DALLAS OFFICE MARKET Relocations Spur Growth

DALLAS OFFICE MARKET

Market Analysis Relocations Spur Growth Second Quarter 2019

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Jeff Adler Vice President & General Manager of Yardi Matrix [email protected] (800) 866-1124 x2403

Jack Kern Director of Research and Publications [email protected] (800) 866-1124 x2444

Chris Nebenzahl Senior Analyst [email protected] (800) 866-1124 x2200

Veronica Grecu Senior Real Estate Market Analyst [email protected] (306) 955-1855 x7583 Dallas continues its office boom, fueled by strong employment gains, growing demographics and increased investor interest in the metro’s Author Class A properties. More than 33,000 office-using jobs were added Jeff Hamann Associate Editor year-over-year through March, with more gains on the horizon as [email protected] corporations seek to take advantage of the metro’s lower rents and (212) 977-0041 x8598 Texas’ advantageous tax policies.

The metro’s office vacancy rate remained elevated at 17.9% at the Aggregated and anonymized end of April, precipitated by tenant shifts and consolidations from expense and lease expiration outdated Class B space into newer, amenitized assets. As the gap data is available to Yardi Matrix between Class A and B asking rates continues to widen, landlords are likely to invest more in building upgrades and renovation projects to subscribers. Please contact us ensure older stock remains competitive. Newly completed properties for details! performed well, as the majority of the 1.2 million square feet delivered this year was fully leased upon completion. This trend is set to continue over the coming quarters, as corporate relocations will help absorb the For more information please contact: more than 4 million square feet underway.

Ron Brock, Jr. Investor interest remains strong, with upwards of $575 million in Industry Principal, Matrix transaction volume year-to-date through April. Acquisition yields [email protected] increased across both Class A and B office assets and are likely to spur (480) 663-1149 x2404 increasingly more investment activity through the remainder of the year. While the bulk of transactions occurred outside the urban core, Goldman Sachs’ $180 million sale of the recently completed 1900 North in the CBD highlighted significant interest in centrally located, high-end office stock.

Image by Nate Hovee/iStockphoto.com 1 ECONOMIC SNAPSHOT

Dallas added 90,600 jobs during the 12 months ending in March. The unemployment rate fell to 2.8% in April, its lowest point since December 2000 and far below the national rate of 3.6%. Office-using employment comprised 31.1% of the job pool, substantially above the national average of 21.5%.

The office-using employment sector expanded by 33,700 jobs. Professional and business services remained the mainstay of the metro’s economy, increasing by 5.9% year-over- year, with a net gain of 29,000 jobs. Financial activities grew by 2.2% (5,200 jobs), while the information sector contracted slightly, with a net loss of 500 jobs.

Dallas continued to attract corporate relocations, boosted by a favorable regulatory climate, combined with rapid population growth and Texas’ lack of income tax. With nearly 132,000 residents added between 2017 and 2018, Dallas is one of the country’s fastest-growing metros. In late 2018, several large companies announced plans to relocate there, including McKesson and Core-Mark.

Office-Using Employment

Source:Source: Bureau Bureau of Laborof Labor Statistics Statistics (BLS). Data (BLS). as o fData March as 2019 of March 2019

Employment Growth by Sector as of March 2019 (Year-Over-Year)

Employment Growth by Sector asCurrent of March Employment 2019 (Year-Over-Year)Year Change Code Employment Sector (000) % Share Employment % Current Employment Year Change 60 Professional and Business Services 520 19.4% 29,000 5.9% Code70 Leisure and HospitalityEmployment Sector 277 (000)10.3% %17,600 Share 6.8%Employment % 4060 Trade,Professional Transportation and and Business Utilities Services 528 52019.7% 19.4%13,700 2.7% 29,000 5.9% 1570 Mining,Leisure Logging and and Hospitality Construction 149 277 5.6% 10.3%7,400 5.2% 17,600 6.8% 80 Other Services 89 3.3% 6,000 7.3% 40 Trade, Transportation and Utilities 528 19.7% 13,700 2.7% 55 Financial Activities 244 9.1% 5,200 2.2% 6515 EducationMining, and Logging Health Servicesand Construction 316 14911.8% 4,600 5.6% 1.5% 7,400 5.2% 9080 GovernmentOther Services 307 8911.5% 4,200 3.3% 1.4% 6,000 7.3% 3055 ManufacturingFinancial Activities 182 244 6.8% 3,400 9.1% 1.9% 5,200 2.2% 50 Information 72 2.7% -500 -0.7% 65 Education and Health Services 316 11.8% 4,600 1.5% Source: Bureau of Labor Statistics (BLS). Data as of March 2019 90 Government 307 11.5% 4,200 1.4% 30 Manufacturing 182 6.8% 3,400 1.9% 50 Information 72 2.7% -500 -0.7%

