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Office Insight

Dallas . Q2 2012

Strong demand in Far North Dallas and Uptown pushing overall rates higher
Economy The unemployment rate has been trending downward for roughly two years and currently stands at 6.8 percent. This is far below the national unemployment rate. The latest employment figures show that Dallas has added 50,200 jobs on a year-over-year basis, making it a top metro area for job creation.

Key market indicators


Supply Direct vacancy rate Total vacancy rate Under construction (% preleased) Leasing activity 12 mo. % change YTD net absorption 12-month overall rent % change Pricing Class A overall asking rent Demand Supply

12-month forecast
159,951,692 sf 21.6% 22.4% 439,400 sf 1.1% 563,232 sf 2.0% $23.08 psf

Above average demand for space in the first half of 2012 has pushed the overall total vacancy rate down to 22.4 percent. Much of the demand remains concentrated in the Far North Dallas and Uptown submarkets and is primarily in Class A product. Rising occupancy rates in these higher priced submarkets have helped to raise the overall average asking rate for the market, which increased from $20.59 per square foot (full service gross) to $20.70 per square foot over the past quarter. Outlook As occupancy has increased for most submarkets, market fundamentals have begun to shift more from tenant favorable to neutral conditions. With overall rising asking rates and limited construction currently underway, a landlord market is anticipated for some submarkets sometime within the next year. The Dallas market, however, is a development friendly market and speculative construction is expected to bring the market back to neutral conditions once significant new product is brought to the market. In the mean time, moderate rental rate growth is expected, especially for Class A properties. Currently rates are primarily being driven by three submarkets, Far North Dallas, Uptown and Preston Center. Outside of asking rates increasing, landlords have become less aggressive with incentives.
In the short term, look for improvement in the Las Colinas, Richardson/Plano, and North Central Expressway submarkets as larger blocks of space have become more scarce in Far North Dallas, Uptown and Preston Center.

sf

Market conditions In the second quarter the Dallas office market has gained positive traction with higher than average net absorption at 445,000 square feet. This combined with the first quarters 117,545 square feet of positive net absorption brings the first half of the year numbers ahead of pace for a typical year (If you look at the Dallas office market since 2001, in a typical year net absorption is usually about 800,000 square feet).

Class B overall asking rent

$17.66 psf

Net new supply, net absorption and total vacancy


4,000,000 3,000,000 2,000,000 1,000,000 0 -1,000,000
Q2 2012 2008 2009 2010 2011

Net new supply

Net absorption

Total vacancy

30% 25% 20% 15% 10% 5% 0%

Leasing activity vs. sublease available space Historical asking vs. effective rents
20,000,000 16,000,000 12,000,000 8,000,000 4,000,000 0 2008 2009 Sublease space includes available space 2010 2011 Q2 2012 Leasing activity Sublease space

sf

Jones Lang LaSalle Americas Research Dallas Office Insight Q2 2012 2

Tenant perspective With overall rates beginning to rise in the recovering market, tenants are increasingly pushing for more flexible terms when it comes to lease term and square feet (i.e. expansion rights, contraction options, and termination options). Tenants are also trying to mitigate rate increases through higher parking ratios and less square feet per employee. Rental rate growth is primarily being driven by Class A product in the three submarkets (Far North Dallas, Uptown and Preston Center). As these submarkets have fewer options for larger blocks of space, look for larger absorption gains to shift to Las Colinas, Richardson/Plano and Central Expressway. The vacancy rate remains high in the Dallas CBD, LBJ Freeway and Stemmons Freeway submarkets, look for tenant-favorable conditions to continue for these submarkets for at least the next few quarters. For LBJ this is tied to the highway construction project. For the Dallas CBD, law firms downsizing and Blockbusters bankruptcy has increased the vacancy rate, while the Stemmons submarket remains largely flat outside of the medical district.

Landlord perspective Landlord sentiment for most submarkets has shifted over the past few quarters as the overall occupancy has increased. With multiple potential tenants touring spaces, landlords have become less aggressive with concessions. Higher occupancy in Far North Dallas, Uptown and Preston Center has resulted in solid rental rate growth, while Las Colinas, Richardson/Plano and Central Expressway have been stable and are expected to see growth later this year. In the Dallas CBD, LBJ Freeway and Stemmons Freeway, tenants still have a great deal of leverage and landlords remain aggressive with incentives. There has also been further segmentation between Class A and B product type. As companies have slowly begun to shift from cost containment to recovery and growth, Class A properties with higher rates can be justified for recruiting and retention. Look for Class A properties to continue to outperform Class B product from a rental rate growth perspective at this point in the cycle. The construction pipeline remains far below historical averages. Additional speculative construction is anticipated to begin later in the year, but should not impact market fundamentals until 2014 or later.

Class A overall asking rents


$ psf
$30 $25 CBD Suburbs

Class A tenant improvement allowance


$ psf

$40

CBD

Suburbs

$30
$20 $15 $10

$20

$10
$5 $0 2010 2011 Q2 2012

$0 2010 2011 Q2 2012

Class A free rent


months

Class A blocks of contiguous space


CBD Suburbs
Number of blocks

10 8 6 4 2 0 2010

CBD 140 120 100 80 60 40 20 0 48 0


30,000 50,000 sf

Suburbs

60 1
50,000 100,000 sf

11 1
100,000 200,000 sf

10 8
> 200,000 sf

2011

Q2 2012

Includes vacant existing blocks and available UC/UR blocks

Jones Lang LaSalle Americas Research Dallas Office Insight Q2 2021 3

Property clock current market conditions

Submarket leverage market history and forecast


Submarket
2010 2011 2012 2013 2014

CBD

Landlord leverage

Peaking market

Falling market Bottoming market

Far North Dallas

Tenant leverage

Las Colinas Richardson/Plano Uptown North Central Expressway Preston Center LBJ
Landlord-favorable conditions Balanced conditions Tenant-favorable conditions

Far North Dallas, Uptown


Dallas

Rising market

Central Las Colinas Richardson/Plano

Dallas CBD, LBJ Stemmons

Completed lease transactions Tenant Merit Energy Address Galleria North Tower II Submarket Far North Dallas sf Type 73,607 New

BBVA Compass Bank


1st Global Alon USA Energy Academic Partnerships US Risk Insurance

8080 NCX
The Towers at Park Central 7 3 Park Central Plaza of the Americas One Lincoln Park

N Central Expressway
LBJ Freeway LBJ Freeway Dallas CBD N Central Expressway

65,000 Expansion
52,836 New 52,398 New 46,401 Expansion 41,328 New

Completed sale transactions Address Lakeside Centre I & II Submarket Richardson/Plano Buyer / Seller Caplease/Commonwealth Partners Sf 318,822 $ psf $144

Dallas, TX methodology: Inventory includes all Class A & B office properties (excluding Class C) > 15,000 square feet, excluding owner occupied buildings

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