March 05, 2019
This article origninally appeared in the February 2019 issue of Texas Real Estate Business.
Fort Worth is heavily dependent on the oil and gas industry, unlike its more diversified neighbors to the east and south. Recently, the energy sector has had an increasingly tangible impact on the real estate market, particularly the office sector of the city’s Central Business District. The instability of oil prices has pushed some businesses and investors to look to the suburbs for better growth opportunities.
The connection between the energy sector and the performance of the office market became most visible when one of Fort Worth’s largest employers, XTO Energy, consolidated its operations into its Houston headquarters. In a market that rarely sees major building transactions, XTO Energy’s exit left a considerable hole to fill. The energy company sold six of the seven buildings it owned and occupied in Fort Worth, totaling 565,500 square feet. Three of those six buildings represented 307,000 square feet that will be converted from office to hospitality, multifamily and residential uses.
The major increase in vacancy from this activity was only slightly offset by the delivery of Frost Tower, the only new project completed in the CBD in 2018. The 280,000-square-foot building was 70 percent leased only a few months after opening, despite having the highest asking rents in the market.
Frost Tower has pushed the limits of the CBD office leasing market, quoting $40 per square foot plus electricity. The market has seen a wide range of asking rental rates, ranging from the low $20s per square foot to the $40 plus electricity at Frost Tower. This puts Frost Tower about $8 per square foot above the average asking rates for other Class A buildings in Fort Worth’s CBD.
Competition for tenants remains healthy, prompting landlords to offer attractive tenant improvement packages and abated rents in many cases. Tenants continue to shuffle from building to building, but occupancy in the CBD has consistently hovered around 85 percent for Class A and B product during the third quarter of 2018.
The real action is in the Fort Worth suburbs. Southwest Fort Worth has been and will continue to be a hotspot for new development, fueled by the Chisolm Trail Parkway connecting Southwest Tarrant and Johnson counties to the CBD and Medical District.
More than 2 million square feet of new office space has been delivered since 2010, which has followed mixed-use developments in ClearFork and Waterside. For example, the Offices at ClearFork is part of a $1 billion, 270-acre, mixed-used development that has attracted the corporate headquarters of pharmaceutical companies, energy companies, hospitals and other health-related companies.
North Fort Worth, or the Alliance corridor, is largely dominated by Hillwood Properties and is known for its booming logistics sector. However, this area has seen a significant expansion of office inventory recently due in large part to BNSF, which has constructed 164,000 square feet, and the FAA, which built 357,000 square feet.
As the housing boom continues in this area, office, retail and support services will quickly follow. The recent announcement of a joint venture between KDC and Fine Line Developments to build 1.2 million square feet of office space at Champions Circle will likely attract attention for corporate relocations and fuel further activity in this submarket.
The CBD will stabilize as the energy sector does, but look to the southwest and north suburbs to lead the area in new supply growth and leasing activity. As Dallas gets more congested and too expensive for new development in the coming years, it would not be surprising to hear that Fort Worth becomes the focus of North Texas for future corporate relocations and other major developments.
– By Kirk Kelly, Principal, Fort Worth, Texas