DFW Commercial Real Estate Market Update December 2023

The Story of D-FW's 2023 Commercial Real Estate Landscape: Resilient with a Promising Outlook in 2024

Table of Contents

Overview of Today's D-FW Commercial Real Estate Market

DalIas-Fort Worth leads the nation in all sectors and types of commercial real estate investment and growth. Even as activity has fallen 62% year over year, there have been major pockets of wins for the region. Plus, the last two years were big-time outliers in terms of the massive increases seen in investment activity that were unlike anything ever seen before.

So, while yes, volume is down (somewhat drastically) from last year, it has decreased just 23% from the averages seen between 2017-2019 before the pandemic. The biggest contributing factor has also, of course, been the higher interest rate environment we are hoping to see cool from now into 2024.

Overall, the story of D-FW’s booming commercial real estate market is an interesting one. The metroplex is ranked only behind New York in terms of multi-family investment activity, leads the state and nation in number of new rental units absorbed this year, and has seen pockets of increased office activity, as well as 9% rent growths in the industrial sector and unparalleled tight-vacancy rates in the retail sector. 

Let’s walk through each of the major commercial real estate sectors and break down the major points of what is happening today in each and where we expect we are headed tomorrow.

D-FW Commercial Real Estate Update By the Sector

Multi-Family News in Dallas-Fort Worth

The multi-family sector of Dallas-Fort Worth is ranked only behind New York City and accounted for one third of all investment activity in the first three quarters of 2023. However, demand has fallen this year in the rental markets, with rents decreasing about 1% year over year and more than 75% of Dallas-Fort Worth single-family leasing seeing price cuts, according to CoStar analytics.

It should be noted that the higher-class apartments have seen rent declines of closer to 2% this year, while 3-star properties have performed better and even saw a 3.3% increase in rents in the Mesquite area, according to a report by CoStar. 

However, outlook remains favorable for the near future, as rents are expected to rebound with continuing high demand. Dallas is ranked 3rd in the country for units absorbed year to date.

Office Sector Update for Dallas-Fort Worth

Office transactions are still down across the board. This is due to a new era of hybrid and remote driven work, which was propelled by COVID and the necessity of learning to work from home.

Many employers and especially employees took to the new model and have decided to altogether forego the more traditional work environment of being “in office.” However, Dallas’ leasing activity is not necessarily at record lows.  

Rental rates increased slightly in Q3 for Class A Properties, according to Tenant Analyst Report. And the D-FW office market has seen two quarters this year of positive absorption. Average market rents in Dallas are $35/SF, compared to the U.S. average of $30/SF, according to CoStar’s most recent Office Insights Report. Vacancy rates in Dallas-Fort Worth are up 0.9% over the past year, now at 18.0% – the highest vacancy rates seen in about 20 years. Over the past few years, demand in suburban areas has been trending upwards.

Meanwhile, the more urban areas of the market such as uptown and downtown have seen a loss of 5.9M sf of space being occupied over the past few years. However, uptown Dallas has fared better than downtown, reporting positive demand since 2020. Annual Rent Growth is up 2%, lower than the 5-year average but still positive. But accounting for other factors such as inflation and rent growth is negative. Market rent growth in D-FW still outperforms other Texas metropolitan areas like Austin and Houston.

Construction is holding pace right now in Dallas-Fort Worth. According to Costar’s Office Insights Report, “Construction activity has risen modestly over the past two years with Uptown, the market’s premier office node, accounting for 25%.”

Finally, North Texas has attracted over 150 company headquarters in the last several years, as companies seek a more business friendly environment where there is a large talent pool, high population growth, and a lower cost of living.

So don’t count out office just yet. Just be strategic about where you put your dollars. The northern areas of the metroplex, uptown, and suburban areas have been the sturdiest areas this year.

Construction Activity of Offices in Dallas

Industrial Property in Dallas-Fort Worth Market Update

One area that has not seen decreases in Dallas-Fort Worth is that of industrial space. “Developers delivered 55 million square feet thus far in 2023, the highest level on record with almost half that volume coming from buildings 500,000 square feet or greater,” reports CoStar.

Dallas is an epicenter in terms of its logistical networks and booming population, leading to an increase in the number of e-commerce, retailers, and manufacturing plants. In fact, demand for Dallas-Fort Worth industrial space increased by 30 million square feet (about the area of Central Park in New York City) in 2023, with the region ranking #1 in the country for volume.

However, vacancy rates are rising as of 2023, simply due to the vast amount space coming on to the market. Vacancy rates are currently at 8.3% but we expect this to level off and not increase much more in 2024.

One exception to this rule is the high demand still seen for smaller spaces, which we see daily at M&D Commercial Group. There are many tenants looking and competing for spaces in the range of a few thousand feet to around 50,000 square feet. 

But, as the demand has risen for smaller bays, construction of smaller spaces has also ramped up. 

However, vacancy rates for smaller spaces are expected to hold steady around the 5.5% mark going into 2024.

Finally, rent growth has been up about 8% in this sector in D-FW since this time last year, but more recent analysis indicates this will slow down some.


Retail Sector Activity in Dallas-Fort Worth

Retail is seeing historically low vacancies in Dallas-Fort Worth as the demand driven by grocers, major retailers, and other food and beverage tenants continues to ramp up. Rent growth is at 4.5% year over year, outpacing the national average.

The region currently tops the nation for net absorption. And this trend is only expected to continue long-term. “Areas such as North Dallas, Uptown, Frisco, and Southlake feature average rental rates from $30/SF to $45/SF,” well above the market average, according to CoStar. Demographics will continue to play a key role in this sector moving forward. 

Even as space is added, households are coming on board, too – keeping pace. Increasing incomes in the area will only serve to elevate the position of retail real estate in this market. 

Now, while sales are down from last year, they are keeping pace with pre-COVID era and investors retain interest in area shopping centers anchored by popular grocers, home goods stores and discount stores.

Retail demand in Dallas is strong

Final Thoughts: Outlook for D-FW Commercial Real Estate in 2024

For M&D Real Estate, we saw sales activity decrease in 2023, while leasing activity ramped up.

But as interest rates moderate and prices come down in certain sectors, activity is expected to increase again in 2024.

The Dallas-Fort Worth Metroplex is well positioned geographically, is an attractive place to live, and possesses a thriving epicenter which continues to experience a strong job market and growth in population numbers that are much higher than anywhere else in the country.

“As of October 2023, the Lone Star State’s seasonally adjusted job count numbered 14,048,200,” according to the Texas Workforce Commission. “Texas was first in the nation in over the year job growth with 391,500 jobs gained.” Of that, D-FW has added 162,900 jobs between October 2022 and October 2023, according to statistics from Texas Labor Market Information.

Job Growth in Dallas Outpaces Country (1)

As for each sector of the Dallas-Fort Worth market, we expect rents to rebound in multi-family in 2024, the office sector to continue to be strong in the northern, suburban as well as uptown markets, with the industrial sector experiencing more normalized rent growths as the pipeline continues to fill the already available space. For retail, we expect activity and attractiveness to continue to increase as the population and average household incomes follow suit.

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