Dallas Office Market

RESEARCH 1Q 2020 DALLAS OFFICE MARKET

MARKET AT A GLANCE CURRENT CONDITIONS The Dallas Fort Worth office market continues to see moderate movement through the first quarter. Population and employment growth Rental rates are still on the incline, as the average rental rate for Dallas Fort Worth creeps above $27.00. continue to drive demand for office space. Vacancy rates have seen little fluctuation over the last year and continue to hover around 17%. Dallas Fort Worth is still a hotbed for corporate expansions as Direct leasing accounted for most of the leasing activity during the first companies continue to grow and flock to the metroplex. quarter at approximately 2.4 million square feet. Sublease activity Covid-19 hits the metroplex and begins to shake up the local accounted for approximately 262,000 square feet, accounting for a small economy. amount of the market’s overall activity.

Since first quarter 2019, over 6 million square feet has been delivered to MARKET ANALYSIS the Dallas Fort Worth office market. The Far North Dallas and Uptown/ Turtle Creek submarkets account for most of the space under Asking Rent and Vacancy construction in the metroplex. $27 24% RENTAL RATES & VACANCY REMAIN RELATIVELY $24 22% STABLE In the fourth quarter the average asking rate was $26.51/SF, during the $21 20% first quarter of 2020 that increased slightly to $27.03. Submarkets with a $18 18% relatively high number of new development such as Uptown/Turtle Creek and Far North Dallas are currently outflanking the market with rental $15 16% rates in the mid $30.00 to low $40.00 per square foot range. The 1Q15 1Q16 1Q17 1Q18 1Q19 1Q20 suburbs have profited the most from enormous corporate shifts, but the Average Asking Rent (Price/SF) Vacancy (%) CBD and Uptown/Turtle Creek have pulled in a significant number of migrations and corporate growth too. A handful of submarkets Net Absorption (SF, Millions) experienced increases in sublease rates including Dallas CBD and Las Colinas in the first quarter. The average market sublease rate is $23.31/ 2.0 SF, which is a slight increase from the previous quarter in which it was 1.5 $22.70/SF. 1.0 0.5 At 17.3%, the overall vacancy rate has increased very minimally since 0.0 fourth quarter when it was 17.0%. Most submarkets in the Dallas Fort -0.5 Worth market experienced slight changes in vacancy. The Ft. Worth CBD 1Q15 1Q16 1Q17 1Q18 1Q19 1Q20 submarket saw one of the biggest changes decreasing from 16.1% in the fourth quarter to 12.1% in the first quarter of 2020. This was due to an MARKET SUMMARY increase in leasing activity. Current Prior Year Ago 12 Month Quarter Quarter Period Forecast During the first quarter, 707 transactions occurred in the metroplex Total Inventory 313.6 MSF 312.9MSF 306.9 MSF é totaling approximately 2.4 million square feet. The number of Availability Rate 20.2% 20.1% 20.0% ê transactions decreased in the first quarter from 758 in the previous Quarterly Net Absorption -560,676 2,026,481 1,513,691 é quarter. Uptown/Turtle Creek, Far North Dallas and Las Colinas were $27.03 $26.51 $26.21 some of most sought out submarkets in the first quarter, as rental rates Average Asking Rent é in these submarkets ascended over the quarter. New inventory in these Under Construction 7.7 MSF 7.3 MSF 8.8 MSF é submarkets is driving interest and demand; thus, creating an increase in Deliveries 8 12 10 é rents.

RELOCATIONS & EXPANSIONS SALES & INVESTMENTS Dallas Fort Worth continues to be at the epicenter of corporate The first quarter of 2020 got off to a fast start with a few of high- relocations and expansions. Some of the key attributes that make profile sale transactions. Most notable was the sale of The Union Dallas Fort Worth attractive to companies are a profoundly talented located in the Uptown Turtle Creek submarket. The Class A office work force, relatively low price of doing business, and incentives building sold for $350M or approximately $731/SF. This transaction provided by the State of Texas. Relocation activity appeared to slow takes the title as being the priciest office property in Dallas per square down during the first quarter of 2020. Some of the most notable foot. The Union was purchased by the South Korean firm KB Financial. relocations and expansions this quarter include Appen and USAA. In the neighboring CBD submarket, 750 North Saint Paul changed Appen, an Australian tech company who specializes in the artificial hands in the first quarter of 2020 as well. The Class A office building intelligence field announced they plan to open their first Texas office in sold for $85M or approximately $311/SF. The 22-story office tower Dallas. One of the main reasons Appen chose Dallas was because of was about 85% leased at the time of sale and traded at a 5.5% cap its highly talented workforce. Appen signed a long-term lease for rate. The buyer was the global investment firm Heitman. 50,000 square feet at 3033 W. President George Bush Turnpike known as The Apex in the Plano office submarket. The space was “plug in CONSTRUCTION PIPELINE play” as it is the former space another tech company. The move by Across the market, roughly 675,000 square feet has delivered during Appen is supposed to bring around 300 new jobs to the metroplex. the first quarter. Most of the space under construction is in the Far North Dallas and Uptown/Turtle Creek submarkets. These are two of During the first quarter, USAA announced it will be taking the top office submarkets in Dallas Fort Worth, flaunting some of the approximately 125,000 square feet of office space at 5543 Legacy most noteworthy leases and highest rents in the metro. More than half Drive located in the Upper Tollway/West Plano submarket. The national of the submarket's inventory is class A & B buildings and of that, many insurance company will not move into their space until the summer of buildings are viewed as prize assets. 2020. This expansion allows USAA to stay near where they already occupy over 230,000 square feet at 5601 Legacy Drive also located in the Upper/Tollway West Plano submarket.

