Key Highlights:

1. Record-High Vacancy Rates – Direct vacancy hit an all-time high of 23.2%, while total vacancy, including sublease space, reached 24.67% by year-end.
2. Continued Negative Absorption – The CBD recorded -3.2 million square feet of direct net absorption, with the East Loop suffering the largest loss (-1.1 million square feet) due to long-term tenant migration. Fulton Market was the only submarket with positive absorption.
3. Sublease Vacancy Improvement – Sublease vacancy declined for four consecutive quarters, dropping from 2.31% in late 2023 to 1.47% by the end of 2024.
4. Surge in Q4 Leasing Activity – Leasing volume reached 2.45 million square feet in Q4, marking the strongest quarter since 2021 and a 9.26% year-over-year increase. Notable deals included Sargent & Lundy’s 381,944-square-foot relocation and major renewals by PwC, Mayer Brown, and BP.
5. West Loop Leads Demand – The West Loop remained the most active submarket, with professional services firms driving leasing activity. Tenants favored move-in-ready “spec suites” and high-quality existing spaces.

While vacancy remains a significant challenge, strong leasing activity in Q4 suggests continued tenant demand for well-located, high-quality office spaces.

The post Chicago Q4 2024 Quarterly Report appeared first on Stream Realty Partners.

This article first appeared in D Magazine’s Commercial Real Estate section.

Just two-thirds of the way through the first quarter of 2020, the Dallas-Fort Worth (DFW) office market was moving along at a brisk clip, indicative of what we had grown accustomed to seeing over the past five-plus years. The Dallas office market was as healthy as it had ever been, and the fundamentals were sound. As written numerous times in Stream’s previous Quarters, the only possible headwinds to this strong long-term recovery would have to be an external, global influence. As we all know, that is exactly what happened. In unprecedented fashion, the coronavirus pandemic ground the entire country and its economy to a halt. The Dallas office market is no exception. Only a small percentage of deals that were in the works moved forward, with many put on hold and some opting for short-term extensions in their current buildings. For the most part, only tenants that had to make a decision have done so. The remaining companies are in a wait-and-see mode, trying to determine how this “new normal” will affect their long- and short-term real estate needs.

When looking at the DFW office market’s performance for the first quarter, it is important to note that, due to the lagging-indicator nature of tracking market performance, none of the first quarter’s stats were affected by this pandemic. Stream does not expect to see the pandemic’s effect on notable trends in absorption, vacancy, and rental rates until likely the third and fourth quarters. That said, this was a relatively flat quarter for the DFW office market, with the market witnessing a paltry 159,000 square feet of positive absorption. Bucking a trend witnessed the past three to four years, Class B absorption outpaced Class A absorption. In fact, Class A space finished the quarter by giving 90,000 square feet back to the market, which marks the first quarter the Class A sector has seen negative absorption since early 2018 and only the second time in the past five years. These numbers are somewhat surprising given the flight-to-quality the market has experienced, especially of late. It will be interesting to see if this negative absorption was just an anomaly or the beginning of a new trend. One very bright spot was the performance of the Lower Tollway submarket, which led all DFW submarkets with 578,000 square feet of positive absorption. Due to numerous large tenant move-ins and expansions, Class A vacancy in the submarket dropped almost three percent to 15.6 percent. We expect these Lower Tollway numbers to continue to improve, as a significant number of large leases were signed in the latter part of 2019 and early 2020.

During the first quarter, rental rates continued to hold steady at $28.59 per square foot, full-service, across all classes. Overall market vacancy held steady, with Class A vacancy increasing slightly to 16.5 percent, primarily driven by the vacancy left at Williams Square by Pioneer’s move to its new corporate build-to-suit campus. There is currently just over six million square feet under construction in DFW, with 522,000 square feet of new deliveries this quarter. One Class A building, The Sound at Cypress Waters, delivered in Las Colinas at 80 percent leased, and Headquarters II delivered in the Upper Tollway at zero percent leased. Of the approximately six million square feet under construction, 70 percent of it is speculative construction and currently sits at just 15 percent pre-leased. Couple the current lack of demand due to COVID-19 with the fact that approximately 1.4 million square feet of spec space (which is five percent pre-leased) is slated to deliver in 2020, and the recipe is likely climbing vacancy rates and eventually, a following rental rate adjustment.

