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PMRG Q2 Report: DFW Office Market Still Strong

Frost Tower in Downtown Fort Worth

With a humming North Texas economy as the backdrop, the DFW office market concluded the second quarter with 329K SF of direct net absorption, its 28th consecutive quarter of leasing gains, according to PMRG’s Q2 Dallas-Fort Worth Office Market report.

Year-to-date absorption increased to approximately 1.3M SF, according to the report.

Class-A properties absorbed a net 628,507 SF of direct space during the quarter, increasing the year-to-date total to nearly 2M SF, but saw direct occupancy rates fall by 150 basis points to 80.9% over the prior six months, as construction deliveries outpaced leasing demand.

Notable Class-A tenants with leases scheduled to commence during the second half of the year include Nationstar Mortgage (244K SF), Brinker International (216K SF), PwC (190K SF), Steward Health Care System (165K SF) and 7-Eleven (115K SF).

Class-B buildings reported a net 402K SF of direct occupancy losses during the quarter and about 850K SF of negative absorption for the year, resulting in the occupancy rate declining by 60 basis points to 81.8% since year-end 2017.

Absorption in subsequent quarters should get a boost from several significant lease signings during Q2, including Samsung Electronics (216K SF), Darling Ingredients (95K SF), Genpact (95K SF) and GAINSCO Insurance (87K SF).

The South Fort Worth submarket had the highest occupancy rate during Q2, 90.3%, up 2.1% year over year, followed by Uptown/Turtle Creek (89.6%/up 0.2%) and Arlington/Mansfield (88.8%/up 1.6%). The largest gains in Fort Worth involved Frost Bank and Jetta Operating Co. moving into a combined 144K SF in the new Frost Tower, but the pending move-out of XTO Energy will dampen absorption numbers for Fort Worth’s CDB in the second half of the year.

The weakest three submarkets for occupancy were Plano, which had an occupancy rate of 66.7%, down 16.9% year over year, North/Northeast Fort Worth (69.8%/down 3.9%) and Stemmons, (73.8%/no year-over-year change). Plano was negatively affected by Liberty Mutual’s move out of 160K SF at Tollway Office Center II. 

717 Harwood

Class-A full-service asking rental rates, which are at record levels, climbed by $0.37 during the quarter to $29.33/SF and have improved by $1.22, or 4.3%, over the prior 12 months. More increases are expected as new construction comes online, PMRG said.

Weighted average Class-B asking rents, also at record levels, inched up to $0.02 to $21.31/SF during the quarter but have appreciated by 2.6% over the past year. Although rental rates are high, bargains can still be found in submarkets with high vacancy rates, PMRG said.

The DFW region should continue its expansionary phase through the second half of 2018, barring an unforeseen national recession or negative geo-political event.

The region’s strong employment and population growth, diversified economy and low costs of doing business should lead to above-average performance, according to PMRG Research. Among the metropolitan markets with a workforce over 1 million, the DFW Metroplex ranks first in annual employment gains, ahead of New York-Newark-New Jersey.