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Home , Dallas, North Texas

Second Quarter 2019 / Office Research Report

14643 , Suite 950, LB#58 | Dallas, TX 75254 214.294.4400 MARKETInsights

DALLAS-FORT WORTH

POPULATION GROWTH Population The Dallas-Fort Worth-Arlington metropolitan saw a slight decrease). The following industry Dallas/Fort Worth Population Growth statistical area has been one of the fastest sectors experienced the largest net gains in 10,000,000 Dallas-Fort Worth-Arlington growing metro areas of the country over the the past 12 months: professional and 9,000,000 past thirty years. According to the U.S. Census business services (+27,400 jobs); trade, 8,000,000 Bureau, the Metroplex is the fourth largest transportation and utilities (+19,300); leisure 7,000,000 metropolitan statistical area (“MSA”) in the 6,000,000 and hospitality (+13,900 jobs); and with an estimated population of 5,000,000 education and health services 7.4 million. By comparison, the three largest 4,000,000 (+10,500 jobs).

3,000,000 MSAs in terms of population were New

2,000,000 York, and with According to the most recent data from the

1,000,000 populations of 20.3 million, 13.4 million, and Bureau of Labor Statistics, the seasonally

0 9.5 million respectively. Since the last census adjusted unemployment rate for the Dallas- 1970 1980 1990 2000 2010 2018 2020 2030 in 2010, the Census Bureau estimates the Fort Worth-Arlington MSA was 3.4% as of

Source: North TexasSource: Council North of Governments; Council US Census of Governments; US Census population of the Dallas-Fort Worth MSA May 2019. By comparison, the Texas and

grew by 900,000 or an average of 130,000 national unemployment rates were both people per year. That’s a gain of 356 per day. 3.5% and 3.6%, respectively as of May 2019. NET JOB GROWTH VS. The Dallas-Fort Worth-Arlington metropolitan UNEMPLOYMENT RATE area’s 146,000-resident increase over the Population projections for Dallas-Fort Worth past year was the most of any metro state the Metroplex will reach 9 million area in the United States. by 2030 and 10.7 million by the year 2040. The North Council of Gov- The Dallas-Fort Worth-Arlington metropolitan ernments (NCTCOG) estimates the Dallas- area continued to produce new jobs, creating Fort Worth population will grow from 6.5 an estimated 107,000 net new jobs in the 12 million as of the 2010 Census to 10.7 million by months ending May 2019 (the most recent the year 2040, an average annual increase of figure available) according to the Bureau of 144,578 and an annual compounded growth Labor Statistics. The majority of new jobs rate of 1.8%. It should be noted that the were created in the professional and business NCTCOG’s prior estimate of the Dallas-Fort services sector, which grew by 27,400 net new Worth population, an estimate of the 2010 JOBS EMPLOYMENT jobs. Net job gains occurred for almost all in- population made in 1987, underestimated dustry sectors (only the information sector the actual population per the 2010 Census. youngerpartners.com 1 MARKETInsights Second Quarter 2019 / Office Research Report DALLAS-FORT WORTH

Employment by Industry (January 2019) Financial EMPLOYMENT BYInformation INDUSTRYProfessional SECTOR and Activities 2% 8% Business Services Other Services 17% Employment 3% EmploymentJANUARY by Industry 2019(January 2019) Financial Information Professional and Manufacturing Activities 2% 8% Business Services For demand, employment – For the cycle so far, the total net job 8% Other Services 17% 3% especially employment in the “office-us- gains have been 1,060,900. This is second Manufacturing 8% ing” industry sectors – is a key driver. in the nation behind New York, which has Trade, Government Transportation, a much larger base. 12% Trade, and Utilities Government Transportation, 22% According to the Bureau of Labor Sta- 12% and Utilities 22% tistics, Dallas-Fort Worth was the fourth Employment growth in Dallas-Fort Worth

