Dallas Office Market

RESEARCH 2Q 2020 DALLAS OFFICE MARKET

MARKET AT A GLANCE CURRENT CONDITIONS The Dallas Fort Worth office market saw decrease in movement Rental rates increased slightly as leasing activity declined from the through the second quarter. Covid-19 along with shelter in home previous quarter sanctions and orders slowed leasing activity. Vacancy rates have seen little fluctuation over the last year and continue to hover around 17%. Sublease space availability increased substantially from the previous quarter

Direct leasing accounted for most of the leasing activity during the Texas was one of the first states to re-open but business and second quarter at approximately 1.7 million square feet, down from 2.4 leasing still remains slow million last quarter. Sublease activity accounted for approximately 179,000 square feet, accounting for a small amount of the market’s MARKET ANALYSIS overall activity. Since second quarter 2019, over 6 million square feet has been delivered to the Dallas Fort Worth office market. The Far Asking Rent and Vacancy North Dallas and Uptown/Turtle Creek submarkets account for most of the space being delivered. $27 24%

$24 22% RENTAL RATES & VACANCY REMAIN RELATIVELY STABLE $21 20% In the first quarter the average asking rate was $27.03/SF, during the $18 18% second quarter of 2020 that increased slightly to $27.10. Submarkets with a relatively high number of new development such as $15 16% 2Q15 2Q16 2Q17 2Q18 2Q19 2Q20 Uptown/Turtle Creek and Far North Dallas are currently outflanking the market with rental rates in the mid $30.00 to low $40.00 per square Average Asking Rent (Price/SF) Vacancy (%) foot range. The suburbs have profited the most from enormous corporate shifts, but the CBD and Uptown/Turtle Creek have pulled in a Net Absorption (SF, Millions) significant number of migrations and corporate growth too. A handful of submarkets experienced increases in sublease rates including Far 2.0 North Dallas and Richardson/Plano in the second quarter. The average 1.5 market sublease rate is $23.51/SF, which is a slight increase from the 1.0 previous quarter in which it was $23.31/SF. 0.5 0.0 At 17.5%, the overall vacancy rate has increased very minimally since -0.5 first quarter when it was 17.3%. Most submarkets in the Dallas Fort 2Q15 2Q16 2Q17 2Q18 2Q19 2Q20 Worth market experienced slight changes in vacancy. The Las Colinas submarket saw one of the biggest changes increasing from 15.4% in MARKET SUMMARY the first quarter to 17.1% in the second quarter of 2020. Current Prior Year Ago 12 Month Quarter Quarter Period Forecast During the second quarter, 434 transactions occurred in the metroplex Total Inventory 313.5 MSF 313.6 MSF 307.5 MSF é totaling approximately 1.7 million square feet. The number of Availability Rate 20.4% 20.2% 19.8% ê transactions decreased in the second quarter from 707 in the previous quarter. Far North Dallas was one of the most sought out submarkets Quarterly Net Absorption -444,531 -560,676 1,406,059 ê in the second quarter, as rental rates in this submarket ascended over Average Asking Rent $27.10 $27.03 $26.16 é the quarter. New inventory in this submarket is driving interest and Under Construction 7.2 MSF 7.7 MSF 8.8 MSF ê demand; thus, creating an increase in rents. Deliveries 7 8 8 ê

