MARKET RESEARCH - DALLAS

Flight to quality continues to shape office market performance as tenants prefer modern, well-located buildings, putting downward pressure on standard office spaces

Growth Moderates, but Dallas-Fort Worth's Expansion Story Remains Intact

Dallas–Fort Worth expanded through the first half of 2026, though the pace of growth has become more measured compared with the outsized gains recorded earlier in the cycle. Service-sector employment increased 0.8% year over year, improving from 0.4% at year-end 2025 but remaining well below the stronger growth levels seen in prior years. Even with a more moderate employment gains, the region’s long-term outlook remains favorable, supported by  population gains, corporate relocations, and a broad employment base.  Office demand also moved back into positive territory, with 1.8 million SF of net absorption recorded in the first half of 2026, confirming that tenant activity remains active, although companies are more selective in their real estate decisions.

Flight to Quality Continues to Shape Office Market Performance

The DFW office market showed additional signs of stabilization during the first half of 2026. Direct vacancy edged down to 18.2%, improving from 18.4% at year-end 2025 and 19.5% at year-end 2024. While vacancy remains elevated relative to pre-pandemic norms, the recent decline suggests that the market has begun to absorb portions of the excess space added over the last several years with most large spaces of vacancy coming from class B space. At the same time, rent performance remained mixed. While the overall average fell slightly to $37.61 PSF (from $38.17 at year-end 2025), prime rents rose to $75.33 PSF. This gap reflects a bifurcated market: tenants prefer modern, well-located buildings, putting downward pressure on standard office spaces.

Investment Activity Remains Selective Amid Higher Capital Costs

Capital markets activity remained constrained in the first half of 2026, but pricing trends suggest investors are still underwriting quality office assets with discipline. Total commercial real estate investment reached approximately $3.0 billion during the first half of the year, with office investment accounting for $776 million of that volume. This was well below the $13.4 billion in total investment and $3.4 billion in office investment recorded through 2025, reflecting the continued impact of elevated borrowing costs, tighter lending standards, and cautious buyer sentiment. Cap rates moved slightly higher, with the average office cap rate increasing to 6.8%, while the prime office cap rate stood at 6.3%.