Savills Studley Research /Fort Worth

Savills Studley Report Dallas/Fort Worth office sector Q4 2018

SUMMARY Market Highlights

LEASING DECLINES LITTLE CHANGE IN RENT Quarterly deal volume fell for the second The overall asking rent was essentially "The Metroplex’s economy and office quarter in a row, dropping from 3.5 msf unchanged, ending the year at $24.23, but market seem to show few signs of losing (million square feet) to 3.2 msf. Tenants jumped by 2.5% year on year. The average leased just over 14.3 msf in 2018, a sharp Class A asking rent rose to $26.64 and has momentum. A steady influx of companies increase from the 13.5 msf leased in 2017. jumped by 2.3% year on year. from other markets and strong local growth have kept activity aloft. The housing market AVAILABILITY FALLS The region’s overall availability rate dipped SALES DOWN is starting to lose traction, though, as supply Office property sales during the first eleven by 30 basis points, declining to 24.7%. starts to outstrip demand and the capacity The continued flight to quality pushed the months of 2018 totaled $3.8 billion, a 11% region’s Class A availability rate down by 60 decrease compared to the same period of of households to afford down payments and 2017. basis points to 24.2%, the second quarter in interest." a row with a decrease of this amount. Frank McCafferty, Executive Managing Director Savills Studley Report | Dallas/Fort Worth

Businesses Beat Well-Worn Path To Dallas Office-Using Employment Trends The Dallas/Fort Worth region continues to Millions 0.90 8% see robust leasing as the flow of businesses from California and West Coast shows 0.80 6% little signs of stopping. The residential and 0.70 commercial development proliferating across 4% West Plano and Frisco, and continued 0.60 2% growth of Uptown and nearby Arts District, 0.50 can be attributed largely to major business 2009 0% movement to the region. In the last couple 0.40 of years, Las Colinas and Plano have also -2% 0.30 captured extensive movement. -4% 0.20 The overall regional economy and office 0.10 -6% market stayed on a steady path of

2012 expansion during 2018. The Metroplex 2010 2011 0.00 2013 2014 2015 2016 2017 2018 -8% DFW. Office Emp. DFW. - % Annual Change U.S. - % Annual Change gained 109,000 jobs in the last 12 months,

Source: Bureau of Labor Statistics^ a 3.0% increase. The region added 37,800 office-using jobs (a 3.5% increase) during the same period. Both rates were well above Availability Rate Trends more anemic national growth. Availability Rate Trends Dallas lost out on the Amazon stakes, but it may have taken little notice as the 30% flow of firms into the region remained 24.5% 25.4% steady. McKesson Corp., the nation’s 25% largest pharmaceutical distributor, 24.2% recently announced that it will relocate its 20% 22.0% headquarters from San Francisco to Irving in April. This is just the latest in a steady stream of moves from California to . 15% The company, which delivers prescription drugs and medical supplies, has more than 10% 75,000 employees globally. Revenue totaled $208 billion last year. It ranks sixth on the Fortune 500 list and pushes Dallas-Fort 5% Worth's roster of Fortune 500 company Class A Class B headquarters to 22 companies. Additionally, 0% global medical tech firm DJO is relocating Q4 '13 Q4 '14 Q4 '15 Q4 '16 Q4 '17 Q4 '18 its corporate headquarters from California to North Texas.

Development Spreads

West Plano and Frisco have captured much of this movement by West Coast firms. Asking Rent Trends ($/sf) The two towns have seen a combined total Rental Rate Trends of 14.1 msf in new construction delivered since 2010 and still have another 2.0 msf $30 $26.64 underway. Now that the Toyota, Liberty Mutual, and JPMorgan Chase campuses $25 $23.24 (all in Legacy West) are complete, the next round of build-to-suits include $20 facilities for American Airlines (Fort Worth), $20.96 Pioneer Natural Resources (Irving Las $18.10 Colinas), Charles Schwab (Westlake), and $15 AmerisourceBergen (Carrollton), to name a few. Excluding single-tenant buildings, 2.2 $10 msf is underway with 50% pre-leased.