Source: Bureau of Labor Statistics (BLS). Data as of March 2019 Dallas Office Report | Second Quarter 2019 2 LEASING | Vacancy

The metro’s office vacancy rate was 17.9% as of May 1. Class A properties were 16.6% Vacancy by Submarket vacant resulting from higher demand, while Class B properties lagged at 19.2%. While Top Submarkets Vacancy Rate (%) vacancy is anticipated to remain stable in VacancyGrand Prairie by Submarket 0.2%

the coming quarters, the gap between Class TopEllis Submarkets County Vacancy Rate (%) 7.5% A and B assets is projected to widen further VacancyGrandWest Prairie Fort by WorthSubmarket 0.2% 7.9% as tenants move to newer space. Ellis County 7.5% TopRockwall Submarkets County Vacancy Rate (%) 8.0% West Fort Worth 7.9% Grand Prairie 0.2% Keurig Dr. Pepper signed one of the largest RockwallPreston County Hollow 8.0% 10.2% Ellis County 7.5% leases of 2019, totaling 350,000 square feet Preston Hollow 10.2% WestSource: Fort Worth Yardi® Matrix. Data as 7.9%of May 2019 at Blue Star Land’s The Star development in Note: Vacancy including sublease RockwallSource: Yardi®County Matrix. Data as of May 2019 8.0% the Platinum Corridor North submarket. The Note: Vacancy including sublease Preston Hollow 10.2% project is currently under construction, with Source: Yardi® Matrix. Data as of May 2019 an estimated completion date set for 2021. Note: Vacancy including sublease AvailableAvailable Properties Properties Square SquareFeet Properties Feet Properties AvailableTop Submarkets Properties Available Available LEASING | Listings Top Submarkets Available Available Dallas Central Business Square6,519,170 Feet Properties47 TopDistrictDallas Submarkets Central BusinessAvailable 6,519,170Available 47 Some 38 million square feet was listed in DallasPlatinumDistrict Central Corridor Business 6,519,1705,511,850 47156 the metro as of May 1 at an average price District South of $27.42 per square foot, considerably PlatinumPlatinum Corridor Corridor 5,511,850 5,511,850156 156 Las Colinas 3,043,300 186 below the national average of $36.40 per SouthSouth square foot. The wide spread between Platinum Corridor North 2,781,110 131 LasLas Colinas Colinas 3,043,300 3,043,300186 186 Class A ($31.79 per square foot) and Class PlatinumTelecom CorridorCorridor North 2,781,1102,693,640 131101 B ($22.82 per square foot) listings resulted TelecomTotalPlatinum Market Corridor Corridor North2,693,64038,125,0002,781,1101011,386 131 from pent-up demand for amenitized space. TotalSource:Telecom Market Yardi® Corridor Matrix. Data as38,125,000 of May 20192,693,6401,386 101 Uptown/Oak Lawn’s asking rates were the Source:Total Yardi® Market Matrix. Data as of May 201938,125,000 1,386 highest at $40.04 per square foot. West Top Coworking Tenants Dallas’ aging stock led to one of the lowest Source: Yardi® Matrix. Data as of May 2019 Top Coworking Tenants average rates ($17.81 per square foot), by Square Footage despite its proximity to the CBD. by Square Footage Square Coworking Tenant/ No. of SquareFeet CoworkingOperatorsTop Coworking Tenant/ TenantsNo.Locations of FeetLeased Operators Locations Leased COWORKING Regusby Square Footage 49 851,460 Regus 49 851,460 WeWork 8 415,785 Square WeWork 8 415,785 Coworking is gaining popularity throughout WorksuitesCoworking Tenant/ 15 No. of269,565 Feet Worksuites 15 269,565 the metro. The highest concentration of ExecutiveOperators Workspace 13 Locations 185,773 Leased shared working space is in the Platinum Cor- Executive Workspace 13 185,773 CommonRegus Desk 5 49 155,339 851,460 ridor South submarket. Regus had the larg- Common Desk 5 155,339 est portfolio by both square footage and lo- Source:WeWork Yardi® Matrix. Data as of May 2019 8 415,785 cations, though WeWork continued its rapid Source: Yardi® Matrix. Data as of May 2019 Dallas expansion with a 77,000-square-foot Worksuites 15 269,565 lease in the Las Colinas submarket. Executive Workspace 13 185,773

Hana, CBRE’s new coworking brand, an- Common Desk 5 155,339 nounced its first location (67,006 square feet) at Trammell Crow’s PwC Tower at Park Source: Yardi® Matrix. Data as of May 2019 District, due to open in mid-2019.