Education and largest employment market in the – both total non-farm and office-using – Education and Health ServicesHealth Services LeisureLeisure and and 12% 12% nation with total non-farm employment has been fairly consistent since 2010. For Mining,Mining, Logging Logging and Construction ConstructionHospitality 6% Hospitality 6% 10% 10% of 3.9 million as of May 2019. Of this fiscal year ending May 2019, Dallas-Fort

total, almost 27% or 1 million jobs were Worth’s total non-farm employment 1 in the office-using sectors of professional grew by 107,000 (2.9%) and the office EMPLOYMENT GROWTH Dallas/Fort Worth Employment Growth

6.0% and business services, financial activities, employment sector grew by 27,100 (3.0%). DALLAS-FORT WORTH 4.0% Dallas/Fort Worth Employment Growth and information. 6.0% 2.0%

0.0% 4.0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD -2.0% 2.0% -4.0%

0.0% -6.0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD -8.0% -2.0% Total Employment Growth (%) Office Employment Growth (%) -4.0% NET JOB GROWTH VS. UNEMPLOYMENT RATE

-6.0%

-8.0% 150,000 9.0% Total Employment Growth (%) Office Employment Growth (%)

8.0% 100,000 EMPLOYMENT GROWTH BY INDUSTRY 7.0% Job12 Growth Months by -Industry Ending (Year January, over Year 2019 Change) 6.0% Professional and Business Services 50,000

Trade and Transportation 5.0%

Leisure and Hospitality 0 4.0% Education and Health Services 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 YTD Finance and Insurance -50,000 3.0%

Manufacturing 2.0% Government -100,000 1.0% Information

-5,000 0 5,000 10,000 15,000 20,000 25,000 30,000 -150,000 0.0%

JOBS Net Job Growth Unemployment Rate EMPLOYMENT

Unemployment Trends

Unemployment rates for Dallas-Fort Worth, Texas, and the United States hit highs during the last recession of 8.5% in late 2009. Since then, the unemployment rates in Dallas-Fort Worth have fallen consistently, reaching a low of 3.1% in late 2017, but have since then begun to drift upward over the past few months. Keep in mind the 3.1% was a low not seen in two business cycles (approximately 17 years ago). Currently, the unemployment rates for Dallas-Fort Worth, Texas, and the United States are 3.4%, 3.5%, and 3.6% respectively (as of May 2019). Unemployment numbers this low are considered full-employment, which could create some headwinds for future employment growth.

youngerpartners.com 2 MARKETInsights Second Quarter 2019 / Office Research Report DALLAS-FORT WORTH

Office Market Conditions Demand and Supply

The DFW Office market moved back into the boom between 1997 and 2002 when more positive territory with just over 1 million square than 46 million square feet were built or the NET ABSORPTION & DELIVERIES feet of positive net absorption in the second “crazy ‘80s” when, between 1981 and 1986, NET ABSORPTION & DELIVERIES quarter of 2019. This bounce back from the almost 100 million square feet of space 3,000 previous quarter was largely the result of was completed. 2,500 several new construction projects being 2,000

