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3 Impacts All This New Office Supply Is Having On Fundamentals

3 Impacts All This New Office Supply Is Having On Fundamentals
DFW office rental rate delta being increased due to new Class-A construction

DFW loves new.

Younger Partners Research Director Steve Triolet delved into the impact of Dallas' huge office pipeline on the market and found that deliveries — 20.1M SF of Class-A and 3.8M SF of Class-B office has come online since 2013 — are shaping the city in a few ways.

1) Rent Explosion

The delta between Class-A and Class-B office rents is widening as new supply sets new bars for pricing. Historically, there was a $4 to $5 gap per square foot between what tenants paid for a top-tier building and a Class-B one, but that has been increasing over the past five years, Triolet said. The delta is now $8/SF.

2) New-Build Is Low-Risk, But Could Hurt Everyone Else

The best performing submarkets are typically the ones with the newest buildings, and those properties are almost guaranteed to do well.

"Even in an overbuilding situation, it’s rare for the newest buildings to go into distress," Triolet said. "The properties that struggle the most at almost any point in the business cycle are the older, outdated properties."

Even with a growing discount on pricing, these properties are more often struggling to attract tenants.

3) Time On Market Is Shrinking, Which Is Unexpected

The overall vacancy rate in DFW office has been rising for three years. Typically, the average time to lease space is directly correlated to vacancy — as competition increases, so does the amount of time it takes to fill a building. Not this time.

The average time on market has been trending downward for the past five years and particularly the last three. Basically, tenants are quickly jumping on new space, and there has been more new space to jump to recently. DFW has been absorbing a strong 5M SF per year for about five years, making it one of the most active leasing markets in the U.S.

No surprise: Time on market is much longer for older properties than new or newly renovated ones.

"The underlining message is old, unimproved space tends to languish on the market, while there continues to be a healthy appetite for higher-quality space, especially new and improved office space," Triolet said.

Related Topics: Younger Partners, Steve Triolet