Dallas Office Report | Second Quarter 2019 3 Office Completions (Square Feet) SUPPLY Office Completions (Square Feet) 5,000 5,000 Developers added 1.2 million square feet in 2019 through the end of April, representing Office4,000 Completions (Square Feet) 0.4% of total stock. An additional 2.6 mil- 5,0004,000 lion square feet is slated to come online by year-end. In 2018, some 4.2 million square 4,0003,000 feet was added to Dallas’ office inventory. 3,000 3,000 Some 4.3 million square feet was under 2,000 construction in Dallas at the end of April. 2,0002,000 An additional 43.2 million square feet was 1,000 in the planning and permitting stages. 1,000 The Platinum Corridor North submarket 1,000 0 contained about 44% (1.9 million square 0 2016 2017 2018 2019* feet) of the metro’s new-supply pipeline. 2016 2017 2018 2019* Source: Yardi®0 Matrix. Data as of May 2019 *Total Year Projections 2016 2017 2018 2019* AmerisourceBergen Corp.’s 300,000-square- Source: Yardi® Matrix. Data as of May 2019 foot headquarters at Austin Ranch was the Construction Activity *TotalSource: Year Yardi® Projections Matrix.Square Feet Data Under as of May 2019 largest delivery year-to-date through April. Top*Total Submarkets Year ProjectionsConstruction Owner and developer Billingsley Co. broke ConstructionPlatinum Corridor North Activity1,922,312 ground on the build-to-suit development in Las Colinas 1,730,430 Construction Activity Square Feet Under April 2017 and completed work in January. Uptown/Oak Lawn 316,548 PlanoTop Submarkets 200,000 Construction The tenant moved its operations into the Square Feet Under DallasPlatinum Central Corridor Business North 176,715 1,922,312 building in March. DistrictTop Submarkets Construction TotalLasPlatinum MarketColinas Corridor North4,346,005 1,730,4301,922,312 Source: Yardi® Matrix. Data as of May 2019 The largest project under construction at Uptown/OakLas Colinas Lawn 1,730,430 316,548 the end of April was Pioneer Natural Re- PlanoUptown/Oak Lawn 200,000 316,548 sources’ 1.1 million-square-foot build-to- Construction Distribution Dallas Central Business 176,715 suit headquarters developed by KDC in the TopPlano Submarkets % of Inventory 200,000 PlatinumDistrict Corridor North 7.4% Las Colinas submarket. The project broke Dallas Central Business 176,715 LasTotal Colinas Market 5.4% 4,346,005 ground in mid-2017 and was financed with Uptown/OakDistrict Lawn 2.5% a nearly $350 million construction loan pro- PlanoSource:Total Market Yardi® Matrix. Data as 1.4%of May 20194,346,005 Dallas Central Business 0.7% vided by JPMorgan. The five-building ame- District Source: Yardi® Matrix. Data as of May 2019 nitized office campus is anticipated to open Total Market 1.7% Construction Distribution by year-end. The property will include an Source: Yardi® Matrix. Data as of May 2019 on-site conference center, day care, fitness ConstructionTop Submarkets Distribution% of Inventory center and cafeteria. Platinum Corridor North 7.4% Top Submarkets % of Inventory Las Colinas 5.4% Platinum Corridor North 7.4% Uptown/Oak Lawn 2.5% Las Colinas 5.4% Plano 1.4% Uptown/Oak Lawn 2.5% Dallas Central Business 0.7% DistrictPlano 1.4% TotalDallas Market Central Business 1.7% 0.7% District Source: Yardi® Matrix. Data as of May 2019 Total Market 1.7%