AVERAGE ASKING RENT BY SUBMARKET VACANCY BY SUBMARKET

Average Asking Rent ($/SF) Vacancy Rate (%) Current 12 Month Current 12 Month Quarter 1Q2019 Change Quarter 1Q2019 Change

Uptown/Turtle Creek $41.37/SF $39.62/SF é Northeast Fort Worth 15.5% 29.8% ê

Preston Center $40.00/SF $38.49/SF é Stemmons Fwy 22.6% 21.9% é 24.8% 23.3% Fort Worth CBD $29.15/SF $28.66/SF é Dallas CBD é 21.3% 20.8% Central Expressway $31.58/SF $29.77/SF é CBD Total é 16.3% 17.6% Far North Dallas $31.30/SF $29.40/SF é Richardson/Plano é

ECONOMIC INDICATORS COVID-19 HITS DALLAS FORT WORTH Dallas Fort Worth economic growth continued in January according to The Covid-19 virus pandemic has spread across the world and has hit the Federal Reserve Bank of Dallas. Payroll employment expanded, the Dallas Fort Worth area also. As of March, Dallas County officials unemployment stayed near record lows, and the Dallas and Fort Worth have made the tough decision to close all restaurants, bars, and business-cycle indexes rose further. Homebuilding activity soared in businesses. All large gatherings in public places have been canceled January, and housing market indicators point to moderate price as well, such as worship facilities and concerts. All public schools appreciation and stable affordability in fourth quarter 2019. Dallas Fort have been closed indefinitely as well. It is certain the regional economy Worth employment rose an annualized 2.0 percent in January, down is going to feel some momentary torment as we adjust to these means from 4.6 percent in December. Payroll expansion was 1.7 percent in to help moderate the spread of this virus. Understanding the long-term Dallas, while employment grew 2.7 percent in Fort Worth. effect of this virus regarding the Dallas Fort Worth market is just Unemployment in Dallas and Fort Worth held steady at 3.1 percent. something that will take time but will be predicated on the virus being contained and people being able to resume daily and routine activities Expansion in the Dallas and Fort Worth business-cycle indexes Coworking companies have been hit hard by Covid-19 pandemic as continued in January, supported in part by healthy job growth. The they are slashing salaries and letting workers go. With a business Dallas index rose an annualized 4.7 percent, slower than December’s model based around bringing office workers closer together and rate. Growth in the Fort Worth index was solid at 4.3 percent. Year over sharing space they will struggle to make it through this time period. year in January, the Dallas index rose 5.8 percent, and the Fort Worth With workers being asked an encouraged to stay home the coworking index was up 4.2 percent. Growth in both indexes remained higher than companies will continue to suffer. Jobless claims have soared over 3 their long-term averages. Homebuilding remained active in the million to a record high. Some of the hardest hit industries have been metroplex, buoyed by housing demand. Dallas Fort Worth single-family the travel, hotel, and restaurant/bar industries. Travel has been housing permits climbed for the second month in a row in January, up restricted or suspended to and from many places and many non- 27.6 percent year over year, while the three-month moving average essential businesses have been asked to shut down. Congress has showed strong growth. recently passed a 2 trillion-dollar stimulus bill to help with recovery of the economy.

