Savills Studley Report Dallas/Fort Worth office sector Q4 2016

Savills Studley Research Dallas/Fort Worth

SUMMARYMarket Highlights

LEASING FALLSTenants leased 3.5 msf in the Metroplex during the fourth quarter, declining from the 4.0 msf leased in the third quarter and below the long-term quarterly average of 3.6 msf leased. Despite the quarterly decline, tenants leased 14.1 msf in 2016, above the long-term average of 13.8 msf per year.

AVAILABILITY RATES FALLThe overall availability rate dropped by 80 basis points to 20.9% and is 100 basis points under its year-end 2015 mark. The Class A availability rate declined by 130 basis points to 22.6% in the fourth quarter, and is 80 basis points below the rate from a

year ago.

RENT FLATClass A asking rent increased by 0.4% to $25.91 quarterly. It also increased year-on-year by 3.1%. Class B asking rent has jumped much more sharply, rising by 7.8% from a year ago, to $21.64.

INVESTORS BUYING UP DALLAS ASSETSSales this year have surged – as of November year-to-date office sales totaled $4.9 billion, a 47.1% spike from the $3.3 billion sold in 2015.

“Although the number of blockbuster 100,000-sf deals has diminished, demand for office space is expected to remain healthy in 2017. Corporate relocations and a vibrant local economy should keep leasing activity and investment sales aloft."

Frank McCafferty, Executive Managing

Director

02

Savills Studley Report | Dallas/Fort Worth

Rally Runs On

The incredible run in the Dallas economy and office market, which started in 2010, showed only very modest signs of slowing in 2016. Next year is shaping up to bring steady hiring and robust demand for office space. Tenants can anticipate moderate increases in rent as well, but they will still have a wide range of pricing and quality to choose from – ranging from premier product in Uptown and West Plano, to more reasonably priced options Downtown and in the Lower Tollway and LBJ corridor.

The region can recognize familiar sources of growth - a strong flow of companies relocating from other markets and local organic expansion. This recovery has brought some new twists as well. For one, sustained demand and controlled development have supported the longest period of rental rate growth for the region in decades. The Class A rent for the region ended 2016 with an average of $25.91, 6.1% above the prior peak of $24.42 attained in early 2008. Rental rate increases have been much sharper and sustained in core submarkets, primarily because development activity has been much more restrained. The region has embraced higher-density, suburban, mixed-use clusters and town centers that incorporate a live/work/play environment. Infill development has also become more prevalent. Additionally, the Metroplex’s industry base has become more specialized and diverse, and should be less susceptible to the volatile pullback tied to layoffs in back office operations.

Dallas, the Latest Target for Core Investors

Another unique feature of this cycle is the health of the region’s housing market. The Metroplex’s housing sector has been among the most stable over the last decade, avoiding the peaks and valleys that so many markets – including many Sunbelt markets – have experienced. According to the FHFA housing index, pricing for single-family homes jumped by 25.7% between 2010 and 2015, and are expected to rise another 17.8% by 2020. Despite these increases, home prices remain a bargain relative to Chicago, New York or California. Limited labor is driving prices higher and also delaying delivery times. Any major infrastructure bill passed in Washington would give a wide range of sectors including engineering and real estate a boost; it would also exacerbate the rising construction costs and shortage of skilled tradesmen. Finally, it will push the break-even point for