As we look forward to the remainder of 2020, there are too many unknowns and variables to estimate how the market will be affected during the short and long term. Businesses will ultimately re-open, but this will likely be a gradual process. Questions have been raised on how the pandemic will affect office densities, staggered employee work schedules, work-from-home programs, and the like. Stream anticipates 2020 will be an adjustment year, as companies try various strategies to become efficient, while keeping employees safe until this crisis subsides. As far as the long-term impacts of COVID-19 on the DFW office market, it is simply too early to tell. One thing is certain—the people of DFW and its commercial real estate market have always been resilient. In the past, every time the market took a hit, it has come back stronger than before during the subsequent recovery. In the immortal words of Abraham Lincoln, “This too, shall pass…”.

To view Stream Realty Partners’ 1Q 2020 Dallas-Fort Worth Quarter Report in full, click here.

J.J. Leonard is the managing partner of Stream Realty Partners’ Dallas office division.

SOURCE: D Magazine

The post The DFW Office Market – Navigating a Curveball appeared first on Stream Realty Partners.

As we outlined in the overview last quarter, the health of the current market is different than past cycles. Still, as one might expect, we are often directly asked by our clients and other investors, “How much gas does this cycle have left in it?” Or more indirectly: “We will likely pass on that deal; we just don’t know how much upside there is given where we think we might be in the current run.” Yet, the industry is still optimistic about where we are today, and what the next few years look like.

I was recently having lunch with a client from the west coast, and he relayed a story. He was speaking on an event panel, and the moderator polled the audience as to how many more years are left in this cycle. The choices were: 1: less than two years; 2: about two years; or 3: greater than two years. The audience overwhelmingly felt we had “about two years” remaining in the current bull market.

The client then grabbed the microphone and made the following point: “Two years represents enough time where we can be optimistic, but no one is going to get in trouble for decisions made today which are affected by a change in the market two years from now. Likewise, beyond two years seems like a relatively long time given the length of this recovery. So, psychologically, we point to two years, and have been doing so for at least the past one or two years.” He then noted that perhaps it’s time we look at the fact that, due to many factors, recoveries today, and going forward will likely look different, and last a lot longer, than cycles of the past. I thought his points were spot on.

The Stream office team continues to be confident regarding the relative near-term performance of the DFW office market. 2017 was a record year for our Dallas office brokerage group, and activity across our portfolio is extremely healthy. We feel the office market in general will benefit from the new corporate tax cuts, as companies put additional capital to use in growing their businesses from a headcount, and ultimately office space, standpoint. Vacancy rates for the market continued to tick downward, finishing the year at 15 percent even, while quoted rental rates plateaued to just under $27 per square foot gross. Class A office buildings continued to rule the day, with virtually every submarket experiencing positive absorption in that sector for the year.

On the construction front, we are currently tracking a little more than 6.5 million square feet under construction across the metroplex, or a mere 3 percent of our total core office inventory. This total is down from a peak of more than 9 million square feet earlier in 2017, with the highest concentrations again in the Upper Tollway, Las Colinas, and Uptown submarkets. If it were not for the fourth quarter groundbreaking of Pioneer Resource’s new build-to-suit campus in Las Colinas and The Epic in Deep Ellum, the total product under construction would be closer to 5 million square feet. Of these totals, 3.5 million square feet is speculative development which is approximately 32 percent preleased. One thing to note as we move ahead into 2018 is that we do expect to see some negative absorption, especially in the first quarter, in some submarkets as JPMorgan, Fannie Mae, and Liberty Mutual vacate existing pockets of office space for their new campuses.

While we are not going to make any bold predictions about where Amazon’s HQ2 will end up (call me if you want my opinion), we do remain bullish on the Dallas-Fort Worth office market and look forward to continued momentum throughout the year.