Source: Yardi® Matrix. Data as of May 2019

Dallas Office Report | Second Quarter 2019 4 Transaction Volume Total Total INVESTMENT TRANSACTIONS Transaction Transaction Top Submarkets Square Feet Volume (000s) Total confirmed transaction volume ex- Platinum Corridor 4,450,343 $591,202 ceeded $575 million in 2019 through the TransactionNorth Volume end of April. Class A assets continued to Total Total perform well—totaling $397.7 million in Plano Transaction3,055,333Transaction $264,571 sales volume—as a result of strong ten- TopEast Submarkets Dallas Square Feet1,729,554Volume (000s) $249,937 ant demand for modern office space. The Platinum Corridor 4,450,343 $591,202 Transaction Volume majority of transactions occurred outside NorthDallas Central 1,361,475 $185,357 central areas in select, high-growth nodes. Plano 3,055,333Total $264,571Total Business DistrictTransaction Transaction EastTop Submarkets Dallas Square1,729,554 Feet Volume$249,937 (000s) Acquisition yields in Dallas increased be- Platinum Corridor 1,945,896 $185,077 tween the first and second half of 2018, DallasPlatinum Central Corridor 1,361,4754,450,343 $185,357$591,202 BusinessSouth District with stabilized Class A properties averaging North nearly 7%. Class B yields also rose, ending PlatinumPlanoTotal Market Corridor 1,945,8963,055,33323,394,317$185,077$264,571 $2,213,011 South the year at nearly 10%. The overall increase East Dallas 1,729,554 $249,937 TotalSource: Market Yardi® Matrix.23,394,317 Data as of May$2,213,011 2019 was partially driven by lower sale prices in Dallas Central 1,361,475 $185,357 most submarkets, combined with steadily Source:Business Yardi® District Matrix. Data as of May 2019 rising rents. Platinum Corridor 1,945,896 $185,077 South The Platinum Corridor North submarket Total Market 23,394,317 $2,213,011 had the highest transaction volume in AverageAverage Price Price Source: Yardi® Matrix. Data as Avg.of May Price 2019 the 12 months ending in April ($591.2 Top Submarkets Per Square Foot Avg. Price million). The submarket’s office stock is DallasTop SubmarketsCentral Business $616.00 Per Square Foot District dominated by Class A properties with an Dallas Central Business $616.00 Uptown/Oak Lawn $330.00 average age of 15 years. DistrictAverage Price Fort Worth Central $190.87 BusinessUptown/Oak District Lawn Avg. Price $330.00 The State Teachers Retirement System Top Submarkets Per Square Foot North Dallas $178.63 DallasFort CentralWorth Business Central $616.00 $190.87 of Ohio made the largest purchase in the Platinum Corridor North $173.20 DistrictBusiness District 12 months ending in April, with its $180 Source: Yardi® Matrix. Data as of May 2019 Uptown/Oak Lawn $330.00 million acquisition of the 260,326-square- North Dallas $178.63 Fort Worth Central $190.87 foot 1900 North in the Dallas CBD from BusinessPlatinum District Corridor North $173.20 Goldman Sachs. The 25-story property NorthInvestment Dallas Activity $178.63 Source: Yardi® Matrix. Data as of May 2019 reached completion in early 2018, follow- Platinum Corridor North $173.20Total Total ing two years of development, financed Source: Yardi® Matrix. Data as of May 2019Transaction Transaction with a $60.4 million construction loan Top Buyers Square Feet Volume (000s) from Regions Bank. HighlandInvestment Capital Activity2,928,767 $326,721 ManagementInvestment Activity State Teachers 260,326Total Total$180,000Total Total Transaction Transaction Retirement System Transaction Transaction ofTop Ohio Buyers Square Feet Volume (000s) Top Buyers Square Feet Volume (000s) UnionHighland Investment Capital 2,928,767324,010 $163,000$326,721 Management EquusHighland Capital Capital 518,545 2,928,767$125,857 $326,721 PartnersState Teachers 260,326 $180,000 RetirementManagement System TerraCap 565,772 $115,007 ofState Ohio Teachers 260,326 $180,000 Source: Yardi® Matrix. Data as of May 2019 UnionRetirement Investment System324,010 $163,000 Equus Capital 518,545 $125,857 Partnersof Ohio TerraCapUnion Investment 565,772 324,010$115,007 $163,000 Source:Equus Yardi® Capital Matrix. Data as of May 2019 518,545 $125,857 Partners TerraCap 565,772 $115,007

Source: Yardi® Matrix. Data as of May 2019

Dallas Office Report | Second Quarter 2019 5 Brought to you by: EXECUTIVE Q&A

The Transformation of the DFW Suburbs

By Corina Stef

Bright Realty President & COO Eric Stanley discusses how the company’s upcoming The Realm at Castle Hills, a 324-acre mixed-use development, will introduce an urban feel in the suburban settings of Dallas-Fort Worth.

The Realm at Castle Hills is one of construction in the metro. How will your largest up-and-coming projects. these developments impact the What can you tell us about it? market in the upcoming quarters?