Source: Bureau of Labor Statistics

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90Millions

DFW. Office Emp. DFW. - % Annual Change U.S. - % Annual Change

Office-Using Employment Trends

$25.91

$22.43

$21.64

$17.75

$0

$5

$10

$15

$20

$25

$30

4Q164Q154Q144Q134Q124Q11

($/sf) Rental Rate Trends

Class A Class B

Asking Rent Trends

22.6%

25.4%

18.9%

25.3%

0%

5%

10%

15%

20%

25%

30%

4Q164Q154Q144Q134Q124Q11

(%) Availability Rate Trends

Class A Class B

Availability Rate Trends

savills-studley.com/research 03

Q4 2016

Tenant Sq Feet Address Market AreaState Farm Insurance* 2,200,000 1150, 1201, 1250 & 1415 State St Richardson Telecom CorridorAmerisourceBergen 300,000 Parker Rd & Plano Pky North Dallas CorridorCaliber Home Loans 182,700 1525 S Belt Line Rd West LBJWater Mark Church 127,913 7616 Lyndon B Johnson Fwy LBJOccidental Petroleum 120,000 14555 N Dallas Pky North Dallas CorridorWeWork 84,000 1601 Elm St Dallas CBDGoosehead Insurance 62,000 4 Campus Cir Mid-CitiesStream Energy 55,226 14675 Dallas Pky North Dallas CorridorLhoist North America 50,081 5600 Clearfork Main St South Fort WorthKimley-Horn 45,646 13455 Noel Rd LBJSum of Top 10 Leases 3,227,566 Sum of 4th Qtr Leasing Activity 3.5 MSF

landlords even higher. Investors are also acknowledging the changes; they no longer consider Dallas/Fort Worth a second-tier city. On a sales per square foot basis, buyers can find assets well under $300/sf. Office sales volume through November totaled $4.9 billion, an increase from the same period in 2015.

Leasing Coming Back Down to Earth

This recovery and expansion is entering its seventh year, though, and the business community is realistic that the stratospheric growth of recent years can not be sustained indefinitely. Deal volume and leasing velocity has dropped off slightly in the last few months. Fewer headline 100,000-sf plus deals have been completed in recent quarters, but activity is still outpacing long-term trends. Development activity is likely to moderate in 2017 as more owners focus on filling up existing assets or those that are currently being built. Dallas/Fort Worth ended 2016 with 5.3 msf underway—only 1.1 msf of that is pre-leased.

Despite some moderation in larger corporate relocation activity and slight deceleration in leasing, 2016 has been another solid year. Tenants leased 14.1 msf in 2016, just above the long-term annual average of 13.8 msf. Leasing activity remains very fluid with companies taking advantage of opportunities across the entire market. The competition for space is fiercest in Uptown and the Far North Dallas Corridor. Tenants can anticipate additional rental rate growth in most submarkets with sharper increases in Uptown, West Plano and Frisco where steady corporate relocations keep demand brisk. Companies relocating from California, New York or Chicago are not at all fazed by the $45.00-$50.00 rent for the newest product in these submarkets. Some local firms are unwilling to absorb these rents, though. Fortunately, while rent is up in nearly all submarkets, tenants have a wide range of different pricing to select from. Central Expressway and Stemmons, for example, still have a fair amount of space priced below $30.00/sf. Downtown Dallas has even lower-priced rent. Tenants Spreading Out

The combination of rental rate hikes and fewer big block opportunities has pushed many tenants west to Las Colinas and West LBJ/Central Expressway. The Richardson Telecom Corridor and Upper North Central Expressway have started to see some increased demand as well. Downtown Dallas captured several noteworthy leases in 2016, including Compass Health and Chubb

Insurance earlier this year, and WeWork in the fourth quarter, but ultimately saw little decline in its availability. The loss of additional companies to Las Colinas, West Plano and extensive repositioning/capital improvements that many landlords are undertaking has contributed to a 30%-plus availability rate Downtown.

Submarkets that still have availability over 20.0% (Central Expressway) and 30.0% (Downtown) are seeing some modest growth in asking rent. Effective rents have registered much weaker growth, though, as landlords are willing to budge a bit on face rent while also offering aggressive concessions. In contrast, landlords have dialed back concessions slightly in the most competitive submarkets. Landlords in short are generally mindful of the questionable longevity of the business cycle. In turn, they are increasingly focused on shoring up their tenant roster and cash flow. Tenants willing to commit to term in this environment still hold a lot of value.

