Lack Of Supply Drives DFW's Top-Tier Office Rents Into The Stratosphere

Rents in Dallas' hottest office submarkets have skyrocketed, and they aren’t expected to come back to Earth for at least two years. 

Asking rents for trophy and Class-A office space in Preston Center jumped by nearly 37% from the first quarter of 2024 to the third quarter of this year. And real estate private equity firm Capital Commercial Investments projects Preston Center rents could rise by almost 19% by the first quarter of 2027.

The rise of Y’all Street has turned DFW into a financial hub and fueled demand for top-tier office space in Preston Center and areas like Uptown and along the LBJ Freeway corridor near the Galleria. 

Demand is also peaking in these submarkets because there isn’t much new construction happening, De La Vega Development founder and CEO Artemio De La Vega said.

“There's been a lack of new supply because office has been out of favor with the capital markets and lenders,” De La Vega said. “And so with more demand, limited supply just creates opportunity.”

Preston Center has long been a top office market in DFW, thanks to its location in the heart of Dallas and its proximity to the city’s wealthiest neighborhoods. The submarket also has just 4M SF of Class-A office space and a vacancy rate of 5.2%, according to Colliers' Q3 office market report. 

In addition to the growth of Y’all Street, DFW has also emerged as a magnet for corporate relocations, bringing new employers to the region’s growing population. And with that job growth, the demand for the region’s highest-quality office space is expected to persist through at least 2027, as little new supply is in the pipeline.

The 2.6M SF of new product under construction in the third quarter was down from the previous quarter and Q3 of last year. However, nearly 75% of new construction on the way is Class-A. 

Asking rents have also risen around 20% since the beginning of last year in Preston Center’s neighboring markets of Uptown to the south and near the Galleria to the north.

Uptown rents went from $51.41 per SF in the first quarter of 2024 to $61.54 last quarter. Office rents near the Galleria jumped from $31.50 to $38.78 per SF during that time, according to Capital Commercial.

The rent increases haven’t been as dramatic in those submarkets since both have more Class-A inventory and higher vacancy rates. 

Uptown has nearly 14M SF of inventory and a 22% vacancy rate. The LBJ Freeway corridor, which includes the area near the Galleria, has more than 11M SF of inventory and a nearly 23% vacancy rate. 

Still, Capital Commercial projects asking rents will continue their upward trajectory in both areas into early 2027, rising by nearly 19% in Uptown and more than 16% near the Galleria. 

In addition to the scarcity of product and rising demand from companies moving to DFW, Preston Center, Uptown and offices near the Galleria have benefited from their locations close to Dallas’ wealthiest neighborhoods. The nearby concentration of wealth sets the expectation that companies have client-facing space in those submarkets, Capital Commercial founder and President Doug Agarwal said.

Due to the lack of available office space in submarkets like Preston Center, Agarwal expects some neighboring markets could see overflow demand for premium office space. 

“It's very traditional for the Central Expressway market to benefit from Preston Center rents increasing,” Agarwal said of the submarket to the east of Preston Center. 

The Knox-Henderson corridor and Turtle Creek areas south of Preston Center are also poised to reap the benefit of the increased demand for top-tier office space, De La Vega said. Both are near high-end neighborhoods and have already seen positive momentum. 

“Buildings that are well located are going to do well,” De La Vega said.

The increased demand for trophy and Class-A office space will also trickle down to older and more distressed product, Agarwal said. For every $10 rents increase in Class-A space, he estimated Class-B rents will eventually go up $5 to $6 per SF.

This rent growth could also follow the population growth suburbs along the Dallas North Tollway have experienced. Agarwal estimated that office rents in North Plano and Frisco could rise by $5 to $7 per SF by the end of the summer. 

“There’s absolutely going to be a commensurate rent increase in the North Plano-Frisco market. It's just 12 to 18 months behind what happened at Preston Center,” Agarwal said.

As their populations have increased, cities like Plano and Frisco have been aggressive in offering economic development incentives to support job growth and to entice companies to locate there. 

Those areas have been hot spots in recent years for mixed-use developments that have added considerable office space to the submarket. It wasn't too long ago that the Plano-Frisco area had nearly 8M SF available, Cawley Partners Director of Development Jeremy Duggins said.

“Since that time, we've seen some giant subleases come off the market,” Duggins said at Bisnow's State of DFW Office event last month. “There's big groups in the market, [and] from Q4 of last year into Q1 of this year, there was an explosion of growth.”

In February, Toyota Financial Services snatched up the entire 242K SF The Offices at Southstone Yards in Frisco. A month later, Sally Beauty Holdings leased 140K SF to move its corporate headquarters to the Legacy West development in Plano. 

All this demand for office space will prompt the construction of new spec buildings, but Agarwal said profit margins will differ due to higher labor and material costs.

Construction costs have increased 3.4%, and building costs have climbed nearly 4% over the past year, a higher rate than the prior three years, according to a November report by Skanska. The industry also faces a shortage of about 450,000 construction workers.

Once new construction starts, the market could be flooded with too much supply, as it was right before the turn of the century, Agarwal said. It took more than five years for rents to recover after 20M SF of office space was constructed over 1998 and 1999, he said.

“What happens is 10 different guys don't talk to each other, and they all go start a new building,” Agarwal said. “Then they oversupply the market, and then [rent] goes back down.”