JJ Leonard is managing director for the Dallas office division of Stream Realty Partners.

SOURCE: D Magazine

The post CRE Opinion: How DFW Office Space Looks After a Record 2017 by JJ Leonard appeared first on Stream Realty Partners.

Overall, the marketplace is experiencing sustained growth thanks to small- to medium-sized businesses expanding at a rapid rate, investors selectively chasing higher yields and market cores shifting to suburban areas.

[x_pullquote cite=”J.J. Leonard, Managing Director” type=”right”]“The pulse of the Dallas-Fort Worth office market is stronger today than it was at any point in 2016. With an inventory of 206 million square feet, new speculative construction representing a small percentage of the market, absorption on the rise and a 15.4 percent vacancy rate, we foresee the Dallas office market remaining strong.”[/x_pullquote]

According to Stream’s first quarter 2017 data, the market experienced cautious growth in the latter half of 2016, with stagnations that are common during election years. Yet the report indicates 2017’s outlook is very promising. With 75 percent of the metro’s office markets posting a decrease in vacancy, we have much to look forward to over the remainder of the year. Only submarkets with heavy volumes of speculative office construction have not seen as much in the way of decreasing vacancies

Kicking off with a bang, the Dallas office market saw leasing activity ramp up dramatically to begin 2017. With quarter one in the books, we can project continued job growth, a robust local economy and heavy deal activity.

Noteworthy Dallas Developments

Similar to 2016, buildings that primarily focus on improving parking availability and walkable retail options will have the best chance to attract and retain leases.

Downtown Dallas is moving in this direction with Lincoln Property Company’s project on 1900 Pearl, a 25-story, 260,000-square-foot office development currently under construction, and 2000 Ross, a mixed-use project aimed at bringing restaurants, a boutique hotel, multifamily space and abundant parking to the Arts District.

During the last quarter of 2016, downtown Dallas’ leasing activity remained strong thanks to commitments from WeWork, Wells Fargo, the Dallas Morning News and AT&T.

As for the first quarter of 2017, the Arts District stole the spotlight. Baker Botts L.L.P. chose to renew its lease at Trammell Crow Center, while Goldman Sachs relocated from the suburbs to Trammell Crow Center in anticipation of the renovations coming to the building and surrounding area.

Uptown and Turtle Creek continue to stay competitive with new developments under construction, such as Metlife and Trammell Crow’s Park District project, which will feature 19 stories of office space, residential units and ground-level retail. With the delivery slated for late 2017 or early 2018, absorption is not expected to shift until product is delivered.

Submarket Forecasting

In the first quarter of 2017, we saw more than 1.5 million square feet of positive absorption in the DFW metroplex, which equals 60 percent of the total space absorbed during all of 2016. The Upper Tollway and Los Colinas submarkets accounted for the majority of this uptick, representing 1.7 million square feet of DFW’s nearly 2.0 million square feet of new construction.

In general, the outlook for both the Upper and Lower Tollway remain positive, as new product in the Legacy/Frisco area draws demand and the completion of the LBJ Freeway has once again renewed the Tollway/LBJ corridor as the epicenter of business in Dallas. Recent buzz surrounding Plano makes Legacy West a top destination for corporate relocations and regional consolidations, despite the alarming lack of housing for relocating employees.

The city of Richardson currently has the highest rental rates the sector has seen, yet expects a decline due to scarce large-block demand. However, Richardson has seen a slight uptick in tenant demand in this department since the start of 2017, creating a situation that warrants monitoring for the remainder of the year.

As one of the most expensive submarkets, Preston Center continues to have the lowest vacancy rate in Dallas thanks to its proximity to the city’s most affluent neighborhoods, as well as a plethora of walkable retail options for tenants. This echoes a trend evolving over the past five years: companies are relying more on lifestyle factors when it comes to site selection of office spaces.

