Q4 2022 Office Space Report: Dallas, TX
Dallas, Texas, is one of the nation’s most popular business hubs, and it’s not hard to see why. Lower taxes, less stringent industry regulations, and a sunny climate encourage relocation.
The most recent numbers for Dallas’s office space market were mixed: Even though the previous quarter of 2022 saw negative absorption, the total absorption for 2022 was just over 1.8 million square feet (MSF).
Class A space came in first with over 1.5 MSF of absorption.
Recently, Dallas landlords were discovered offering flexible options for renewing tenants, especially those experiencing “sticker shock” when quoted their new rate.
General Area Overview & Demographics
Dallas is famous for the Southern friendliness of its people, a vibrant art and music scene, and a diversity that continues to attract more people from other states.
With a population of 1.3 million, Dallas is one of the state’s three largest cities and the ninth-largest city in the nation.
According to 2021 data from the US Census, the average household income in Dallas is $63,494. Over 34% of the population holds a four-year college degree.
Summary of Dallas Office Space Performance in Q4 2022
While various factors caused office leasing to decrease by around 700,000 SF during Q4, performance for the previous quarters of 2022 saw net leasing increase by about 1 MSF for the entire year.
The price difference, aka spread, between quality and value rents reached 65%, which means it has remained near its highest level in over a decade.
Companies continue discounting sublease offerings to attract demand. Sublease space is generally discounted 19% below direct space, the most since at least 2014.
Rent growth is expected to continue over the short term as more workers trade remote offices for full- or part-time office attendance. However, this is expected to soften as price discovery slows with space demand.
Let’s look at the actual pricing for Dallas office space now.
What Are Office Space Rents Like in Dallas?
Rent growth for Dallas commercial real estate remains strong within the office sector, at +7.9% year-over-year.
The overall asking rental rates of $30.44 PSF continues to be driven by record Class A rates of $34.62.
The highest rent rates are in the Uptown area of Dallas, which is situated near the city’s downtown CBD. New construction in Uptown is commanding rental rates of up to $90 PSF.
Rents in value-class (Class A-/B) properties reached $26.88 per SF, representing a nearly 6% increase from 2021.
Expensive office rental rates for new construction have risen as much as $75-$90 PSF in the trendy Uptown area. This has contributed to a general shift in pricing trends.
Purchase & Leasing Activity
Heading up the CRE headlines in Q4 2022 was the sale of Comerica Bank Tower, a 60-story building in downtown Dallas with 1.5 million SF of office space.
Buyer Woods Capital has assigned renovations to their affiliate Pacific Elm Properties, including adding residences and hotel rooms to the tower.
Other buying and selling activities included the sale of Park Central 7-8-9, an 846,000-SF complex, to Morning Calm, and the sale of the Plaza at Legacy, a 216,000 SF development north of Dallas in West Plano, to Larson Capital Management.
Notable Office Space Deals in Dallas in Q4 2022
One of the most significant area leases signed during this time was Texas Capital Bank’s expansion to 175,000 square feet in Uptown Dallas.
This increased the Bank’s total lease to more than 200,000 SF across 7 floors of the 21-story building and earned naming rights to 2000 McKinney Avenue, which will be known as Texas Capital Center.
Another notable lease: Solar energy provider Sol-Ark’s 115,200 SQ lease in Allen. This new lease is for Sol-Ark’s headquarters at 805 North Central Expressway, close to their 180,000 SF warehouse facilities at 915 Enterprise Blvd.
New Office Space Development Activity in Dallas in Q4 2022
While new construction has been strong during 2022, development is expected to be affected by rising interest rates and construction costs.
While 2022 saw few office deliveries (only 2 MSF), many more will be completed in 2023. Over 60% of the construction pipeline will deliver during the first quarter of 2023.
Buildings with no advance leases, aka “spec” projects, are already pre-leased at 26%. This is the highest percentage seen since 2019.
Properties that are nearing delivery include:
- Harwood No. 14 is a 27-story multi-use building with 360,000 RSF of office space. The building will also feature a 17,000 SF combined rooftop and sky garden.
- The Star Phase IV is an 11-story, 313,000 SF building located north of Dallas in Frisco. The Star complex is the Dallas Cowboys World Corporate Headquarters.
Properties breaking ground in 2022 included Southstone Yards, a 241,000-SF Class A timber building near the Spring Creek Parkway in Frisco, and Old Parkland East, a 285,000-SF Class A building in the Uptown/Turtle Creek neighborhood near the Dallas CBD, with a budget of $156 million.
Market Forecast for Dallas’s Office Space Market
The short-term expectation is that higher interest rates and other financial conditions may slow the Dallas area’s momentum. However, unemployment is still at historic lows, meaning new hires will generate new leases.
The long-term prospects for Dallas and the surrounding area are positive. The DFW area is predicted to have more workers than Chicago by 2030, and its population is expected to grow.
What can investors expect if this forecast is correct?
Takeaways for Office Space Investors
In the years ahead, investors willing to wait for long-term results may be richly rewarded by Dallas office space. However, there are still plenty of opportunities for those who plan to add Dallas office space to their portfolios in 2023, even more so with the help of a Dallas-based commercial real estate agent or broker.
Investment sales were strong during 2022. Dallas and the DFW metroplex are one of the nation’s most active investment markets, even though the significant relocation trend to Texas, fueled by the COVID-19 pandemic and a pro-business environment, is expected to wane slightly.
With a strong economic outlook and attractive investment values, Dallas is well-worth consideration.
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