Executive Summary
- Q4 sales volume sinks 29% below 2016 numbers
- the average price per sq.ft. marks weak Q4, yet strong 2017
- Brookfield seals largest deal of the year in December ($875M)
- 2017 brings 5.7M sq. ft. of new office space to the DFW market
The Texas office market had a rather slow Q4 in 2017, with dollar volume and average prices both falling below the levels of the previous years. Dallas-Fort Worth and Houston were the most active markets during the final three months of the year, while Austin and San Antonio didn’t witness too much office sales activity. Nevertheless, Yardi Matrix office data shows that, while the Lone Star State recorded a less-than-stellar quarter, the whole of 2017 showed average prices reach a five-year peak, as buyers competed to grab quality office assets.
Our year-end analysis also shows that Dallas–Fort Worth remains the top target for new office construction in Texas, even if office properties in Houston fetch much higher prices. The DFW market welcomed nearly 6 million square feet of new office space during 2017, and is scheduled to deliver an additional 9 million square feet by the end of 2018. Read on to see how the Texas office market fared during Q4 and 2017 overall.
Q4 Sales Volume Lowest since 2014, 29% below 2016 Numbers
Following a weak Q3, which saw 33 deals close for a mere $990 million, the Texas office market bounced back in the final three months of 2017, checking off a lower number of deals but a much higher dollar volume compared to the previous quarter–58% higher, to be exact. Nevertheless, even though the 28 office deals that closed between September and December 2017 amounted to a combined volume of $1.56 billion, the market recorded the weakest Q4 since 2014 and marked a 29% drop in sales volume year-over-year.
Zooming out to look at the whole of 2017 doesn’t paint a brighter picture: the Lone Star State concluded the year with just 131 office transactions closed for roughly $5 billion, marking the weakest year for the market since 2014, when the total dollar volume stopped short at $4.7 billion. This steep drop in the overall number of transactions and the total sales volume did not, however, drag the average price per square foot down, as we will soon learn. The past year actually saw average prices for office buildings trading on the market reach their highest level in five years, a clear signal that buyer interest is not waning.
The most popular Texas markets in Q4 were Dallas–Fort Worth, which recorded the highest number of transactions (16) and Houston, which concluded the quarter with the highest dollar volume ($920 million). Austin and San Antonio each saw just two office sales close during the year’s final quarter, but for very different price tags. Two transactions closed on the Austin office market in Q4, for a total of $333 million, while the same number of deals amounted to just $9 million in San Antonio. This disparity in sales volume highlights the striking difference between the two markets, in terms of their appeal to office investors. Office rental rates in Austin are some of the highest in the country–for a $5,000 monthly budget, you can rent 2,226 square feet of Class A office space in San Antonio and just 1,087 square feet in Austin. Moreover, according to our research, Austin office rents are surpassed only by Boston, Washington, D.C., San Francisco and New York City.
Despite Quarterly Ups & Downs, Average Price per Sq. Ft. Reaches 5-Year Peak in 2017
In terms of the average price per square foot, the Texas office scene didn’t exactly close 2017 with a fruitful final quarter. The average price for office buildings trading on the market dropped 36% year-over-year and 50% compared to Q3, resting at $130 per square foot through December. Furthermore, Q4 2017 recorded the lowest average prices per square foot in 5 years, well below the $294 peak set in Q2. In Houston, office properties changed owners at an average price of $141 per square foot, while buyers paid an average of $130 per square foot for Dallas office buildings. There weren’t enough sales closed in Austin or San Antonio in Q4 to extract a valid and accurate price per square foot.
The drop in prices during Q4 is, however, no reason to fret and is merely the result of market fluctuations. Looking at the whole of 2017, average prices for office assets changing hands in Texas actually reached a new peak, closing the year at $215 per square foot. The rise in prices in 2017, coupled with a lower annual number of deals and a relatively modest dollar volume (based solely on disclosed numbers), is a clear signal that buyer interest is strong and the market remains attractive to investors, in spite of supply limitations and quarterly ups and downs.
Houston Home to Largest Sale of 2017–Brookfield Seals $875M Deal in December
The final quarter of 2017 saw 28 office transactions close in Texas, 14 of which had undisclosed price tags. Of the total number of transactions, 13 closed in Dallas-Fort Worth, 8 in Houston, and 2 in Austin and San Antonio. It’s worth mentioning that, though the DFW market was home to the highest number of deals, they all had modest price tags compared to deals closed in Houston or Austin.