An Optimistic Outlook

The pulse of the Dallas-Fort Worth office market is stronger today than it was at any point in 2016. With an inventory of 206 million square feet, new speculative construction representing a small percentage of the market, absorption on the rise and a 15.4 percent vacancy rate, we foresee the Dallas office market remaining strong.

Expect significant deal activity fueled by the expansion needs of small- to medium-sized companies to continue at a vigorous pace. Given all the positive factors at play, expect robust demand for office space to continue throughout 2017.

By J.J. Leonard, Managing Director, Stream Realty Partners.

This article first appeared in the June 2017 issue of Texas Real Estate Business Magazine.

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Stream Realty Partners (Stream), a national real estate services, development, and investment firm, hosted its sixth annual Dallas-Fort Worth (DFW) State of the Market at the W Dallas Victory Hotel with more than 300 business leaders in attendance. Featured keynote speaker, Geoff Colvin, Fortune Magazine’s Senior Editor-at-Large and author/commentator on business and economic issues, discussed how the nature of business is changing dramatically and why self-disruption is required to separate world-class businesses from the rest.

Key Insights on Dallas Office Market
Chase Lopez, Senior Associate of Stream’s office division

• Stream’s office leasing team consists of 13 brokers covering all the major markets across Dallas and Fort Worth.
• At the end of the election year, the DFW office market had an overall vacancy percentage of 15 percent, absorbed 2.3 million square feet, delivered 3.4 million square feet, 11.4 million square feet under construction, and rental rates averaged $26 full service.
• Currently, 24 office buildings are under construction with build-to-suits totaling 62 percent and spec construction representing the remaining 38 percent. The combined percentage preleased is 72 percent; however, spec construction is 25 percent preleased. The three leading submarkets for new construction are Uptown, Upper Tollway, and Las Colinas, excluding the build-to-suit construction.
• The top five year-over-year job growth in DFW combined with a minimal amount of new office supply delivered since 2010 indicates that the market today is healthier than it’s ever been.
• Since 2010, the market has experienced rent growth of 26 percent, vacancy decreasing by 3 percent, and realizing 19.6 million square feet of positive net absorption (which is 2.2 million square feet more in new deliveries since the start of the cycle).
• There are five major indicators required to be in sync during a healthy real estate cycle (1. Absorption, 2. Deliveries, 3. Vacancy Change, 4. Rent Growth, & 5. Economic Diversification)
  • DFW is just beginning to witness the healthiest balance across each category
    • A testimony to the health of DFW was witnessed 2 years ago when the oil market crashed. Many investors assumed the DFW recovery would be hampered as a result.
    • Not only was our recovery not hampered but some economists would argue DFW benefited from the oil market crash due to our presence of various transportation related companies.

Key Insights on Dallas Industrial Market
Sarah Ozanne, Senior Associate of Stream’s Industrial Division

• Stream’s industrial leasing team consists of 17 brokers that cover all the major markets across Dallas and Fort Worth.
• In 2016, Stream completed 476 transactions which represented more than 16 million square feet and $580 million in value. Our Tenant Representation service line continues to grow, now totaling 34 percent of our division, as well as building sales, now 19 percent in addition to our standard core and leasing business.
• DFW ended 2016 at a record low with a 6.5 percent vacancy rate on 750 million square feet in the total market. Net absorption for the year was 22 million square feet.
• So far in 2017, DFW has absorbed 6.5 million square feet of industrial product. Construction deliveries are increasing, but net absorption continues to exceed that growth.
• Development under construction is most predominant in the Great Southwest and South Dallas submarkets. As the Great Southwest increasingly becomes an infill market, with little available land, South Dallas has the most robust pipeline of assets in planning.
• In the current cycle, there are 111 million square feet under construction, in planning or that has been delivered.
• The demand is caused by job and population growth, as well as e-commerce.
  • DFW boasts the top job growth rate in the U.S. at 3.9 percent.
  • At 7.1 million people, DFW ranks as the fourth-largest populated city in the U.S., and is the third fastest-growing city in the country.
    • Many new Texans, including the groups that are coming with the major corporate relocations that have been announced haven’t even arrived yet. So, these numbers are only going to increase.
  • E-commerce represented nearly 9 percent of all retail sales in 2016 and is at a growing rate of 16 percent annually.
  • Of the top 12 e-commerce businesses that you see here, eight have facilities in DFW and 10 have a presence in Texas.
    • Amazon represents 7 million square feet in DFW, which is almost 1 percent of the entire market. 35 percent of the 7 million square feet has signed within the past two years.
  • Fulfillment is the next largest sector influencing the industrial market. UPS and FedEx now represent 6.8 million square feet within the market. These numbers continue to grow, with several new facilities in talks or in leases.
• Across the market we’ve seen rental rates grow 11 percent in the past year. This is an average across all markets, and is substantially higher in core infill markets and with new product. Although South Dallas has seen rent growth, it hasn’t reach double digits.
• Stream’s expectation for 2017 is an absorption of over 21 million square feet, a growth of three percent in occupied base, which is 65 basis points above the long-term average. Although that’s fairly conservative, it’s the lowest vacancy we’ve seen in the past 20 years.

