Office markets around the country are slumping as companies issue hiring freezes, cut jobs, or shut their doors entirely. But the outlook for the Dallas/Fort Worth market is better than most. Here we look at why.
In December of 2008 the United States was officially declared to be in a recession. The waters are too murky to see the bottom, but while many markets across the nation are sinking or struggling to stay afloat, others don’t seem to be in such desperate straits. The Dallas/Fort Worth area, based on the strength of its overall economy and office market, falls into the latter group.
A Tale of Two Cities
While vacancy rates in the Dallas/Fort Worth office market have been somewhat high relative to other large U.S. cities, several factors are aligning to strongly suggest vacancies will not notably increase in 2009. To illustrate the singular dynamics present in the Dallas/Fort Worth area, it helps to set up a comparison. The Atlanta Metropolitan Statistical Area (MSA) is comparable to the Dallas/Fort Worth MSA in most respects. They share a similar cost of living, and both have experienced similar population, household, and income growth over the past three decades. The most noteworthy difference is that Atlanta is subject to state income tax, while Dallas/Fort Worth is not.
Data from the U.S. Bureau of Labor and Statistics shows Atlanta’s unemployment rate hovered near 5.0% from 2002 to 2007. The city’s unemployment had climbed to 6.1% by July of 2008 and 7.6% in December of that year. By contrast, the Dallas/Fort Worth Metroplex has seen steady declines in unemployment since 2003, when unemployment stood at 6.6%, to 4.3% in 2007. The economic fallout of the past year has taken its toll on Dallas, to be sure (unemployment had risen to 5.8% for the Dallas/Fort Worth area as of December of 2008), but the increase is slight by comparison.
The health of their office markets provides another indicator for the state of cities’ overall economic condition. Rent growth is slowing, sometimes declining, in many major U.S. cities. Vacancy rates are on the rise. Typically, the climb in vacancy rates closely mirrors that of unemployment for any given area, albeit with some lag and variances in severity. Per Cresa Partners’ 2008 Fourth Quarter Tenant’s Guide, Atlanta posted a year-end office vacancy increase of 2.1% over one year prior. Conversely, the Dallas/Fort Worth office market experienced only a 0.1% increase in vacancy over the same period.
Less Supply, More Demand
Many factors affect unemployment and office market vacancy rates in both cities, but Dallas/Fort Worth has a corner on one very influential market: energy. The rapid expansion seen in the energy industries has proven a deciding factor in the stability of Dallas/Fort Worth’s office market. High oil and gas prices in early to mid-year 2008 infused the market with jobs and capital, sustenance crucial to the health of the office market. One striking example was Chesapeake Energy’s purchase of Pier Place, a 20-story, 460,000-square-foot facility located in Fort Worth, in June of 2008. Additionally, XTO Energy and several other energy firms have leased up large swaths of office space in the area.
Another factor benefitting the Dallas/Fort Worth office market at this stage and going forward is the relatively humble introduction of new supply since 2001, when an additional 9.9 million square feet came online. CB Richard Ellis’ Fourth Quarter Office Market Report for 2008 stated that the Dallas/Fort Worth area currently has 3.1 million square feet (1.6% of existing inventory) in the construction pipeline, the lowest level of office projects in queue since 2005. Alternatively, the Atlanta market has 3.5 million square feet, or 2.5% of existing inventory. This phenomenon of rapid growth in office inventory leading to higher vacancy rates and oversupply is happening elsewhere throughout the country. By contrast, the lack of significant supply expansion in Dallas/Fort Worth limits the amount of vacant space on the market and the erosion of rental rates that inevitably follows.
The relocation or expansion of numerous other businesses has also helped slow the increase in vacancies and unemployment in Dallas/Fort Worth. AT&T announced that it will relocate a portion of its headquarters to Dallas from San Antonio, a move that will capitalize on the global presence of Dallas and the concentration of telecommunication companies in the area. The Federal Deposit Insurance Corp. (FDIC) recently signed a five-year lease on a 125,000-square-foot expansion of its existing 185,000-square-foot facility, which houses its Division of Resolution. The Division of Resolution is tasked with managing troubled banks, a responsibility that has exploded in the past year, requiring a large workforce that is unlikely to diminish any time soon.
Looking Forward
The lack of a state income tax, the presence of several stable energy-sector corporations, and the relocation and expansion of private and government business operations form three pillars of strength for the Dallas/Fort Worth office market. Even though vacancy levels are expected to rise while the economy struggles to gain footing, overall tenancy and rent levels should remain relatively stable, encouraging new projects and resumed growth once the economy starts to turn around.