$5 Uptown Dallas, one of the metro's strongest and most appealing office markets, is adding Class A Class B to its stock of trophy buildings. Kaizen $0 Development Partners is building The Link at Q4 '13 Q4 '14 Q4 '15 Q4 '16 Q4 '17 Q4 '18 02 Q4 2018

Uptown, a 300,000-sf trophy office tower at the intersection of Olive and Akard streets. Availability Rate Comparison Rental Rate Comparison ($/sf) The 22-story building will be erected on a Southwest Dallas 9.6% 0.7-acre site Kaizen purchased in October Uptown $34.94 South Fort Worth 14.1% US Index from local restaurateur Mike Karns. Uptown $34.69 Preston Center 14.7% Preston Center $31.97 is one of the few areas in the region that Fort Worth CBD 15.9% Fort Worth CBD $29.04 is short on developable land. Kaizen will Far North Stemmons 16.3% Central Expressway $27.45 demolish several buildings on the site to West LBJ 17.6% Corridor $25.85 make way for the trophy tower. The building US Index 17.90% Las Colinas $25.27 is expected to deliver in 2021. Central Expressway 18.1% South Fort Worth $24.96 Uptown 23.0% Dallas/Fort Worth $24.23 Active CBD 23.9% Dallas CBD $23.06 Dallas/Fort Worth 24.7% West LBJ $22.68 Earlier in this cycle, transplants and local Richardson Telecom Corridor 24.9% LBJ $22.50 firms focused largely on Mid-Cities 25.5% Richardson Telecom Corridor $22.28 and Uptown, but the Dallas CBD is also Las Colinas 25.7% Northeast Fort Worth $20.56 attracting some sizable relocations and North Dallas Corridor 25.7% Far North Stemmons $20.35 LBJ Mid-Cities expansions. For example, AT&T announced 26.8% $20.26 North Fort Worth 28.7% North Fort Worth $20.20 that it will remain at its headquarters in the Stemmons 31.4% Southwest Dallas $19.78 CBD and hire more 1,500 employees in the Dallas CBD 32.1% Stemmons $16.38 next few years. Jacobs Engineering added Northeast Fort Worth 44.7% East Dallas $14.12 hundreds of jobs at its 0% 10% 20% 30% 40% 50% $0 $15 $30 $45 location as it relocated its headquarters from Southern California. In other major moves, Goldman Sachs consolidated most Major Transactions of its local operations into 175,000 sf at the Trammell Crow Center, and Steward Health Tenant Sq Feet Address Market Area relocated from Boston into 67,000 sf at 1900 MetroPCS Communications, Inc. 115,582 2250 Lakeside Blvd Richardson Telecom Corridor Pearl in early 2018. Altair Global 64,949 3201 Dallas Pky North Dallas Corridor Brierley+Partners 56,703 6160 Warren Pky North Dallas Corridor These relocations and steady local organic Credit Union of Texas 52,030 900 W Bethany Dr Richardson Telecom Corridor growth support strong leasing activity. Deal GSA-FDA 44,255 1201 Main St Dallas CBD volume has been steady in Dallas, averaging Hill & Wilkinson Construction Group, Ltd. 43,000 2703 Telecom Pky Richardson Telecom Corridor just over 3.0 msf three consecutive quarters Lynn Pinker Cox & Hurst 39,000 2100 Ross Ave Dallas CBD a row. With leasing activity on par with its Generational Group LLC 30,794 3400 N Central Expy Richardson Telecom Corridor historical average and construction activity X Coworking I