Key Insights on Healthcare Market
John Huff, Managing Director of Stream’s Healthcare Platform

• The top trends within the healthcare industry are being driven from the results of the changes in healthcare laws and reimbursement over the past few years. As the laws are focused on lowering costs to the consumer and providing affordable insurance to everyone, the fallout has led to lower reimbursement to the providers. As a result, the facilities being developed and planned are focused on being able to deliver the highest quality of care, in a lower cost setting.
• What we’re seeing from an ownership standpoint is that more doctors are represented by brokers, leading to more concessions, like free rent and termination options, which was rarely seen in the healthcare industry 10 years ago.
• From a development standpoint, the industry is becoming retail-oriented. Micro-hospitals are being constructed throughout DFW. Instead of spending $100 million on a 90-bed hospital, they can spend $20 million and still capture patients and process their medical needs in the micro hospital.
• Last year, there was $7.7 billion delivered in outpatient clinics alone. That doesn’t include the major hospitals or large medical centers, simply the pop-up emergency clinics, free standing EDs, walk-in clinics and micro-hospitals to name a few. Another $6.5 billion have started construction.
• Healthcare facilities and MOBs have become a “Darling” asset class for investment due to the static tendency, high replacement costs and low renewal capital requirements.
• As DFW’s population grows, more patients are created which will lead to the need for healthcare facilities to handle the new patients.

Key Insights on Investment Sales
James Mantzuranis, Vice President of Stream’s Investment Sales Division

• Stream’s investment sales division, led by Managing Director Jamie Jennings along with James Mantzuranis, focuses on middle-market opportunities ranging from $2 to $40 million, although the group has transacted on opportunities in excess of $80 million.
• The spectrum of product types covered by the team include industrial, office, flex, healthcare, and land, as well as debt and equity placement for acquisitions and new developments.
• During the current cycle, the investment sales team has closed on more than 50 transactions totaling more than 120 buildings with a gross asset value in excess of $500 million.
• Stream is tracking approximately 30 active industrial transactions, ranging from $5 million single-tenant buildings to billion-dollar plus multi-city portfolio and platform sales.
• Stream is tracking approximately 40 active office transactions, including $10 to $15 million suburban assets up to multiple hundred million dollar-plus core deals representing trophy assets in their respective submarkets.
• Investors today are less likely to look at opportunities with a “get in and get out” mentality, often assuming to hold assets for 10-years or longer. Dallas is no longer a momentum play due to strong fundamentals, fueled by population growth.
• Foreign capital buyers have been a major player, although they are focused on mega DFW transaction and bondable lease assets. Transactions that do not fit this mold or fall under $30 million in gross value are not receiving the same impact and attention.

Austin Commercial, Jackson Walker, VTS, BOKA Powell, Republic Title, Wilson Office Interiors, Gap Solutions Group, Kimley Horn, and Platinum Parking sponsored Stream’s 2017 State of the Market event.

View event photos here

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