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Spec Space Still Leading the DFW Office Pipeline

More Than 80% of New Office Development Pipeline is Tied to Spec Space -- And That's Not Bad, Analyst Says
April 4, 2018
Dallas-Fort Worth remains one of the top U.S. office markets in the country, in part because of its robust pipeline of new office space under development in the region spurred by continued job growth and corporate expansion in North Texas.

More than 80 percent of Dallas-Fort Worth’s development pipeline is tied to speculative office space -- an anomaly from other major U.S. cities, but a new normal for the market once known in the 1980s for being a boom-and-bust city. But investors shouldn't be too concerned, one analyst says.

"You really can’t compare the Metroplex of today to the Metroplex of the 1980s - it’s like comparing apples to oranges," Robert Kramp, director of research and analysis for CBRE, told CoStar News. "Back then, the Metroplex was a single-trick pony tied to oil and gas and today the region is so diversified.

"It’s no longer an energy market, but a mature market with diverse employment sectors," he added.

Texas has three of the top 10 U.S. markets for office space, including Houston and Austin. At the end of last year, Dallas-Fort Worth had 22 projects remaining in the construction pipeline totaling 4.4 million square feet, of which 83 percent were tied to speculative office projects.

"The construction cycle seems to be different," Kramp said. "Developers are not just building to build; the demand seems to be there."

If North Texas continues to add jobs -- as expected -- the office space will eventually fill with new and expanding company operations. And Kramp said he believes this will happen with Moody’s Analytics projecting the region to add 73,800 new jobs by the end of the year, a slight dip compared to the 100,000+ jobs added annually in Dallas-Fort Worth in the last couple of years.

"We’ve been the third best producer of office jobs in the country, which is one reason we are seeing demand begin to percolate," Kramp said, adding the demand is tied to the corporate relocations of years past.

Like the job projections, Kramp said he’s seeing a slowdown in the number of new projects getting off the ground in 2018 through 2019 because of rising construction costs and rising interest rates.

"Instead of having a gusher of a pipeline, which is what we’ve had the last few years, we’ll have a steady pipeline of activity, which is what we want," he said. "We need a chance to absorb what’s been built the last few years."

How are other real estate food groups fairing? Kramp gives us the lowdown on each sector:

- For apartment development, Dallas-Fort Worth and Houston have added 220,000 apartment units in the last seven years. This helps illustrate the velocity of these two Texas markets. At the end of last year, Dallas-Fort Worth developers had 38,792 units in the development pipeline, which is the biggest number of any other U.S. metro.

- Industrial development shows no signs of slowing. Last year, North Texas developers delivered 26.8 million square feet of industrial space to the region. The majority of that space was absorbed immediately by end users. The current construction pipeline of 19.2 million square feet is 50 percent pre-leased by companies.

Candace Carlisle, Dallas-Fort Worth Reporter  CoStar Group   
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