RELOCATIONS & EXPANSIONS SALES & INVESTMENTS Dallas Fort Worth continues to be at the epicenter of corporate The second quarter of 2020 saw a few notable sale transactions. Most relocations and expansions. Some of the key attributes that make notable was the sale of Mockingbird Towers in the Stemmons Freeway Dallas Fort Worth attractive to companies are a profoundly talented submarket. The 448,000 square foot Class A office building sold for an work force, relatively low price of doing business, and incentives undisclosed amount. The property was approximately 80% leased at provided by the State of Texas. Relocation activity appeared to slow the time of sale. The sale also included a 253,000 square foot parking down during the second quarter of 2020. Some of the most notable garage. expansions this quarter include Global Medical Response and IntelliCentrics, Inc. Another notable sale in the second quarter was the changing hands of 3905 North Dallas Parkway. The Class B office building sold for an Global Medical Response, who specializes in quality medical care, undisclosed sales price. The 2-story high vacancy office building was primarily in the areas of emergency and patient relocation services only about 25% leased at the time of sale. The buyer reportedly was around the world will be getting a new home. Global Medical Response attracted to the property due to them already owning approximately 1 signed a new lease at 4400 Sam Rayburn Tollway located in the Upper million square feet of real estate in the area. Tollway/West Plano submarket. The tenant will occupy approximately 61,000 square feet on two floors in their new home. The deal was CONSTRUCTION PIPELINE signed it mid-May, but Global Medical Response is not expected to Across the market, roughly 737,000 square feet has delivered during move until fourth quarter 2020. the second quarter. Most of the space under construction is in the Far North Dallas and Uptown/Turtle Creek submarkets. These are two of During the second quarter, IntelliCentrics, Inc announced it will be the top office submarkets in Dallas Fort Worth, flaunting some of the expanding into approximately 30,000 square feet of Class A office most noteworthy leases and highest rents in the metro. More than half space at 777 International Parkway located in the Lewisville of the submarket's inventory is class A & B buildings and of that, many submarket. The national healthcare company will not move into their buildings are viewed as prize assets. new home until the third quarter of 2020 when their building is completed.

AVERAGE ASKING RENT BY SUBMARKET VACANCY BY SUBMARKET

Average Asking Rent ($/SF) Vacancy Rate (%) Current 12 Month Current 12 Month Quarter 2Q2019 Change Quarter 2Q2019 Change

Uptown/Turtle Creek $40.39/SF $39.17/SF é Northeast Fort Worth 15.3% 16.1% ê

Preston Center $39.65/SF $37.83/SF é Stemmons Fwy 22.2% 21.8% é

Fort Worth CBD $28.33/SF $28.14/SF é Dallas CBD 24.6% 23.9% é

Central Expressway $30.54/SF $29.33/SF é CBD Total 21.8% 21.3% é

Far North Dallas $30.54/SF $28.95/SF é Richardson/Plano 16.4% 17.5% é

ECONOMIC INDICATORS Single-family construction will likely slow further in coming months The Dallas Fort Worth economy contracted at an unprecedented pace given that several new land and lot deals have been put on pause or in April and May due to the ongoing economic distress caused by the canceled and that spec building has moderated, in part due to COVID-19 pandemic. Payroll employment saw its steepest decline on heightened uncertainty. record, and unemployment spiked to a historical high as business closures led to layoffs in most industries. The Dallas and Fort Worth COVID-19 STILL IMPACTING DALLAS FORT WORTH business-cycle indexes—broad measures of economic activity in the The Covid-19 virus pandemic has spread across the world and has hit metro area—slumped further. Unemployment climbed further in April, the Dallas Fort Worth area also. Some of the hardest hit industries have jumping to 11.8 percent in Dallas and 12.3 percent in Fort Worth, been the travel, hotel, and restaurant/bar industries. Travel has been reflective of the layoffs occurring from mid-March to mid-April. restricted or suspended to and from many places and many non- Unemployment remained below the state and U.S. rates, which rose to essential businesses are operating at minimal capacity. Texas was one 12.8 percent and 14.7 percent, respectively. Recent data for weekly of the first states to re-open. As of late May, officials have made the initial claims for unemployment insurance in Texas suggest the tough decision to partially open restaurants, bars, and businesses. All unemployment rate will increase further in May to close to 20.6 large gatherings in public places have still been frowned upon, such as percent. worship facilities, concerts and sporting events. It is certain the regional economy is going to continue to feel some momentary The Dallas Fort Worth business-cycle indexes fell at a historical pace in torment as we adjust to these means to help moderate the spread of April, driven by widespread job losses and a rapidly rising this virus. unemployment rate in the metroplex. Both the Dallas and Fort Worth indexes saw their largest drops ever dating back to November 1978. Understanding the long-term effect of this virus regarding the Dallas Contraction in the Fort Worth index was more pronounced relative to Fort Worth market is just something that will take time but will be the Dallas index, partly due to a larger employment decline. Year over predicated on the virus being contained and people being able to year in April, the Dallas index fell 6.0 percent and the Fort Worth index resume daily and routine activities. The unemployment rate is over was down 12.3 percent. This is the first time since early 2010 that 12.5%, a record high, the unemployment rate was 3.6% this time a year year-over-year growth in both indexes has been negative. Dallas Fort ago. Coworking companies have been hit hard by Covid-19 pandemic Worth single-family housing permits fell in March and April after as they are slashing salaries and letting workers go. With a business growing strongly in the beginning of the year. The three-month moving model based around bringing office workers closer together and average reflects the recent declines. Through April, total single-family sharing space they will struggle to make it through this social permits were higher than in the same period last year by 17.2 percent distancing time period. With workers being asked an encouraged to in Dallas Fort Worth and 13.5 percent in Texas. stay home the coworking companies will continue to suffer.