Adding to the success of the larger High demand for space comes from master-planned community of employers who want the upgraded Castle Hills, The Realm at Castle technologies and amenities the Hills will be a new 324-acre mixed- newest buildings provide. It will put use development consisting of pressure on the owners of older office, retail and multifamily buildings who need to upgrade in components. The Realm is a order to remain competitive. Also, community that allows individuals to our location allows people to avoid live, play, eat, shop and work in one some of the worst traffic in the location. The guiding principles are metro, while still having easy access based upon creating an environment to the airport. that encourages community and to use The Realm’s trail system to invites human interaction within its access one of several luxury multi- How do you think the Dallas confines. The project at completion family properties, single-family office market performed in the will consist of 1.5 million square feet homes, condos or rental cottages. last year and how do you see it of office and retail space and more going forward? than 5,000 multifamily units. What are some of the metro’s hottest submarkets for investment? Year after year, Texas has added How does this property bring an more jobs than any other state, urban feel to a suburban location? Dallas-Fort Worth has been including California, which has 10 among the best-performing large million more people than Texas. The Realm will reveal a metropolitan metropolitan areas in the nation Almost 400 people a day are enclave within a small, self- for job growth for some time, and moving to North Texas to fill new contained town, allowing people to the Upper Tollway submarket of jobs. About 40 percent of the office live, work and play within a walkable Dallas is one of the fastest growing. buildings under construction in the suburban environment and providing This area along State Highway 121 North Texas area are preleased, so the highest level of amenities. Our continues to draw major employers there is definitely room in the local office tenants at The Realm will like Toyota, FedEx, Liberty Mutual market for more office buildings. have the opportunity to unwind and and JPMorgan Chase. relax over breaks or after work in the (Read the complete interview on restaurants on the building’s first There’s currently more than 4 million cpexecutive.com.) floor. After work, they will be able square feet of office space under

Dallas Office Report | Second Quarter 2019 6 Brought to you by: NEWS IN THE METRO

Get the latest in local real estate news on CPExecutive.com

Taconic Capital Uptown Dallas Lands 372 KSF Office Adds Tenant in Dallas 3 New Tenants

Tenet Healthcare Corp. Koch Industries, IDI Logis- will occupy International tics and Roscoe Property Plaza I in Farmers Branch, Management will occupy one-half of a two-building a combined 10,500 square office campus. feet at The Union, bringing the building’s occupancy to more than 90 percent.

VanTrust JV Estein USA Tops Out Office Sells Retail, Office Building at $1.8B Assets in Dallas

Dallas Project HFF handled the sale of The company has teamed 422,000 square feet within up with Hillwood and the the live-work-play Victory Rudman Partnership to Park neighborhood, which develop The Offices Two includes office, retail, at Frisco Station, expected restaurant and entertain- to come online in October. ment space, a hotel and residential units.

Stream Realty DFW Office Asset Sells Dallas-Area Changes Hands

Office Building The new owner took out The transaction marks a $3.4 million loan to the first time the finance the acquisition 166,324-square-foot Plati- and intends to relocate its num Park in Plano, Texas, North American head- has changed hands since it quarters in the building came online in 2017. this summer.

Dallas Office Report | Second Quarter 2019 7 YARDI MATRIX OFFICE SUBMARKETS | Metropolitan Dallas

Area # Submarket Area # Submarket 1 Dallas Central Business District 17 Grand Prairie 2 Uptown/Oak Lawn 18 Rockwall County 3 West Dallas 19 Arlington 4 Preston Hollow 20 Fort Worth Central Business District 5 Central Expressway 21 South Fort Worth 6 Lake Highlands 22 West Fort Worth 7 Telecom Corridor 23 North Fort Worth 8 North Dallas 24 East Fort Worth 9 Northwest Dallas 25 Westlake 10 Platinum Corridor South 26 Denton 11 Platinum Corridor North 27 Parker County 12 East Dallas 28 Hood County 13 South Dallas 29 Johnson County 14 Plano 30 Ellis County 15 Las Colinas 31 Kaufman County 16 Lewisville 32 Hunt County

Dallas Office Report | Second Quarter 2019 8 OFFICE REPORT DEFINITIONS AND METHODOLOGY

Office using employment is defined as all jobs within the Professional and Business Services, Financial Activities and Information sectors.

Rents shown in the listing section are reported on a Full Service (FSG) basis. Yardi Matrix subscribers have access to both listed rents and FSG equivalent rents.

Class A and A+/Trophy buildings are combined for reporting purposes.

Yardi Matrix tracks properties with 50,000 square feet or more.

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Dallas Office Report | Second Quarter 2019 9