2 Houston Center
The largest office sale of Q4 closed in December, when Brookfield Properties forked over $875 million to acquire the Fulbright Tower, the LyondellBasell Tower, as well as 2 & 4 Houston Center from JPMorgan Asset Management. The four buildings are all located in the Houston CBD, and feature a combined total of 4.2 million square feet of Class A general and medical office space. The properties were built during the 1970s and 1980s, and are all LEED Gold certified. The portfolio sale, which also marked the biggest office deal of the whole year, was funded by an undisclosed loan held by Citibank, per Yardi Matrix data.
The second-largest deal of the quarter was another portfolio transaction: Starwood Capital Group grabbed nine Austin office buildings from Brandywine Realty Trust in October. Starwood paid $333 million to acquire Cielo Center, Encino Trace – Buildings One & Two, 7000 West at Lantana I & II, The Crossings at Lakeline I & II, and The Park on Barton Creek One & Two.
Baylor Cancer Center at Dallas
As far as Q4 goes, these are the only transactions to cross the $100-million-dollar mark; the third-largest office deal of Q4 fetched a price tag of $69 million–Stanton Road Capital’s acquisition of the Trinity Towers in Dallas-Fort Worth. There were, however, a few larger deals to close during the year’s first two quarters. In February, a joint venture between CCP Investment Board, TH Real Estate and Silverpeak paid $512 million for a Houston office portfolio, which included the Phoenix Tower, 3800 Buffalo Speedway and the Greenway Plaza Portfolio. Another major deal closed in July, when Duke Realty Trust sold the Baylor Cancer Center at Dallas to Physicians Realty Trust, for a price tag of $290 million. Check out a round-up of the 10 largest Texas sales of 2017:
DFW Proves Main Target for Construction in 2017, Adds 5.7M Sq.ft. of Office Space
Two new projects were delivered on the Texas market during Q4, namely the 214,809-square-foot Factory Six03 in Dallas and the 60,168-square-foot Overlook at Barton Creek in Austin, both Class A office properties completed in November.
Toyota Headquarters at Legacy West, DFW
The whole of 2017 saw 39 new office developments come online in the four Texas markets we analyzed, amounting to nearly 11 million square feet of space. More than half of this space was delivered in Dallas-Fort Worth, which welcomed 16 new projects totaling 5.7 million square feet of office space, followed by Houston (10 projects totaling 2.6 million square feet), Austin (8 projects and 1.7 million square feet) and San Antonio (5 projects and 794,483 square feet). The largest office delivery of the year was the Toyota Headquarters at Legacy West in Plano. Located at 6565 Headquarters Drive, the mid-rise building incorporates 2.1 million square feet of Class A office space owned and fully occupied by Toyota.
Of the 10 largest deliveries of the year, 6 are located within the Dallas-Fort Worth office market, the Toyota HQ being the biggest one. However, Houston and Austin also made the cut: the second-largest new office project was delivered in Houston in May, when the 1 million-square-foot 609 Main at Texas was finalized. Located at 609 Main St. in the Houston CBD, the 48-story tower is owned by Hines Interests, which completed the project with the aid of a $231 million construction loan funded by JPMorgan Chase. Another notable Houston delivery was the 350,000-square-foot Amegy Bank Tower, which came online in January 2017.
Two notable office projects were also delivered to the Austin market last year: the 500,436-square-foot building at 500 West Second St. and the 342,000-square-foot One UT System.
This year is set to be even busier for the Texas office construction market, with 15 million square feet of office space currently underway. Once again, Dallas-Fort Worth will be the main target for development, as 9.2 million square feet of office space are scheduled for delivery by the end of 2018, followed by Houston, with 2.6 million square feet currently in the pipeline.
Methodology
We used detailed Yardi Matrix data to analyze all office transactions with price tags equal to or exceeding $5 million to close in Texas during the fourth quarter of 2017 (October through December). Our analysis, based on data recorded up until January 12th, 2018, includes completed office buildings equal to or larger than 50,000 square feet that changed owners during the quarter. In the case of mixed-use assets, only properties featuring over 50% office space were taken into account. We counted portfolio deals as single transactions and excluded distressed sales altogether.
To make sure the trends and comparisons presented in our analysis are valid, we excluded portfolio, partial interest and ground lease deals from our calculation of the average price per square foot.
Property images courtesy of Yardi Matrix.