LEASE /USER TRANSACTIONS

Tenant Building Submarket Type Square Feet

Global Medical Response 4400 Sam Rayburn Tollway Upper Tollway/West Plano Direct/New 60,742

Unknown 6201 W Plano Parkway Upper Tollway/West Plano Direct/New 43,578

Istation 8150 N Central Expressway Central Expressway Renewal 40,601

SBA 14951 Kingsport Grand Prairie Direct/New 33,000

Unknown 4200 Buckingham Rd Grand Prairie Direct/New 31,245

SELECT SALE TRANSACTIONS

Buyer/Seller Building Submarket Sale Price $/SF

Albany Road Real Estate Partners/Caddo Holdings 1341 W Mockingbird Ln Stemmons Freeway Undisclosed TBD

Wolverine Interest/Ojala Holdings 3905 N Dallas Parkway Upper Tollway/West Plano Undisclosed TBD

AG Commercial/Jack Norman 6510 Abrams Rd White Rock Undisclosed TBD

SUBMARKET STATISTICS

Total Under Total Qtr YTD Direct Sublet Average Inventory Construction Vacancy Absorption Absorption Asking Rent Asking Rent Asking Rent (SF) (SF) Rate (SF) (SF) (Price/SF) (Price/SF) (Price/SF) Dallas CBD Total 31,211,971 259,230 24.6% 208,354 -228,549 $27.32 $17.22 $27.16 Class A 23,859,928 259,230 26.6% 220,934 -188,615 $28.52 $17.24 $27.05 Class B 7,352,043 0 18.2% -33,422 -60,776 $20.55 $15.99 $20.47 Ft. Worth CBD Total 10,894,876 0 13.7% -69,036 73,192 $28.73 $21.94 $28.33 Class A 5,633,117 0 16.3% -21,862 50,658 $31.88 $21.95 $31.60 Class B 5,261,759 0 10.8% -47,174 22,534 $20.94 $21.94 $21.06 CBD Total 42,106,847 259,230 21.8% 139,318 -155,357 $27.51 $17.53 $26.43 Class A 29,493,045 259,230 24.6% 199,072 -137,957 $28.89 $17.35 $27.51 Class B 12,613,802 0 15.2% -59,754 -17,400 $20.62 $20.16 $20.60 Central Expressway Total 13,048,203 88,890 15.2% -31,596 -96,709 $31.38 $23.34 $30.54 Class A 7,527,626 0 18.2% -10,235 -75,159 $33.33 $26.25 $32.68 Class B 5,520,577 88,890 11.1% -21,361 -21,550 $28.22 $19.95 $27.19 East Dallas Total 7,054,858 1,156,730 15.6% -13,237 158,338 $28.29 $23.24 $28.21 Class A 1,200,033 1,132,730 22.2% 461 171,427 $42.83 $25.55 $41.40 Class B 5,854,825 24,000 14.3% -13,698 -13,089 $21.58 $19.76 $21.56 Far North Dallas Total 61,166,866 2,238,724 17.4% -45,193 383,844 $31.20 $26.44 $30.54 Class A 41,637,900 2,136,224 17.1% 4,379 357,667 $35.19 $28.55 $34.14 Class B 19,528,966 102,500 18.0% -49,572 26,177 $23.80 $19.84 $23.41 Las Colinas Total 41,672,918 529,281 17.1% 74,131 -869,133 $26.89 $23.30 $26.65 Class A 23,703,527 426,281 17.6% 275,703 -658,854 $30.60 $25.04 $30.16 Class B 17,969,391 103,000 16.5% -201,572 -210,279 $22.65 $20.34 $22.53 LBJ Freeway Total 21,737,856 0 20.6% -30,328 223,815 $23.23 $22.93 $23.20 Class A 11,286,823 0 18.5% -29,878 177,474 $26.73 $23.85 $26.36 Class B 10,451,033 0 22.9% -450 46,341 $19.62 $17.96 $19.58 Lewisville/Denton Total 7,127,876 308,340 12.6% -18,851 20,420 $25.16 $28.43 $25.19 Class A 386,778 222,000 12.7% 162 26,368 $30.05 $29.39 $30.04 Class B 6,741,098 86,340 12.6% -19,013 -39,742 $24.05 $28.13 $24.09 Mid-Cities Total 28,005,467 962,316 18.9% -341,832 -243,211 $25.32 $23.14 $25.17 Class A 11,664,179 738,999 26.1% -146,371 -149,358 $28.34 $22.09 $27.89 Class B 16,341,289 223,317 13.7% -195,461 -93,853 $21.47 $24.68 $21.68 North Ft. Worth Total 3,871,621 182,000 5.4% -18,469 -32,778 $26.37 $20.04 $26.18 Class A 1,414,559 102,000 7.7% -7,721 -19,755 $27.79 - $27.79

