Commercial Real Estate Market analysis in Dallas-Fort Worth March 2024

Commercial Real Estate Market Analysis for Dallas-Fort Worth: March 2024

INTRODUCTION TO THE STATE OF D-FW's COMMERCIAL REAL ESTATE MARKET: MARCH 2024

The commercial real estate market in Dallas-Fort Worth presents a dynamic landscape with distinct trends across various sectors as we near the end of the first quarter of 2024.

Despite a surge in demand for multifamily units, challenges such as increasing vacancies and declining rent growth have become more common, primarily influenced by the supply pressure from construction-heavy suburban submarkets. Projections suggest the potential introduction of 39,000 units in 2024, presenting opportunities for investors and developers.

In the Dallas-Fort Worth office market, there is a struggle with fragile demand and heightened availability, resulting in a notable increase in available space for lease and a high vacancy rate. However, resilient office-using employment growth has defied the national trend, indicating potential opportunities for businesses seeking to invest in this sector.

The industrial sector has experienced a downturn in activity, with rising vacancy rates and declining net absorption.  Despite these challenges, the expected stabilization of vacancies and the outperformance of rent growth relative to the US average still presents good news for potential investors.

The retail market in the Dallas-Fort Worth area remains robust, driven by consistent demand and limited store closures, leading to intensified competition for prime space. Although sales activity in the sector has decreased slightly, the market’s minimal supply, record low availabilities, and long-term structural advantages position Dallas-Fort Worth well for potential consumption pullbacks.

In this comprehensive analysis, M&D Commercial Group embarks on a journey to dissect the intricate nuances of each sector, unraveling the market dynamics and illuminating pathways to prosperity amidst the shifting currents of the Dallas-Fort Worth commercial real estate landscape.

Comprehensive Commercial Market Update in Dallas

Multifamily market in dallas-fort worth: Balancing supply & demand

The return of multifamily demand in Dallas-Fort Worth is a positive indication of increased willingness among households to sign new leases, CoStar claims. In 2023, demand saw an uptick, with 14,000 units being occupied, a level comparable to that of 2012 to 2014. However, despite the increase in demand, the supply surpasses it, leading to a rise in vacancies to 10.6% from a low of 6% in 2021. Rent growth has also declined from 4.4% at the end of the previous year to -1.3% over the past year, largely influenced by the pressure from construction-heavy suburban submarkets on the supply side.

According to Yardi Matrix data complied by Multi-Housing News, Dallas-Fort Worth had the largest number of new units come online in 2023 compared to other Metros, totaling 24,303. This represented a 5.2% expansion of its existing stock, double the 2.6% national rate. However, this marked a softening trend compared to the previous two years, where more units were brought to the market—24,734 in 2022 and 28,694 in 2021.

Dallas ranked first in development among 10 metros, with 73,752 units under construction across 273 properties as of January. Nearly 90% of these were in upscale Lifestyle properties. Although new starts slowed down due to tighter lending circumstances, there was a 15.8% increase in the total units breaking ground in 2023, reaching 36,122. Yardi Matrix projects that Dallas-Fort Worth is expected to maintain its strong position in 2024, with 39,000 units projected to come online should market conditions hold.

But according to CoStar’s Multifamily Market Report, “Normalizing for the market size, developers added 3.6% of existing inventory in Dallas-Fort Worth, below other Sun Belt markets such as Austin and Nashville where deliveries translated to over 7% of inventory, leading to deeper negative rent growth performances.”

Additionally, rent growth is expected to rise by 1% by the end of 2024 and then increase still by the end of 2025 with expectations that rent growth will be up to 3.5% by then.

As mentioned in previous market updates, 4 and 5-star properties are more affected than 3-star properties, which have a lower vacancy rate and higher rent growth rate than more luxury style living units.

navigating challenges: THE state of the d-fw commercial office market

The DFW commercial office market continues to struggle in March 2024, as it does in most regions around the nation. NAR said, “While the U.S. economy remains resilient, the market shows sector-specific challenges and opportunities. The normalization of hybrid working arrangements is impacting office demand, leading to an increase in unoccupied office spaces.”

Furthermore, Placar.ai stated that in February 2024, nationwide office building visits were only 31.3% lower compared to February 2020, which was the last month before COVID significantly impacted in-office activities. However, Placar.ai also said, “Dallas, Atlanta, and Washington, D.C… outperformed the nationwide Yo4Y baseline of -31.3.” In other words, while people are working less in the office around the nation, more people are working in Dallas offices than the average.

Dallas Office Sector Struggles But Offers Opportunities

According to CoStar, the office market in Dallas-Fort Worth is grappling with fragile demand and increased availability. The available space for lease has reached a record level of 89 million square feet, marking a 25% increase since the end of 2019.

The vacancy rate remains near a 20-year high at 18.1%, showing a 320-basis points expansion since the end of 2019. This expansion is lower than the national average, which has risen by 420 basis points. Despite this, relatively resilient office-using employment growth has resulted in less significant vacancy expansion, defying the national trend.

Regarding construction of new units, speculative development is found mostly in “high-energy office submarkets,” according to CoStar. Other projects coming online include the financial services firms expanding in the DFW area.  

Additionally, distressed transactions are occurring in DFW, and more expected to materialize with CMBS loan maturities peaking at $800 million in 2024, reports CoStar. “Of the $3.2 billion outstanding CMBS loan balance, delinquencies have risen over rent months to  5%, on par with the national average.”

