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Office Insight

Dallas . Q1 2013

Healthy demand and solid market fundamentals point toward growing construction pipeline later this year
Economy Optimism for the local economy remains high with a current unemployment rate of 6.7 percent and year-over-year net growth of 108,900 (one of the highest in the nation). Sectors driving growth include professional and business services (27,100 jobs), hospitality (18,600 jobs), and education and health services (13,200 jobs). Market conditions Dallas recorded 376,491 square feet of positive net absorption in the first quarter of 2013. The positive net absorption was largely concentrated in the Las Colinas, Far North Dallas and Richardson/Plano submarkets. This level of net absorption is about double the historic norm, but still well below last years torrid pace. In the first quarter, most of the positive net absorption was in Class B product. This is not typically the case and the high concentration of Class B net absorption this quarter was attributed to the completed construction of MedAssets 246,229-square-foot, built-to-suit in the Legacy area of Far North Dallas. The Dallas total vacancy rate held steady at 21.2 percent and overall average asking rates were unchanged at $20.88 per square foot (full service gross). This is slightly deceiving as rates rose in Uptown, Preston Center and Las Colinas, but fell in some submarkets like Stemmons Freeway and the Dallas CBD. Of the submarkets with decreasing rates, the majority of the decreases were for Class B properties. Outlook With vacancy below the historic norm and solid job growth, several developers have made announcements for new office construction projects. The current pipeline, however, remains well below the average with just 630,689 square feet under construction, 59.0 percent of which is pre-leased or built-to-suit. Most the construction under way is in Far North Dallas. Outside of Far North Dallas, there is Plaza at Preston Center, a 85,000-square-foot, mixed-use development which is 100.0 pre-leased and Emersons 116,160-square-foot, built-to-suit in Richardson/Plano. Construction, however, is on its way for other submarkets later this year with several other projects being announced, including State Farms 1.2 million-square-foot, built-to-suit in Richardson/Plano, a handful of other speculative projects for Far North Dallas, Uptown, and Las Colinas.

Key market indicators

Supply Direct vacancy rate Total vacancy rate Under construction (% preleased) Demand

12-month forecast 161,987594 sf 20.5% 21.2% 630,689 sf 14.4% 376,491 sf 1.4% $23.36 psf $17.72 psf

Net new supply, net absorption and total vacancy

Net new supply

Leasing Historical activity asking vs. sublease vs. effective available rents space
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 2012 Q1 2013 Leasing activity Sublease space


Supply Pricing

Leasing activity 12 mo. % change YTD net absorption 12-month overall rent % change Class A overall asking rent Class B overall asking rent

Net absorption

Total vacancy
30% 25% 20%


2,000,000 15% 1,000,000 10% 0 5% 0% 2008 2009 2010 2011 2012 Q1 2013


Jones Lang LaSalle Americas Research Dallas Office Insight Q1 2013 2

Tenant perspective Overall, market sentiment has shifted for most submarkets from tenantfavorable to neutral conditions. With overall rising asking rates and only moderate construction currently underway, a landlord market is anticipated for roughly half of the submarkets later this year. The Dallas market, however, is a development-friendly market and once some of the speculative construction projects are brought to the market, fundamentals are expected to bring the market back toward neutral conditions. In the interim, moderate rental rate growth is expected, especially for Class A properties. With strong net absorption in Las Colinas and Richardson/Plano, rental rate growth is expected for these two submarkets in the next few quarters. The vacancy rate remains high in the Dallas CBD, LBJ and Stemmons Freeway submarkets, look for tenant-favorable conditions to continue for these submarkets. For LBJ this is tied to the highway construction project. For the Dallas CBD, law firms downsizing and Blockbusters bankruptcy has impeded the recovery, while the Stemmons submarket remains largely flat outside of the medical district.

Landlord perspective With the total vacancy rate below the historical average for the market, landlords in the higher occupancy submarkets like Far North Dallas, Uptown and Preston Center have been raising rates for the past few quarters now. In Far North Dallas, this has pushed some tenants in the hotter areas like Legacy to adjacent submarkets, but most tenants have tended to stay within their respective submarkets. There has also been continued 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. Several construction projects have been announced, but the current pipeline of projects underway is well below the norm. Upward pressure on rates is expected for most submarkets through at least late 2014, when the spec construction might begin to hit the market.

Class A overall asking rents

$ psf $30 $25 CBD Suburbs

Class A tenant improvement allowance

$ psf $40 CBD Suburbs

$20 $15 $10


$5 $0 2008 2009 2010 2011 2012 Q1 2013

$0 2008 2009 2010 2011 2012 Q1 2013

Class A free rent

months 8 CBD Suburbs

Class A blocks of contiguous space

140 Number of blocks 120 100 80 60 40 71 52 18 30,000 50,000 sf 14 50,000 100,000 sf 19 9 100,000 200,000 sf 5 6 > 200,000 sf CBD Suburbs

20 0

0 2008 2009 2010 2011 2012 Q1 2013

Includes vacant existing blocks and available UC/UR blocks

Jones Lang LaSalle Americas Research Dallas Office Insight Q1 2013 3

Property clock current market conditions

Submarket leverage market history and forecast

2012 2013 2014 2015 2016


Landlord leverage

Far North Dallas, Uptown, Preston Center

Peaking market

Falling market

Tenant leverage

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


Rising market

Bottoming market

Central Las Colinas Richardson/Plano

Dallas CBD, LBJ Stemmons

Completed lease transactions Tenant Lockton Companies Jacobs Engineering Group Freese and Nichols ISIS iQor AllsecTech Address 2100 Ross Avenue Harwood Center Cityplace Two Galleria Collins Technology Park Gateway West II Submarket Dallas CBD Dallas CBD North Central LBJ Freeway Richardson/Plano Las Colinas sf Type 118,800 Relocation 81,333 Relocation 60,600 Sublet 46,129 Relocation 40,436 Relocation 37,000 Relocation

Completed sale transactions Address Hallmark I&II Galatyn Park Submarket Far North Dallas Richardson/Plano Buyer / Seller Select Income REIT/Bank of America Champion Partners /Bank of America sf 554,000 499,000 $ psf $190 $167

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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