy Preston contributed to this report.