LEASE/USER TRANSACTIONS

Tenant Building Submarket Type Square Feet

777 Main Street Ft Worth CBD Direct/New 175,192 Unknown USAA 5543 Legacy Drive Upper Tollway/West Plano Sublease 124,366

Appen, Inc 3033 W President George Bush Plano Direct/New 50,206

Copart, Inc 14185 Dallas Parkway Quorum/Bent Tree Renewal 78,593

Sheppard Mullin Richter & Hampton 2200 Ross Ave CBD Direct/New 51,804

SELECT SALE TRANSACTIONS

Buyer/Seller Building Submarket Sale Price $/SF

KB Asset Management/RED Development 2300 North Field Street Uptown/Turtle Creek 351,000,000 $731

Copart, Inc./Pillar Income Asset Management 14185 Dallas Parkway Quorum/Bent Tree Undisclosed TBD

750 North Saint Paul Street CBD Undisclosed Heitman/Quadrant Investment TBD

Dallas CBD Total 30,953,605 259,230 24.8% -447,339 -447,339 $27.20 $17.20 $26.03 Class A 23,743,657 259,230 27.4% -408,321 -408,321 $28.42 $17.26 $26.94 Class B 7,209,948 0 16.2% -11,274 -39,018 $19.88 $13.99 $19.78 Ft. Worth CBD Total 11,696,840 0 12.1% 149,361 149,361 $29.15 $18.34 $28.41 Class A 6,423,791 0 14.2% 78,553 78,553 $31.55 $23.68 $31.21 Class B 5,273,049 0 9.6% 70,808 70,808 $20.93 $13.47 $19.84

CBD Total 42,650,445 259,230 21.3% -297,978 -297,978 $27.47 $17.29 $26.33 Class A 30,167,448 259,230 24.6% -329,768 -329,768 $28.80 $17.52 $27.42 Class B 12,482,997 0 13.4% 31,790 31,790 $20.09 $13.62 $19.79

Central Expressway Total 13,023,131 30,252 15.0% -64,333 -64,333 $31.58 $24.93 $30.87 Class A 7,508,291 0 18.1% -61,756 -61,756 $33.29 $27.34 $32.66 Class B 5,514,840 30,252 10.8% -2,577 -2,577 $28.35 $20.63 $27.50

East Dallas Total 7,054,779 1,134,893 16.0% 131,371 131,371 $27.58 $22.83 $27.50 Class A 1,145,021 1,134,893 22.6 173,676 173,676 42.91 25.55 42.40 Class B 5,909,758 0 14.7% -42,305 -42,305 $21.223 $19.68 $21.21 Far North Dallas Total 61,526,304 2,474,881 18.6% -118,514 -118,514 $31.30 $27.03 $30.68 Class A 41,560,038 2,324,381 18.7% -172,498 -172,498 $35.34 $28.75 $34.21 Class B 19,966,266 150,500 18.3% 53,984 53,984 $23.78 $19.98 $23.45

Las Colinas Total 41,256,504 761,281 15.4% -573,420 -573,420 $26.48 $23.23 $26.27 Class A 23,147,657 658,281 16.1% -624,624 -624,624 $30.41 $24.39 $29.94 Class B 18,108,847 103,000 14.5% 51,204 51,204 $22.26 $21.26 $22.21 LBJ Freeway Total 21,738,144 0 21.0% 125,042 125,042 $23.12 $20.47 $22.96 Class A 11,287,011 0 18.9% 132,362 132,362 $27.11 $21.37 $26.59 Class B 10,451,133 0 23.3% -7,320 -7,320 $19.43 $17.81 $19.38

Lewisville/Denton Total 7,387,837 266,340 14.9% 20,420 20,420 $23.22 $26.77 $23.27 Class A 386,778 220,000 15.3% 19,160 19,160 $30.41 $25.53 $30.19 Class B 7,001,059 46,340 14.9% 1,260 1,260 $21.92 $28.13 $21.97

Mid-Cities Total 27,520,494 970,316 17.6% 171,230 171,230 $24.65 $23.14 $24.55 Class A 11,363,782 638,999 24.1% 128,588 128,588 $29.23 $22.53 $28.76 Class B 16,156,712 331,317 12.9% 42,642 42,642 $21.93 $23.61 $22.02

North Ft. Worth Total 3,871,621 134,000 5.2% -24,657 -24,657 $26.26 $21.37 $26.17 Class A 1,340,812 0 6.7% -17,250 -17,250 $26.33 - $26.33