Class B 2,457,062 80,000 4.0% -10,748 -13,023 $23.99 $20.04 $23.70

SUBMARKET STATISTICS

Total Under Total Qtr YTD Direct Sublet Average Inventory Construction Vacancy Absorption Absorption Asking Rent Asking Rent Asking Rent (SF) (SF) Rate (SF) (SF) (Price/SF) (Price/SF) (Price/SF)

Northeast Ft. Worth Total 3,583,407 0 15.3% 3,924 4,192 $20.73 - $20.73

Class A 415,921 0 55.3% 2076 2076 $21.41 - $21.41

Class B 3,167,486 0 10.1% 1,848 2,116 $23.94 $23.94

Preston Center Total 5,573,854 297,000 11.3% -48,164 10,558 $40.32 $34.33 $39.65

Class A 4,459,535 297,000 10.1% -12,309 54,919 $43.54 $34.80 $42.34

Class B 1,114,319 0 15.9% -35,855 -44,361 $29.88 $24.81 $29.76

Richardson/ Plano Total 35,185,542 418,000 16.4% 12,826 179,563 $24.84 $19.98 $24.49

Class A 15,099,235 348,000 19.4% -32,118 99,004 $27.73 $21.58 $27.31

Class B 20,086,307 70,000 14.1% 44,944 80,559 $22.15 $18.61 $21.89

South Ft Worth 14,886,944 52,531 12.6% -108,948 -147,484 $24.85 $23.93 $24.70

Class A 4,391,401 23,031 10.4% -162,561 -183,959 $27.21 $24.28 $26.82

Class B 10,495,543 29,500 13.5% 53,613 36,475 $24.34 $22.23 $24.21

Southwest Dallas 3,591,434 73,314 14.8% -3,835 -38,751 $24.43 $15.58 $24.38

Class A 280,592 0 6.9% 0 0 $20.00 $20.00

Class B 3,310,842 73,314 15.5% -3,835 -38,751 $24.61 $15.58 $24.56

Stemmons Fwy 13,223,462 65,000 22.2% 39,777 54,154 $18.58 $15.27 $18.52

Class A 4,982,369 0 16.8% -8,821 21,164 $20.76 $16.48 $20.58

Class B 8,241,093 65,000 25.4% 48,598 32,990 $17.36 $10.70 $17.31

Uptown/ Turtle Creek 14,877,132 656,774 14.3% 4,676 -180,012 $40.94 $35.83 $40.39