LLC 30,000 6735 Salt Cedar Way North Dallas Corridor still elevated, availability rates are not falling Common Desk 26,676 14555 N Dallas Pky North Dallas Corridor as sharply as in prior quarters. The region’s Sum of Leases 502,989 overall availability rate ended 2018 with a record ($503/sf) on a price per square foot on an annual basis for eight straight months. rate of 24.8%, down from the prior quarter, basis. The buyer, Union Investment, has This is the longest slump in four years but up by 20 basis points from a year been active in the Metroplex, acquiring 2000 according to the NAR. with sharp declines n ago. Availability rates are all over the map, McKinney in 2016. Seattle, Denver, NYC, Boston and Bay Area. though. The Dallas CBD has availability rates Pricing growth has outstripped wage growth exceeding 30%, the highest in the market. and the capacity of homeowners to arrange In contrast availability in Uptown is below Housing Market Flags financing. Rising interest rates exacerbate 25% and Preston Center is among the The region has enjoyed a well-balanced the affordability issues. Unless wage growth lowest at 14.2%. Tenants looking for block of recovery for most of this cycle with lenders intensifies home prices in most markets 100,000 sf or more, have ample options to and developers keeping a hold on runaway probably peaked some time ago. This spells consider, particularly in downtown the Dallas construction. In contrast to prior cycles, trouble for buyers who bought at the top CBD, Las Colinas and north Dallas locations. lenders did not overlend and developers of the market. As rates rise buyers lower Strong Investor Demand did not overdevelop. The local market is their budget. Builders in turn have to lower losing some momentum. This could be a their costs – in this case has to be land, red flag for the office sector. Pricing has construction costs are not falling. With pricing in core coastal markets such slipped as more buyers struggle to afford as Boston, New York and San Francisco rising mortgage rates and to arrange down In other markets, the subprime market rising over the past few years, institutional payments. The Metroplex has shifted rather implosion of 2007 and 2008 was a leading investors have increasingly turned to less rapidly from a market with some of the indicator of the financial debacle that was expensive secondary markets in search of strongest appreciation in home prices during to follow. The woes of housing sales may in higher yields. This continuing shift of capital 2016 and 2017, to one with steady price fact be connected to some maintenance of has driven up pricing in the Metroplex and in declines Price reductions are occurring at stricter lending standards. Of note, though, multiple ends of the market, both in luxury there is some talk in the nation’s capital of homes and entry-level housing as well. loosening those lending requirements. some cases set records. Fannie Mae's new 324,100-SF campus at Granite Park sold in At the national level home sales have fallen September 2018 for $163 million – setting a