1,500 completed, including Charles Schwab, , As of the end of June 2019, there was a total of NET ABSORPTION & DELIVERIES 1,000 USAA, Brinker International, Independent Bank 7,050,701 rentable square feet of office space 3,000 500 and more. Still, even with the healthy absorp- under construction in Dallas-Fort Worth. Of the 2,500 0 Square Feet 000's) Feet Square tion, new deliveries outpaced demand and 7.1 million square feet of construction currently 2,000 -500 1,500 the vacancy rate continued to increase mod- underway, 4.7 million square feet is -1,000 16,000,000 1,000 erately, as it has over the past few years. Also, scheduled for delivery in the second half of 12,000,000 2017 Q1 2017 2015 Q1 2019 Q1 2016 Q1 2018 Q1 2014 Q1 2017 Q2 2017 2017 Q3 2017 2015 Q2 2019 Q2 2015 Q3 2016 Q2 2016 Q3 Q4 2017 2013 Q3 2013 2018 Q2 2018 Q3 2014 Q2 2014 Q3 2015 Q4 2016 Q4 2013 Q4 2013 2018 Q4 500 2014 Q4 co-working companies continue to expand 2019. 0 Net Absorption SF Total Deliveries SF 8,000,000 Square Feet 000's) Feet Square rapidly in DFW and other parts of the country. -500 4,000,000 In 2018, co-working companies expanded by Of the 7.1 million square feet of space currently -1,000 Class Net Absorption 400,000 square feet 0 under construction, 69% 2013 2014 2015 2016 2017 2018 2Q19 2017 Q1 2017 2015 Q1 2016 Q1 2019 Q1 2014 Q1 2018 Q1 2017 Q2 2017 2017 Q3 2017 2015 Q2 2013 Q3 2013 2015 Q3 2016 Q2 2016 Q3 Q4 2017 2019 Q2 2014 Q2 2018 Q2 2018 Q3 2013 Q4 2013 2014 Q3 2015 Q4 2016 Q4 2018 Q4 2,500 2014 Q4 in DFW and have Under Construction (SF) percent has been ac- 2,000 Net Absorption SF Total Deliveries SF LOCATION % OF CONSTRUCTION

1,500 already committed counted for through a

1,000 to almost 600,000 East DallasPreston Center Uptown combination of built-to- 500 CLASS NET ABSORPTION 4% 2% 1% Class Net Absorption square feet of addi- Southwest suits and pre-leasing. 0 Dallas 2,500 Square Feet (000's) -500 tional space so far 4% Richardson/Plano 2,000-1,000 this year. 5% Mid- and 1,500-1,500 37% 1,000 2016 Q2 2016 Q4 2017 Q2 2017 Q4 2018 Q2 2018 Q4 2019 Q2 Charles Schwab (phase 500 Class A Class B Class C Among the property Far 2) make the Mid-Cities 0 13%

Square Feet (000's) -500 classes, Class A the most active submar- -1,000 properties absorbed ket from an office con- -1,500 2016 Q2 2016 Q4 2017 Q2 2017 Q4 2018 Q2 2018 Q4 2019 Q2 1,749,171 square feet in struction pipeline per- Class A Class B Class C the second quarter, spective. Between mul- while Class B and 31% tiple Cypress Water

Class C properties projects and Pioneer

both had negative absorption of 335,101 Natural Resources’ 1.1 million-square-foot campus, square feet and 366,613, respectively. Las Colinas has the second highest concentration of new construction underway and accounts for On the supply side, Dallas-Fort Worth 31% of the construction pipeline. OFFICE UNDER CONSTRUCTION saw 2.2 million square feet of new space is third at 13% with more of a mix of medium-sized delivered to the market in the second second phase spec projects (Headquarters II, 16,000,000 quarter of 2019. Since 2013, DFW has delivered Frisco Station, Legacy Center). In total 12,000,000 a little over 31 million square feet of new office across DFW, there are about 40 different construction to the market. In the previous properties that make up the 7.1 million square feet 8,000,000 boom period between 2006 and 2010, DFW currently under construction. There have been 4,000,000 completed less than 20 million square feet. So, several recently announced spec projects that construction deliveries this cycle have already have not yet broken ground and are expected 0 surpassed the previous cycle and there is still to begin construction later this year (most of SF 2013 2014 2015 2016 2017 2018 2Q19 Under Construction (SF) an additional 7.1 million square feet scheduled these projects are concentrated in Legacy area

for completion within the next two years. of Far North Dallas).

