More Corporate Relos, Rising Rents And A Potential Multifamily Bonanza: 5 Predictions For DFW CRE In 2022
Dallas-Fort Worth’s commercial real estate market began to emerge from the shadow cast by the coronavirus pandemic in 2021. The Metroplex celebrated several big wins this year, including strong gains in the industrial sector, record-breaking figures for multifamily investment and a string of corporate relocations and expansions.
Uncertainties around the pandemic make predicting next year difficult, but CRE experts generally agree that the Dallas area will gain even more traction in 2022.
Prediction #1: Corporate relocations will continue, with several Fortune 500 companies making the move to DFW
Recent headquarter relocations by corporate juggernauts like Charles Schwab will spur an uptick in moves by other Fortune 500 companies to DFW in 2022, John Griggs, CEO of Dallas-based multifamily real estate investment firm Presidium said.
“It’s hard to be the first or even the second mover in your industry, but once you have three, four, five large technology companies moving to Texas, it just becomes a lot easier to justify the move you’re not really pioneering anymore,” he said.
There is a groundswell behind the Dallas area with respect to relocations, especially from California and the upper East Coast, which comprised 25% and 15%, respectively, of corporate relocations to DFW between 2020 and 2021, Texas’ director of research for Cushman & Wakefield Ching-Ting Wang said.
Corporate relocations are partly behind the resurgence experienced by the DFW office market in the fourth quarter of this year, said Travis Boothe, senior director of leasing tenant representation for Cushman & Wakefield. Companies that spent the last two years contemplating the future of the workplace began to recommit to office space, as evidenced by fourth-quarter net absorption of 181K SF.
“The momentum is definitely behind Dallas, not only regionally with everyone getting back to work, but also with the relocations that we are seeing from outside the state as benefiting the local office sector as a whole,” he said.
Prediction #2: Employers will bring hospitality-like services to the workplace in a bid to reignite the office landscape
Run-of-the-mill office amenities such as a fully stocked fridge or on-site gym are no longer cutting it, said Bart Waldeck, chief strategy and product officer for Tango, a Dallas-based company that provides cloud-based software for real estate needs.
To entice workers back to the office, employers will have to up the ante by providing a suite of hospitality-like services. Amenities like on-site health clinics, dog walking services, dry cleaning and childcare are set to become more common as companies try to persuade workers that the office provides the same level of convenience as their house, Waldeck said.
“Back in the day, high-tech firms would create this campus where you didn’t have to leave,” he said. “This is kind of the same concept, but a little less of you’re required to go in and more of you want to go in because these amenities are there.”
A recent survey by Gensler found that nearly half of U.S. workers still prefer remote work, while only 19% want to return to the office full time. Waldeck believes offering next-level workplace amenities will help reduce attrition; however, relaxed work-from-home policies are still the most foolproof way to recruit and retain employees.
“There’s a war for talent, and talent won,” Waldeck said. “If you do not have some level of greater flexibility, you will lose your top talent — period.”
Prediction #3: Multifamily will continue on an upward trajectory, as long as anti-apartment sentiments are kept at bay
DFW led the nation this year in terms of multifamily investment, with CBRE reporting $16B in year-to-date sales by Q3. The Metroplex also snagged the third-place spot in terms of the most new supply, with 13,600 units delivered over the four quarters leading up to Q3.
This trend is projected to continue, especially as a flood of young professionals moving to the area boost demand for Class-A products, said Doug Jones, managing principal of Cushman & Wakefield’s Dallas office.
“The talent is moving … to Texas, specifically to DFW,” he said. “Companies are chasing that talent, and capital is chasing the companies. All those people need a place to live.”
One thing that could stall this momentum is the growing prevalence of anti-apartment sentiment among DFW suburbs, Griggs said.
“There are over 70 municipalities in the Dallas-Fort Worth Metroplex, and in the last few years, many of them have really turned on apartments,” he said. “It’s pushing development further out geographically from the job centers.”
Multifamily development has become more expensive, not only because of the rising cost of construction, but also due to more stringent municipal requirements. Despite the growing bottom line, Griggs said developers should consider the bigger picture when contemplating whether now is the right time to invest in multifamily.
“Everyone needs to take a step back and realize that some of these factors are going to be pretty volatile and, frankly, negative for development,” he said. “But if we look at the overall health of DFW as an economic giant … it makes all the sense in the world to be actively developing product in this area.”
Prediction #4: Supply constraints will drive up prices at DFW data centers
Headed into 2022, DFW is bracing for a pandemic-induced supply shortage that will likely result in price increases for data center users.
For nearly two years, DFW has been considered an oversupplied market when it comes to data centers, said Ali Greenwood, Cushman & Wakefield’s executive director for data center tenant representation. The metroplex has seen eight consecutive years of price decreases due to several factors, including economies of scale, lower cost of capital and many data center companies going into REIT status, Greenwood said.
According to CBRE, DFW data center monthly rental rates for the first half of 2021 were between $100 and $140 per kilowatt. Those figures are poised to change next year, as cramped supply chains cause landlords to pass the buck to customers.
“Not only is it more time-consuming to build data centers, but it’s taking longer to bring [them] online,” Greenwood said. “And now, with record absorption through the pandemic, we’re facing a little bit of a supply constraint.”
Companies occupying data center space in DFW span a wide range of industries, from telecommunications to healthcare technology businesses. The metroplex also saw increased interest from financial service institutions in 2021 as the trading volume across stock markets spilled over into data center demand, Greenwood said.
“DFW in 2021 and going into 2022 saw a large volume — larger than any other area in the country, actually — of financial institutions taking down data center space in this market,” she said.
Prediction #5: Industrial rents will increase by 10% or more in infill submarkets
Lack of available infill space and supply chain shortages will accelerate rental rates past forecast growth in 2021, said David Eseke, lead of Cushman & Wakefield’s Industrial Tenant Advisor and Agency Leasing teams.
“Institutional groups are underwriting 6.5% to 8% increases in rents for at least the next two years,” Eseke said. “I think that’s a very conservative number. I think we will see rents go up by 10% or more in infill submarkets.”
Limited barriers to entry and access to flat, cheap dirt have made DFW an incredibly attractive market for industrial developers, Eseke said. So far in 2021, the Metroplex has recorded 36.5M SF of net absorption for industrial products, and that figure is poised to reach 40M SF by the end of Q4. This blows past DFW’s previous record-high of 26.5M SF, Eseke said.
Construction of new industrial product is also expected to surge in 2021. There are currently 56M SF of projects under construction, which Eseke said far outpaces the second-place metro of Atlanta, with 36M SF in the pipeline.
Submarkets poised to see the most industrial activity in 2021 include South Fort Worth, Forney and Denton, Eseke said. The projected increase in cost will drive developers to maximize storage space by trading more square footage on the ground for increased height, he said.