Class B 2,530,809 134,000 4.3% -7,407 -7,407 $26.14 $21.37 $25.92

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 3,578,893 0 15.5% -934 -934 $23.41 - $23.41 Class A 415,921 0 55.8% 0 0 $21.41 - $21.41 Class B 3,162,972 0 10.2% -934 -934 $23.94 $23.94 Preston Center Total 5,573,854 297,000 10.6% 45,866 45,866 $40.00 $33.89 $39.54 Class A 4,459,535 297,000 9.9% 61,594 61,594 $43.39 $33.89 $42.45 Class B 1,114,319 0 13.3% -15,728 -15,728 $29.89 - $29.89 Richardson/ Plano Total 35,118,900 691,323 16.3% 200,572 200,572 $24.70 $19.45 $24.27 Class A 15,106,679 600,000 18.8% 191,040 191,040 $27.58 $20.87 $27.09 Class B 20,012,221 91,323 14.4% 9,532 9,532 $18.36 $21.70 $17.49 South Ft Worth 11,685,649 92,991 10.2% 31,303 31,303 $24.86 $23.08 $24.69 Class A 4,277,611 23,031 6.6% -12,482 -12,482 $28.10 $22.25 $27.53 Class B 7,408,038 69,960 12.3% 43,785 43,785 $23.84 $23.36 $23.80 Southwest Dallas 3,647,943 45,000 15.4% -49,918 -49,918 $24.50 $15.58 24.45 Class A 352,607 0 6.9% 0 0 $20.00 $20.00 Class B 3,367,351 45,000 16.1% -49,918 -49,918 $24.68 $15.58 $24.63 Stemmons Fwy 13,217,932 0 22.6% 6,703 6,703 $18.15 $15.36 $18.10 Class A 4,976,848 0 16.6% 32,554 32,554 $20.28 $16.60 $20.13 Class B 8,241,084 0 26.2% -25,851 -25,851 $16.93 $10.70 $16.89 Uptown/ Turtle Creek 14,811,412 656,774 14.3% -162,095 -162,095 $41.37 $35.24 $40.80 Class A 12,486,171 656,774 14.0% -143,492 -143,492 $43.20 $36.58 $42.53 Class B 2,325,241 0 15.8% -18,603 -18,603 $32.97 $24.29 $32.46 Suburban 271,033,732 7,555,051 16.7% -258,745 -258,745 $27.37 $25.01 $27.17 Class A 139,762,082 6,553,359 17.5% -292,599 -292,599 $32.18 $27.11 $31.62 Class B 131,271,650 1,001,692 15.8% 33,854 33,854 $22.33 $20.38 $222.22 Dallas Market Total 313,636,126 7,771,250 17.3% -560,676 -560,676 $27.40 $23.31 $27.03 Class A 169,910,195 6,769,558 18.8% -608,331 -608,331 $31.35 $24.44 $30.57 Class B 143,725,931 1,001,692 15.6% 47,655 47,655 $22.21 $20.08 $22.09

SELECT TEXAS MARKETS- LARGEST EMPLOYMENT BY INDUSTRY SUBMARKETS Dallas, January 2020 Dallas, March 2020 2.2% Top 10 Submarkets by Rentable Square Feet 3.3% Trade/Transportation/Utilities Rank Submarket RSF 21.0% 6.1% Professional/Business Services 1 Far North Dallas 61.5 M 7.6% Education/Health Services 2 DFW Las Colinas 41.2 M 3 Houston CBD 39.7 M Government 8.5% 4 Dallas CBD 30.9 M Leisure/Hospitality 16.8% 5 DFW Richardson/Plano 29.0 M Financial Activities 6 DFW Mid-Cities 27.5 M 10.4% Manufacturing 7 HOU Galleria/Uptown 23.4 M 12.4% Mining/Logging/Construction 8 HOU Energy Corridor 22.4 M 11.7% Other Services 9 DFW LBJ freeway 21.7 M 10 Austin Northwest 17.8 M Information

Source: U.S. Bureau of Labor Statistics Source: Newmark Knight Frank PAYROLL EMPLOYMENT UNEMPLOYMENT RATE Total Nonfarm, Not Seasonally Adjusted, 12-Month % Not Seasonally Adjusted Change

10% 5% 8% 4% 6% 3% 4% 2% 1% 2% 0% 0% Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 12/1/2014 12/1/2015 12/1/2016 12/1/2017 12/1/2019 12/1/2019 United States Dallas United States Dallas

Source: U.S. Bureau of Labor Statistics Source: U.S. Bureau of Labor Statistics EMPLOYMENT GROWTH BY INDUSTRY CONSUMER PRICE INDEX (CPI) Dallas, January, 12-Month % Change, Not Seasonally All Items, 12-Month % Change, Not Seasonally Adjusted, 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 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Government United States Dallas Information

-3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%

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

GRAHAM HILDEBRAND WALTER BRUTON Director –Texas Research Research Coordinator 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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