The View From The Top Is Nice, But Dallas-Fort Worth's Office Market Has Its Challenges, Too
As office markets across the U.S. inch along in their recovery, Dallas-Fort Worth is thriving. With one of the nation’s highest levels of absorption and a robust construction pipeline, many pro-office advocates look to DFW as a beacon of hope in a post-pandemic world.
Experts attribute the Metroplex’s success to its pro-business environment and reputation as a major employment center. But despite outperforming much of the nation, DFW is not immune to the challenges faced by other office markets. To lure employees back to work, companies must go the extra mile to create an environment that rivals the comforts and conveniences of home. This has led to a clamoring for highly amenitized, Class-A space in well-located submarkets.
“In Dallas, historically, there has been a migration to the bright-and-shiny new product,” Nick Summerville, managing partner and chief operating officer of Kaizen Development Partners, said during a May 10 Bisnow event. “Everybody wants to be in the new location [with] new amenities … and that is something that Class-B and C markets will always have to contend with.”
It does not seem to matter whether high-quality buildings are in the urban core or the suburbs, Cawley Partners CEO Bill Cawley said. As long as the property has ample access to amenities, the address is irrelevant, he said.
“A quality project that is walkable, in a submarket that there is reason to be in, is going to be successful,” he said. “The days of building an office building on a corner with nothing around it are over.”
Owners of properties in a lower class in less desirable areas have a higher mountain to climb when attracting new tenants. According to a Q1 office report by CBRE, Class-B office buildings in many Dallas submarkets have higher vacancy rates than their Class-A counterparts.
To combat this trend, owners of Class-B buildings must heavily invest in amenities, which can be hard to do when those properties command lower rents, Summerville said.
“You have to really amplify the amenities and tell a great story for that product, knowing that the leasing rates have to justify that cost,” he said. “Given this environment, with the continued escalation, labor shortages, procurement issues, etc., the cost just continues to rise.”
Competition for tenants has led to an amenities arms race where things like a fitness room and outdoor space are viewed as mere table stakes. Many companies are now hiring hospitality companies to design amenity areas and installing out-of-the-box offerings like golf simulators and pickleball courts. Once those amenities are installed, companies must then ensure they are used, said Meredith Quigley, director of interior design with OmniPlan.
“You can’t just build it and they will come,” she said. “You have to build it, and program it, and activate it. Then it will get going and it will be great, but you can’t just provide it.”
Cost escalations caused by inflation and supply chain shortages are a major challenge for developers building new properties. Several panelists said their companies have absorbed much of this cost through higher rents, but they are seeing a fair amount of pushback on the cost of tenant improvements.
“We’re controlling tenant improvement costs by engaging in as many move-in-ready suites as possible,” said David Wheeler, chief investment officer for Hartman Income REIT. “Producing those 1K to 3K SF suites that folks can move into quickly has been a key driver for us.”
Office tenants in Dallas will soon have even more options as new buildings come online. According to CBRE, eight new developments comprising 1.4M SF broke ground in Q1, adding to the 5.2M SF already in the pipeline. Ryan Chismark, partner at property tax consulting and valuation firm Morrison & Head, said these numbers indicate the ultimate survival of a property type, albeit one that is in the midst of a major metamorphosis.
“I really want to caution people not to use this 'death to office' narrative,” he said. “We don’t want to mistake a change in the workplace for the elimination of an asset class.”