savills-studley.com/research 03 Savills Studley Report | Dallas/Fort Worth

Leasing Available Availability Asking Rents Map Submarket Total Activity SF Rate Per SF

% pp % Last SF This Change Year This Change Year This Change Year 12 (1000's) Quarter from Ago Quarter from Ago Quarter from Ago Months Last Qtr. Last Qtr. (1) Last Qtr.

Dallas CBD 24,151 1,625 7,747 -4.5% 8,189 32.1% -1.5% 33.9% $23.07 -1.4% $23.49 1 Dallas CBD - Class A 20,089 1,374 6,502 -5.6% 7,082 32.4% -1.9% 35.3% $23.46 -0.6% $23.56 Uptown 12,318 726 2,827 -1.0% 2,369 23.0% -0.2% 19.2% $34.84 2.5% $32.41 2 Uptown - Class A 10,049 632 2,226 -0.2% 1,818 22.2% 0.0% 18.1% $36.44 1.6% $34.33 Central Expressway 10,396 628 1,886 -1.3% 1,823 18.1% -0.2% 17.5% $27.45 2.0% $26.48 3 Central Expressway - Class A 6,809 320 1,191 -5.0% 1,233 17.5% -0.9% 18.1% $28.42 1.9% $27.77 Preston Center 3,969 226 583 5.0% 711 14.7% 0.7% 17.7% $31.97 -0.8% $32.55 4 Preston Center - Class A 3,030 199 421 4.1% 589 13.9% 0.6% 19.4% $32.81 -1.2% $32.73 Stemmons 7,347 295 2,309 2.4% 2,065 31.4% 0.7% 28.1% $16.38 1.4% $14.88 5 Stemmons - Class A 1,941 78 567 18.6% 432 29.2% 4.6% 22.3% $16.78 1.5% $15.56 LBJ 18,501 1,199 4,959 -1.8% 5,089 26.8% -0.5% 27.5% $22.50 0.7% $21.74 6 LBJ - Class A 8,984 671 2,413 -3.4% 2,561 26.9% -0.9% 28.5% $24.80 2.0% $24.22 Richardson Telecom Corridor 22,046 1,843 5,492 -3.0% 5,593 25.0% -0.8% 25.4% $22.28 1.3% $22.93 7 Richardson Telecom Corridor - Class A 11,598 1,002 3,001 -6.8% 3,246 25.9% -1.9% 28.0% $24.53 4.0% $25.03 East Dallas 708 63 169 -7.9% 93 23.9% -2.0% 12.1% $14.12 -0.8% $15.05 8 East Dallas - Class A 72 N/A 4 0.0% 4 6.2% 0.0% 6.2% $22.50 0.0% $24.25 North Dallas Corridor 40,791 3,327 10,466 0.3% 9,421 25.8% 0.1% 23.1% $25.85 -0.4% $25.50 9 North Dallas Corridor - Class A 27,177 2,323 6,020 1.0% 5,239 22.2% 0.2% 19.3% $28.54 -1.0% $28.85 Far North Stemmons 3,010 0 490 5.9% 560 16.3% 0.9% 18.6% $18.66 1.6% $13.63 10 Far North Stemmons - Class A 323 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Las Colinas 17,953 1,353 4,606 2.6% 4,320 26.1% 0.6% 24.1% $25.27 -0.3% $24.15 11 Las Colinas - Class A 10,952 966 2,766 2.8% 2,527 25.3% 0.7% 23.1% $27.17 0.3% $26.46 West LBJ 10,529 840 1,851 -12.7% 2,405 17.6% -2.6% 22.8% $22.68 0.5% $21.79 12 West LBJ - Class A 3,700 242 587 -2.6% 636 15.9% -0.4% 17.2% $26.61 4.4% $23.42 Southwest Dallas 1,248 63 119 -5.1% 143 9.6% -0.5% 11.4% $19.78 -6.4% $17.90 13 Southwest Dallas - Class A 282 N/A 23 -24.8% 31 8.3% -2.7% 11.0% $21.25 -14.8% $24.49 Mid-Cities 11,210 1,131 2,859 2.3% 2,787 25.6% 0.6% 24.9% $20.26 -1.4% $20.30 14 Mid-Cities - Class A 4,169 407 1,432 -4.0% 1,619 34.3% -1.4% 38.8% $22.73 1.1% $22.26 Fort Worth CBD 8,047 311 1,283 -2.5% 1,366 15.9% -0.4% 17.0% $29.04 0.1% $27.33 15 Fort Worth CBD - Class A 5,955 183 977 -1.9% 1,019 16.4% -0.3% 17.1% $31.51 -0.2% $29.93 Suburban Fort Worth* 8,940 655 2,019 -0.4% 2,445 22.6% -0.1% 27.2% $22.04 2.9% $21.20 16 Suburban Fort Worth - Class A 3,252 329 439 -8.8% 783 13.5% -1.3% 24.1% $23.38 N/A $22.40 Dallas/Fort Worth Region Total 201,164 14,385 49,667 -1.4% 49,378 24.7% -0.3% 24.5% $24.23 0.2% $23.64 1-16 Dallas/Fort Worth Region Total - Class A 118,382 8,747 28,610 -2.3% 28,861 24.2% -0.6% 24.4% $26.64 0.8% $26.05

Please contact us for further information

Savills Studley Co-Branch Managers Chase Tower Frank McCafferty, Executive Managing Director 2200 Ross Avenue, Suite 4800 East [email protected] Dallas, TX 75201 (972) 739-2200 Kelly Winn, Executive Vice President [email protected]

(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded. ^Unless otherwise noted, source for data is Savills Studley. The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2019 Savills Studley

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