Still, both of these numbers are far below East DallasPreston Center Uptown 2% 1% Southwest 4% Dallas youngerpartners.com4% 3 Richardson/Plano Mid-Cities 5% 37%

Far North Dallas 13%

Las Colinas 31%

MARKETInsights Second Quarter 2019 / Office Research Report DALLAS-FORT WORTH

BIG BLOCKSBig Blocks Of SpaceOF SPACE One of the highest risks in the market is the amount of large blocks of South Ft Worth 1 second-generation spaces that will need to be backfilled. NorthNorth Fort Ft Worth Worth 1 Northeast Ft Worth 1 1 Lewisville/Denton 1 1 1 1 OCCUPANCYCLASS OCCUPANCY TRENDS Central Expressway 4 96.0% Uptown/Turtle Creek 4 1 94.0% Ft Worth CBD 3 2 92.0% Mid-Cities 5 1 6 90.0% Stemmons Freeway 9 4 2 88.0% 86.0% LBJ Freeway 12 3 84.0% Dallas CBD 5 8 4 82.0% Richardson/Plano 15 10 4 80.0% Las Colinas 12 12 5 2017 Q1 2018 Q 1 2019 Q 1 2016 Q 2 2016 Q 3 2017 Q2 2017 Q3 2017 Q4 2019 Q 2 Far North Dallas 21 6 6 2016 Q 4 2018 Q 2 2018 Q 3 2018 Q 4

SPACES 0 5 10 15 20 25 30 35 Overall Occupancy Class A Occupancy

50K to 99K 100K to 199K 200K+ Class B Occupancy Class C Occupancy

Occupancy Trends Rental RateRENTAL Trends RATE TRENDS $27.00 Construction deliveries outpaced net absorption by more Over the past quar- than double for the second quarter, pushing down the $26.00 RENTAL RATE TRENDS ter, Class A an- occupancy rate from 83.8% to 83.5% for the quarter. Longer $25.00 CLASS RENTAL RATES nual rental rates term, the occupancy rate has been trending down for $34.00$24.00 increased $0.05 roughly five years as construction levels have been elevated $23.00 to $29.29 (FSG), and several large tenants have reduced their real estate foot- $/SF/Year $29.00 $22.00 while Class B rates print by moving more employees into less and less office $24 .00 increased $0.08 to space. While several years ago, this densification was $21.00

$/SF/Year $21.90 while Class largely driven by law firms, in more recent quarters, $19.00 $20.00 C rates decreased technology-based companies like AT&T, Nokia, Samsung, $14.00 $0.25 to $18.12. HPE, DXC and others have been moving from an 2017 Q1 2017 2019 Q1 2018 Q1 2017 Q2 2017 2017 Q3 2017 2016 Q2 2016 Q3 Q4 2017 2019 Q2 2018 Q2 2016 Q4 2018 Q3 2018 Q4 average of 300 square feet per employee to

2017 Q1

2018 Q 1 2019 Q 1 The current DFW about 150 square feet per employee. 2017 Q2 2017 Q3 2016 Q 2 2016 Q 3 2016 Q 4 2017 Q4 2018 Q 2 2018 Q 3 2018 Q 4 2019 Q 2 office asking rates Overall Rates Class A Class B Class C are the highest the With continued densification and the construction market has ever pipeline still above 7 million square feet, expect occupancy seen, surpassing even the previous peaks from prior business cycles. Behind this trend, rates to continue the downward trend for at least there is an interesting dynamic happening between Class A & B rates. Historically, the next two years. the two move in pretty close tandem, with the typical spread between Class A & B rates being a little over $5 per SF ($5.24). The delta, however, between the two Despite the elevated levels of new construction over the classes has been widening over the past five years and is currently $7.39. One of past five years, one of the highest risks in the market is the the reasons for this expanding delta has been the preponderance of new Class A amount of large blocks of second-generation spaces that will construction over Class B product. In this construction cycle since 2013, 87% of the need to be backfilled (many of which were recently vacated new construction completed has been Class A product (27 million sf) as opposed to for the large built-to-suit projects). only 13% for Class B (4 million sf). This is one of the primary reasons why Class A rates have increased much more dramatically than Class B rates, helping to fuel the gap. youngerpartners.com 4 Second Quarter 2019 / Office Research Report

