Significant Trends & Key Insights at State of the Market DFW

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Stream Realty Partners Hosts Sixth Annual State of the Market Event in Dallas
Business Leaders Join Leading CRE Firm to Discuss Significant Trends Impacting Business and The Economy

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