Medical Office Space Market Info for the Dallas / Fort Worth Area

ECONOMY

The Dallas-Fort Worth (DFW) economy continued its recovery in Q2 2021. The unemployment rate remains high relative to last year, but with over 3.7 million people employed, the region is approaching its pre-pandemic levels. DFW’s population increased by 91,331 people year-over-year (YOY), and by 27,863 in Q2 alone, continuing a long trend of population growth. As of June 2021, the population reached a new high of over 7.8 million residents. According to Moody’s Analytics, office-using jobs grew by 61,251 positions when compared to Q2 2020. Office-using roles are described as positions that fall within business and professional services, information/technology, and financial activities. The leading indicator of office demand is driven by business and professional services roles, which account for 61% (652,633 jobs) of office-using employment. The region’s office employment totaled 1.1 million jobs as of June 2021.

SUPPLY

Deemed an essential business, construction has continued mostly uninterrupted in DFW. Despite this, deliveries in 2020 and Q1 2021 fell short of historical averages. In Q2 2021, the market broke this recent trend. 1.2 million square feet (msf) of new inventory was delivered in the second quarter, 50.1% of which was preleased. The largest deliveries were both in the Legacy/Frisco submarket: the Keurig Dr. Pepper HQ build-to-suit at 350,000 square feet (sf) and 5301 Headquarters Dr at 248,662 sf. The construction pipeline in DFW remains robust, with 4.6 msf to be completed over the next 24 months. The two leading submarkets in construction activity are Legacy/Frisco and Uptown/Turtle Creek, each with 1.2 msf of space currently under construction. The largest under construction project is The Epic II in Deep Ellum at 470,000 sf in the East Dallas submarket, followed by Victory Commons in Uptown/Turtle Creek at 364,773 sf. Available sublease space remains elevated in DFW with nearly 8.8 msf of sublease inventory. However, just 42.1% of this 8.8 msf is listed as currently vacant, compared to 86.6% of available direct space listed as vacant. This points to a recent trend in DFW; while employees work from home, many companies have listed parts or all their space for sublease to weigh their real estate options without physically vacating existing space.

DEMAND

The DFW office market saw its sixth consecutive quarter of negative occupancy growth and absorbed -893,503 sf in the second quarter of 2021. This number is largely driven by companies downsizing their real estate space by consolidating their employees into fewer locations and/or putting part of their space up for sublease. Below average leasing activity over the last five quarters has also contributed to falling occupancy in DFW. The second quarter of 2021 reported 2.5 msf of new leases transacted – 46.8% lower than the historical average of 4.6 msf per quarter from 2017-2019. Breaking a recent trend towards newer, suburban developments, the Dallas CBD led all submarkets in new leasing activity, with 450,241 sf of deals signed in the second quarter. Activity was bolstered by two large leases signed by the FDIC at Plaza of the Americas (165,524 sf) and Integrity Marketing at Fountain Place (100,000 sf). Overall vacancy rates climbed 80-basis points from the previous quarter, up to 22.1%. Class A assets remain slightly insulated from falling occupancy, as Class A absorption was just -86,252 sf. Class B continued to drive DFW’s rising vacancy with -762,004 sf of absorption in the second quarter. It is important to note that Class A space makes up 59% of all inventory in DFW, while Class B makes up just 37%. The largest move-outs recorded this quarter were Keurig Dr. Pepper (296,433 sf) in Legacy/Frisco, FedEx (82,201 sf) in Las Colinas, and American Airlines (73,155 sf) also in Las Colinas. Class B space still holds the highest overall vacancy at 22.4%, while Class A and Class C trailed at 22.2% and 16.9%, respectively. The Dallas submarkets with the lowest overall vacancy rates included Preston Center (12.9%), Lewisville/Carrollton (14.2%), and Uptown (16.4%)

PRICING

Overall rental rates remained nearly flat, increasing by just 0.3% YOY to $26.51 per square foot (psf) on an annual full-service basis. Despite the market conditions, landlords have not lowered asking rates, instead offering competitive concession packages which include free rent and additional tenant improvement dollars. The Uptown/Turtle Creek submarket remained the leader with the highest overall average asking rates in DFW with rents at $44.01. Preston Center followed at $43.00 and Legacy/Frisco at $34.30. As expected, Class A registered the highest average asking rate, rising to $31.27 psf, while Class B and Class C reported more economical rates of $19.80 and $17.48, respectively.

OUTLOOK

• Absorption is likely to remain negative in the near term in DFW, as leasing activity has yet to approach pre-pandemic levels.
• Despite the market conditions and falling occupancy in Class A space, rental rates for Class A and B space continue to bifurcate as tenants continue to pursue newer, Class A assets.
• Q2 2021 marked a continuation of DFW’s recovery. The long-term outlook for the region remains positive, especially compared to other large, U.S. metro areas.