Class A 12,551,891 656,774 13.9% 21,400 -142,107 $42.93 $37.17 $42.25

Class B 2,325,241 0 16.7% -16,724 -37,905 $32.72 $25.85 $32.25

Suburban 271,425,715 6,955,060 16.8% -583,849 -630,802 $27.45 $24.97 $27.23

Class A 140,708,209 6,009,199 17.7% -168,194 -381,454 $31.74 $27.01 $31.23

Class B 130,717,506 945,861 15.9% -415,655 -249,348 $22.44 $20.44 $22.32

Dallas Market Total 313,532,562 7,214,290 17.5% -444,531 -786,159 $27.46 $23.51 $27.10

Class A 170,201,254 6,268,429 18.9% 30,878 -519,411 $31.09 $24.60 $30.37

Class B 143,331,308 945,861 15.8% -475,409 -266,748 $22.32 $20.43 $22.09

SELECT TEXAS MARKETS- LARGEST EMPLOYMENT BY INDUSTRY SUBMARKETS Dallas, April 2020 Dallas, June 2020 2.3% Top 10 Submarkets by Rentable Square Feet 3.2% Trade/Transportation/Utilities Rank Submarket RSF 21.8% 6.4% Professional/Business Services 1 Far North Dallas 61.1 M 8.0% Education/Health Services 2 DFW Las Colinas 41.6 M Government 3 Houston CBD 39.7 M 9.4% 4 Richardson/Plano 35.1 M Leisure/Hospitality 5 Dallas CBD 31.2 M 17.2% Financial Activities 6 DFW Mid-Cities 28.0 M 6.8% Manufacturing 7 HOU Galleria/Uptown 23.4 M 12.8% 12.0% Mining/Logging/Construction 8 HOU Energy Corridor 22.4 M Other Services 9 DFW LBJ Freeway 21.7 M 10 Austin Northwest 18.4 M Information

Source: Newmark Knight Frank Source: U.S. Bureau of Labor Statistics

UNEMPLOYMENT RATE PAYROLL EMPLOYMENT

Not Seasonally Adjusted Total Nonfarm, Not Seasonally Adjusted, 12-Month % Change

10% 5% 8% 1% 6% -3% 4% -7% 2% -11% 0% -15% 4/1/2015 4/1/2016 4/1/2017 4/1/2018 4/1/2019 4/1/2020 May-15 May-16 May-17 May-18 May-19 May-20 Unit ed St at es Dallas Unit ed St at es Dallas

Source: U.S. Bureau of Labor Statistics Source: U.S. Bureau of Labor Statistics

CONSUMER PRICE INDEX (CPI) EMPLOYMENT GROWTH BY INDUSTRY

All Items, 12-Month % Change, Not Seasonally Adjusted, Dallas, April 12-Month % Change, Not Seasonally Adjusted

Leisure/Hospitality 6% Mining/Logging/Construction 4% Professional and Business Services 2% Financial Activities Other Services 0% Manufacturing -2% Trade/Transportation/Utilities -4% Education/Health Services May-15 May-16 May-17 May-18 May-19 May-20 Government

Unit ed St at es Dallas Information -50.0% -40.0% -30.0% -20.0% -10.0% 0.0% 10.0% Source: U.S. Bureau of Labor Statistics Source: U.S. Bureau of Labor Statistics

Graham Hildebrand Walter Bruton Director –Texas Research Coordinator – Texas Research 713.599.5151 469.467.2042 [email protected] [email protected]

Newmark Knight Frank has implemented a proprietary database and our tracking methodology has been revised. With this expansion and refinement in our data, there may be adjustments in historical statistics including availability, asking rents, absorption and effective rents. Newmark Knight Frank Research Reports are available at www.ngkf.com/research

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