Looking Forward

It took a while to get going, but there is no disputing the resilience of the U.S. economy. This rally seems to have at least another year to run. In fact, the list of pro-growth plans of the next Administration have some businesses excited about the possibility that growth could intensify in the next couple of years. A major infrastructure bill, corporate tax reform and reduced capital reserve requirements for banks could support the FIRE sector in general.

Any substantial increase in federal expenditures for infrastructure, defense spending or other plans will further increase the national debt load. Entitlement programs such as Medicare already have a lot of debt obligations looming in 2020 and later. Texas, minimal debt obligation could be a key differentiator in the coming years.

Availability Rate Comparison Rental Rate Comparison

Major Transactions

$32.78$32.60$32.36

$27.78$26.03$25.84

$24.56$24.21$24.19

$23.40$23.25$23.18$22.85

$22.23$21.01$20.68$20.30$20.11

$16.35$16.24

$15.32

$29.98$23.13

$21.22

$0 $5 $10 $15 $20 $25 $30 $35

US IndexPreston Center

UptownCentral Expressway

North Dallas CorridorFort Worth CBD

Las ColinasDallas CBD

DFW RegionNorth Fort WorthSouth Fort Worth

Far North StemmonsRichardson Tlcm CorrSuburban Fort Worth

LBJNortheast Fort Worth

Mid-CitiesWest LBJ

Southwest DallasEast DallasStemmons

NewExisting - Relet

Sublet

($/sf)

Overall Rental Rate Comparison

Type

6.8%9.5%10.5%11.2%

13.3%15.3%15.5%15.8%

17.1%18.3%19.2%19.7%

20.9%21.0%

22.9%24.0%

26.4%26.6%

28.0%31.4%

35.9%

0% 10% 20% 30% 40%

East Dallas

South Fort Worth

Southwest Dallas

West LBJ

Uptown

Central Expressway

Far North Stemmons

Fort Worth CBD

US Index

Richardson Tlcm Corr

North Dallas Corridor

Preston Center

DFW Region

Suburban Fort Worth

Las Colinas

Mid-Cities

LBJ

Stemmons

North Fort Worth

Dallas CBD

Northeast Fort Worth

(%)

Availability Rate Comparison

* Sale/Leaseback

Savills Studley Report | Dallas/Fort Worth

04

Map Submarket Total

SF(1000's)

Last12

Months

ThisQuarter

%Change

fromLast Qtr.

YearAgo

ThisQuarter

ppChange

fromLast Qtr. (1)

YearAgo

ThisQuarter

%Change

from Last Qtr.