14643 Dallas Parkway, Suite 950, LB#58 | Dallas, TX 75254 214.294.4400 MARKETInsights

DALLAS-FORT WORTH

Submarkets SUBMARKETS

UNDER ASKING INVENTORY VACANCY NET ABSORPTION COMPLETIONS CONSTRUCTION RENT

SELECT # of Current Current At End of Wtd. Avg. SUBMARKETS Bldgs. Total SF Total SF Rate Quarter YTD Quarter YTD Current Quarter (FS/G)

Central Expressway 99 12,522,512 1,560,843 12.5% -83,597 -73,871 0 0 0 $29.38

Dallas CBD 94 32,105,323 7,149,762 22.3% -233,684 -328,857 0 0 60,230 $25.69

East Dallas 141 5,807,126 589,409 10.1% 90,042 112,623 0 0 300,000 $24.54

Far North Dallas 439 57,524,020 10,465,762 18.2% -243,595 -1,147,191 450,000 450,000 920,766 $28.07

Fort Worth CBD 70 11,659,040 1,438,156 12.3% 234 13,289 0 0 0 $27.92

Las Colinas 300 40,095,951 6,657,572 16.6% -131,259 190,686 716,400 746,400 2,173,377 $26.19

LBJ Freeway 149 20,547,702 4,713,090 22.9% 718 -258,240 0 0 0 $22.41

Lewisville/Denton 129 6,191,604 574,666 9.3% 21,912 -236,845 16,875 16,875 84,000 $22.36

Mid-Cities 373 25,762,201 3,005,687 11.7% 545,430 753,932 580,000 580,000 2,614,758 $22.52

North Fort Worth 51 3,851,761 265,218 6.9% 252,136 50,102 200,000 200,000 16,800 $23.08

Northeast Fort Worth 52 3,948,573 583,903 14.8% 483,067 723,529 0 0 0 $22.60

Preston Center 52 5,535,535 481,289 8.7% 2,384 -37,708 0 0 118,000 $38.30

Richardson/Plano 325 32,803,846 5,891,564 18.0% -2,534 96,023 165,000 165,000 322,200 $24.43

South Fort Worth 178 10,243,858 913,171 8.9% 62,794 25,418 27,850 48,850 35,570 $24.10

Southwest Dallas 75 3,401,264 219,993 6.5% 30,074 66,439 0 0 315,000 $18.10

Stemmons Freeway 117 11,331,198 2,622,984 23.1% 71,430 62,885 0 0 0 $17.11

Uptown/Turtle Creek 103 15,077,029 2,073,722 13.8% 181,905 326,254 0 265,860 90,000 $39.24

TOTAL 2,747 298,408,543 49,206,791 16.5% 1,047,457 338,468 2,156,125 2,472,985 7,050,701 $26.04

CLASS A 575 154,777,429 28,631,119 18.5% 1,749,171 631,472 2,111,400 2,377,260 6,164,142 $29.29

CLASS B 1,684 125,791,953 19,080,097 15.2% -335,101 105,027 44,725 95,725 886,559 $21.90

CLASS C 488 17,839,161 1,495,575 8.4% -366,613 -398,031 0 0 0 $18.12

TOTAL DFW 2,747 298,408,543 49,206,791 16.5% 1,047,457 338,468 2,156,125 2,472,985 7,050,701 $26.04

For additional information on any of the submarkets shown above, please refer to our Market Snapshot reports. * Younger Partners research is based on the CoStar office building database. Inventory includes office buildings containing at least 15,000 rentable square feet; single tenant, multi-tenant and owner-occupied; Class A, B and C; existing, under construction or under renovation; excludes medical office buildings and data centers. youngerpartners.com 5