TRENDS & CHALLENGES in the dallas-fort worth industrial market

The industrial sector in Dallas-Fort Worth has seen notable shifts in Q1 2024. According to NAIOP, there has been a 45% decrease in the amount of industrial space under construction compared to the same period in 2023, signaling a significant normalization of warehouse space development. Despite this decrease, the region still boasts a substantial 33.6 million square feet underway, making it the second-largest pipeline nationally and marking a 3.6% increase from the market’s current stock.

Additionally, CoStar reported a significant downturn in industrial market activity in the first quarter of 2024, with rent declines of 1.5% after four consecutive quarters of 1%+ growth. Vacancy rates have risen dramatically, and net absorption has dropped below the market’s average. This downturn can be partly attributed to declining home sales, which have significantly impacted consumer-facing companies and B2B providers of equipment and building materials.

Looking ahead, the market is anticipated to experience a decline in industrial deliveries, with vacancies expected to plateau for most of 2024, peaking at 9.8% by the year’s end. Rents are also projected to slow their year-over-year growth until the end of 2024. Despite the higher vacancies compared to the national average, the Dallas-Fort Worth industrial market continues to outperform the US average for all property types besides specialized industrial, indicating areas of resilience within the sector.

However, availability rates for buildings under 50,000 square feet remain more stable with vacancies running at less then 5% — this is also true of interior submarkets near major highways and the DFW airport, which are more insulated than other industrial buildings located elsewhere in the metroplex.

Even still, market rent growth is at 7.3% since this time last year, down from it’s height of 12.6% in mid-2022, reports CoStar. Pricing power is shifting towards tenants now for outlying submarkets, while landlords continue to increase prices in the interior areas.

Industrial Daily Asking Rent in DFW

NAVIGATING THE RETAIL LANDSCAPE: TRENDS & INSIGHTS in DALLAS-FORT WORTH

An article by CoStar claimed that retail in the Dallas-Fort Worth area, particularly in Collin and Tarrant counties, had high demand for space through the end of 2023, leading to a shortage of available retail locations and limiting potential tenants from acquiring more space.

Dallas County saw a modest annual net growth in retail move-ins of 55,980 square feet last year, placing it in a similar position to other communities like Parker County. Despite having only 6% of the population of Dallas County, Parker had nearly the same level of new move-ins at 54,000 square feet. This trend is not solely driven by demand. In areas like Dallas or Tarrant County, the main limiting factor is often new construction and available space.

Dallas-Fort Worth’s retail market remains robust, driven by steady demand and limited store closures. Since 2021, tenants have leased 50 million square feet while vacating just 35 million square feet. Retailers, including big box stores, grocers, discounters, and food and beverage tenants, continue to seek new locations, creating heightened competition for prime space.

Retail Market Net Absporption and Deliveries in DFW

Available space has fallen to 24 million square feet, representing 5% of inventory. With 66% of the 5 million square feet of new space already pre-leased, the market’s construction is mainly concentrated in fast-growing suburban areas. Rent growth has reached 5% over the past 12 months, outpacing the national average, but is expected to slow down according to CoStar’s Base Case scenario.

Sales activity has decreased to an estimated $3.5 billion in 2023 from a peak of $7.1 billion in mid-2021. Despite this, the market’s minimal supply, record low availability, and long-term structural advantages, including demographic growth, position Dallas-Fort Worth well in the event of a consumption pullback.

EVOLVING TRENDS in DALLAS-FORT WORTH COMMERCIAL REAL ESTATE MARKET

As we enter the spring, the landscape of the commercial real estate market across multifamily, office, industrial, and retail sectors continues to evolve. In the multifamily sector, despite an increase in demand for multifamily units, challenges such as rising vacancies and declining rent growth are evident, largely influenced by the supply pressure from construction-heavy suburban submarkets. But, the market is expected to see positive rent growth by the end of 2024.

The office market in Dallas-Fort Worth continues to grapple with fragile demand and increased availability, leading to a record level of available space for lease and a high vacancy rate. However, resilient office-using employment growth has defied the national trend, showcasing potential opportunities for businesses looking to invest in this sector, especially in the high demand areas of the metroplex.

The market in dallas is still robust

In the industrial sector, a significant downturn in activity, with rising vacancy rates and declining net absorption, has been observed, influenced by an abundance of new constructions and partially by declining home sales. Despite these challenges, the market’s expected plateauing of vacancies and the outperformance of rent growth relative to the US average present areas of interest for potential investors, with the sector still experiencing 7.6% rent growth year over year.

The retail market in the Dallas-Fort Worth area remains robust, driven by steady demand and limited store closures, leading to heightened competition for prime space. Although sales activity has decreased, the market’s minimal supply, record low availabilities, and long-term structural advantages position Dallas-Fort Worth well for potential consumption pullbacks.

For investors and businesses looking to capitalize on the opportunities presented in the Dallas-Fort Worth commercial real estate market, it would be a wise choice considering DFW’s booming population growth and geographical and structural advantages that make this an ideal market for investment opportunities.

If you need guidance, please reach out to M&D Commercial Group’s commercial associates who can provide valuable insights, advice, and help you discover unique opportunities for your business or investment portfolio.

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