YearAgo

Dallas CBD 25,361 1,061 7,973 -3.9% 7,472 31.4% -1.6% 30.1% $24.21 -0.8% $23.09Dallas CBD - Class A 19,782 856 7,283 -3.7% 6,848 36.8% -1.9% 35.1% $24.33 -1.6% $23.42Uptown 12,985 1,451 1,724 -9.5% 1,819 13.3% -2.4% 16.1% $32.36 0.4% $29.96Uptown - Class A 10,446 1,269 1,168 -10.9% 1,164 11.2% -2.5% 13.3% $33.12 -0.8% $31.24Central Expressway 10,281 711 1,577 1.5% 1,904 15.3% 0.2% 18.5% $27.78 0.1% $25.64Central Expressway - Class A 6,294 400 1,049 0.9% 1,249 16.7% 0.1% 19.8% $29.41 0.9% $27.39Preston Center 3,632 232 716 29.1% 538 19.7% 3.7% 15.5% $32.60 4.5% $31.63Preston Center - Class A 2,554 149 497 48.2% 333 19.5% 5.4% 14.0% $32.94 10.2% $29.91Stemmons 9,897 431 2,631 0.1% 2,479 26.6% 0.0% 25.1% $15.32 -0.5% $15.21Stemmons - Class A 3,131 46 657 0.2% 564 21.0% 0.0% 18.0% $17.07 2.7% $16.67LBJ 21,389 1,485 5,643 0.6% 6,421 26.4% 0.2% 30.0% $21.01 1.5% $20.34LBJ - Class A 8,954 517 2,677 -0.4% 2,917 29.9% -0.1% 32.6% $23.42 1.1% $23.61Richardson Telecom Corridor 28,185 1,125 5,152 15.9% 4,560 18.3% 0.6% 18.3% $22.85 2.3% $21.74Richardson Telecom Corridor - Class A 12,349 532 2,243 44.6% 1,468 18.2% 1.5% 16.0% $23.82 2.5% $23.36East Dallas 1,151 31 78 -8.5% 77 6.8% -0.6% 6.7% $16.24 -5.7% $15.54East Dallas - Class A 185 N/A 4 -66.9% 4 2.4% -4.9% 2.4% $24.25 -21.2% $24.25North Dallas Corridor 40,731 3,411 7,840 4.2% 6,546 19.2% -0.9% 18.6% $26.03 2.8% $25.00North Dallas Corridor - Class A 26,371 2,519 4,875 6.9% 3,675 18.5% -1.3% 17.5% $28.80 3.4% $28.21Far North Stemmons 3,735 145 580 0.8% 500 15.5% 0.1% 13.4% $23.18 0.6% $18.77Far North Stemmons - Class A 408 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/ALas Colinas 19,609 1,514 4,484 5.4% 5,032 22.9% 0.7% 26.3% $24.56 0.0% $24.66Las Colinas - Class A 12,742 1,008 3,148 -2.8% 3,758 24.7% -0.9% 29.7% $26.03 0.0% $25.90West LBJ 13,255 1,001 1,485 -21.7% 1,736 11.2% -5.0% 15.5% $20.11 0.7% $19.36West LBJ - Class A 3,263 200 319 862.5% 154 9.8% 7.9% 12.9% $22.86 5.2% $20.57Southwest Dallas 1,642 39 172 24.7% 162 10.5% 2.1% 9.8% $16.35 2.2% $15.83Southwest Dallas - Class A 281 N/A 16 0.0% 16 5.5% 0.0% 5.5% $22.25 0.0% $22.25Mid-Cities 13,630 713 3,270 1.9% 3,306 24.0% 0.2% 24.5% $20.30 1.6% $19.29Mid-Cities - Class A 4,424 343 1,919 1.3% 1,411 43.4% -1.1% 33.1% $22.26 3.8% $20.88Fort Worth CBD 9,016 262 1,426 -0.9% 1,415 15.8% -0.1% 15.7% $25.84 0.9% $26.17Fort Worth CBD - Class A 5,298 142 845 -1.8% 920 15.9% -0.3% 17.4% $29.32 0.3% $29.56Suburban Fort Worth* 8,488 414 1,786 -7.8% 1,667 21.0% -3.3% 21.4% $22.23 0.6% $19.08Suburban Fort Worth - Class A 2,642 215 194 -26.7% 104 7.4% -5.2% 5.4% $25.94 -4.0% $22.41Dallas/Fort Worth Region Total 222,989 14,071 46,538 1.1% 45,635 20.9% -0.8% 21.9% $24.19 0.8% $22.94Dallas/Fort Worth Region Total - Class A 119,124 8,199 26,894 3.3% 24,627 22.6% -1.3% 23.4% $25.91 0.4% $25.14

7

6

LeasingActivity

AvailableSF

AvailabilityRate

5

Asking RentsPer SF

1

2

3

4

15

16

1-16

8

9

10

11

12

13

14

@SavillsStudleywww.savills-studley.com

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(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.

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 © 2016 Savills Studley

Savills Studley15303 Dallas ParkwaySuite 1200Addison, TX 75001 (972) 739-2200

Co-Branch ManagersFrank McCafferty, Executive Managing DirectorFMcCafferty@savills-studley.com

Kelly Winn, Executive Vice President KWinn@savills-studley.com