<p>Dallas</p>

<p>Creating Opportunity in Dallas</p>

Why Dallas?

Dallas is widely recognized as a premier location for businesses and real estate investment, resulting from a diverse economy that consistently ranks among the top in the nation. The Dallas-Fort Worth (DFW) Metroplex is a strategic hub for national and international commerce, which is why the city is home to 24 Fortune 500 and 49 Fortune 1000 companies across various industries, including finance, technology, healthcare and telecom. With a well-connected transportation infrastructure, including a major international airport and an extensive highway system, businesses in DFW have unparalleled access to customers in both domestic and global markets. Additionally, with no personal or corporate income tax and a relatively low cost of doing business, the city offers an attractive environment for businesses to establish and grow operations.

This cost advantage, combined with the region's strong talent pool and excellent educational institutions, continues to attract companies to the DFW Metroplex which contributes to the overall business-friendly atmosphere. DFW’s thriving economy, central location, support for entrepreneurship and high quality of life contribute to the city's appeal as a prime destination for businesses and individuals looking to flourish.

Local Economy/Job Growth

The DFW Metroplex ranks among the top U.S. metropolitan areas in terms of population and economic growth, offering high-paying employment opportunities, the presence of life sciences and tech innovation hubs, and a lower cost of living compared to other major cities across the globe.  At the end of December 2023, the population in the metroplex reached a record high of 8.1 million residents, with an estimated net domestic in-migration of 130,890 new residents in 2022. This gain led the nation in total net new in-migrations for any U.S. metro.

DFW also recorded sustained economic expansion throughout 2023 with significant job growth throughout the pandemic.
The pandemic-induced economic downturn had minimal impact on demand for office space in DFW after the initial uncertainty. Demand for investments from outside the state of Texas changed minimally compared to before the pandemic, even as the use of office space changed to incorporate more flex space in support of hybrid work options. Year-over-year (YOY), the region added 54,570 new office-using jobs, a 1.3% increase from the previous year, and 286,860 new office-using jobs over the past five years, growing by 28.4%.

EMPLOYMENT
Nonfarm Payroll vs. Office-Using, % Change
Since December 2019

Source: U.S. Bureau of Labor Statistics

Tenant Expansions

Despite headwinds felt in most major markets, office-using jobs such as professional services, information/technology, and financial sectors, continued to experience growth in the Metroplex. Dallas’ largest expansions came from the finance, insurance, professional, scientific, and technical services industries. Recent examples include RS&H, a national architectural and engineering firm that renewed and expanded its footprint by 260%, and Stifel, Nicolaus & Company, a brokerage and investment bank that renewed and expanded by 104%. DFW’s 15 largest expansions saw a 40.0% increase in total square footage, with financial, legal, and consulting firms making up two-thirds of those renewals.

Flight to Quality

As with most major urban cores across the nation, the flight to quality narrative continues to hold true in Dallas’ downtown submarket. Businesses, particularly those with stable or growing operations, are increasingly leasing quality spaces in highly amenitized, top-tier office properties. These upgraded spaces provide many benefits for tenants including increased market presence, the ability to attract top talent, and a more conducive environment for business operations. This trend is also beneficial to owners of recently constructed, top-tier office properties. Spaces are achieving record-high rental rates despite near-term headwinds and projected economic outlook for the next few years.

SUPPLY
Top-Tier vs. Traditional Vacancy

*Does not include buildings built after 2021
Source: Cushman & Wakefield Research

Flight to Quality

Downtown Dallas’ set of top-tier properties lead all other categories of CBD (Central Business District) office product in terms of leasing, absorption and rental rates. It is important to note the differences in the total inventory tracked in the CBD. Of the total 27.8 million square feet (msf) tracked, top-tier properties make up 34.8% of inventory, while non-top-tier Class A account for 44.6% of CBD inventory. Top-tier properties recorded a total of 2.6 msf of leasing activity from 2020 to present day, which is 27.1% of the total top-tier inventory, and a current gross rental rate of $36.59 per square foot (psf). Non-top-tier Class A properties recorded 5.3 msf of leasing activity during the same period, 24.5% of the inventory, and a current gross rate of $32.37 psf. Class B and C office properties recorded the lowest leasing activity totaling 688,179 sf, just 12.0% of its office inventory, and a current gross rate of $22.27 psf. Rental rates for top-tier properties in the CBD commanded a 64.3% premium over Class B and C properties.

One area of focus in the CBD submarket, along with Dallas as a whole, is the elevated levels of sublease space being brought to market. While the entire DFW market recorded a total of 12.5 msf of available sublease space at the end of Q4 2023, levels which are off their peak of 12.6 msf in Q2 2023, the CBD had just 1.3 msf of available sublease space at the end of Q4 2023.

DEMAND
New Leasing as % of Inventory: 2020-Present

Source: Cushman & Wakefield Research

Presence of the Legal Sector in the CBD

Over the past four years, law firms in the metro have consolidated their presence from across the market and have been clustering in the core, leasing over 10.0 msf of office space, or 24.0% of all leasing activity in the submarket since 2020. Prominent legal entities have been integrating design features that prioritize maintaining perimeter offices for attorneys, diverging from conventional office-size norms while maximizing the efficiency of central workspace, including more collaborative spaces and digitization of law libraries and file rooms.

Source: Cushman & Wakefield Research

Office-to-Residential Conversion

With a growing number of older, obsolete and amenity-light office properties in the CBD, an interesting trend is emerging in Dallas, demonstrating the resiliency and strength of the market to adapt. There has been an ongoing effort by local and national investors to convert obsolete, non-top-tier office properties to multifamily units, solving for multiple problems at once: a growing inventory of vacant aging office product, an ongoing housing shortage and upward pressure on residential rental rates caused by that lack of available units. Key office-to-residential projects in the CBD include the partial conversion of Energy Plaza (294 units) and Santander Tower (228 units) to mixed-use properties, adding 522 new residential units to Dallas’ urban core.

Research Contacts

Andrew Desai
Senior Research Analyst, Dallas
andrew.desai@cushwake.com

Anu Uppal
Research Analyst, Dallas
Anu.uppal@cushwake.com