Dallas - Fort Worth Office Summary - 1Q 2023
The Dallas-Fort Worth office market continues to find its footing. The metroplex is reporting -190,000 SF of net absorption over the last 12 months, an indication that office demand remains on fragile ground. Risks to the office market persist, and CoStar is anticipating the office market to face headwinds in 2023 and 2024 with anemic demand. As a result, Dallas-Fort Worth's Base Case scenario calls for vacancy rates to drift closer to 19% through the next 12 months, the highest rate since the early 1990s.
As a result of the wider adoption of hybrid work models and rising levels of available sublease space, CoStar is anticipating increased downsizing and more subdued net absorption in the long term. With workplace occupancy still trending at around 45% per Kastle occupancy data, many occupiers expect to reevaluate their space needs. A long-time real estate professional described the state of the office market as follows, "The office will never return to pre-pandemic normals. Anyone still expounding that nonsense is kidding themselves. No office manager or human resources person has come up with a compelling enough reason to return to the office every day."
The rising availability of sublet space is placing further stress on the market. The available sublet space has increased by more than 4 million SF since early 2020, reaching 11 million SF. The highest level recorded. This has cut across all industry sectors. For example, Peloton announced it is downsizing its headcount in its Plano office. As a result, the company is putting 104,000 SF of office space on the sublease market. One of the larger spaces to be put on the sublease market is Thryv, located in the former Braniff Headquarters at D-FW Airport, which put its entire 340,000-SF campus on the market when the company announced an indefinite "remote first" policy. Meanwhile, Uber Technologies has just over 100,000 SF of sublease space available in the Epic in Deep Ellum. While this extra space makes increasing rents difficult for landlords, many tenants are taking advantage of the flexibility and shorter lease terms a sublease provides. The market matched last year's total of 1.6 million SF leasing activity. in 2022. In areas with a high concentration of Class A and trophy assets, sublease activity has increased significantly. For example, in Uptown, subleases accounted for 14% of the total leasing activity. By comparison, from 2017 to 2019, subleases accounted for an average of 5% of the total leasing activity.
Construction activity continues to move forward, albeit at a manageable pace. There is currently 8.0 million SF underway and the market reported 2.3 million SF in deliveries over the past year. Construction activity is concentrated in premier office nodes, led by Uptown, where about 20% of total development is taking place. Higher-quality spec buildings that have been delivered have been leasing well. For example, the 215,000-SF The Stack in Deep Ellum was completed in early 2021 and was fully leased in early 2022. Preston Center's 12-story, 297,000 SF Weir's Plaza was delivered in early 2022 and fully leased with law firm Kirkland & Ellis taking the top three floors, totaling 65,900 SF. They are joined by Fortress Investment, which also signed a 47,850-SF lease.
New York-based financial firm Goldman Sachs announced a project that will redefine the skyline in the urban core. The $480 million, 950,000 SF regional campus will be adjacent to the Perot Museum of Nature and Science and will be home to as many as 5,000 employees. The campus will anchor an 11-acre mixed-use development being built by Dallas-based Hunt Realty Investments on what are now low-rise apartments. The city of Dallas approved an economic incentive package valued at about $18 million. As part of the deal, the company signed a lease with a minimum term of 15 years for the new project. The site has been cleared for construction to begin, with an anticipated delivery date in 2026.
Corporate relocations and expansions continue to drive office demand in Dallas-Fort Worth. A highly skilled labor force, a business-friendly environment and a central location make the metroplex an economic development competitor. A robust air transportation network that provides global connectivity supports the metro's accessibility and attractiveness to office-using employers. Aggressive incentive packages offered by the State of Texas and local municipalities have made the region competitive.
Vacancy rates in the market have stabilized over the past year thanks to rebounding net absorption after weaker demand in the wake of 2020. As a result, vacancy rates are hovering near 18.0%, up from 14.8% in 2019. Dallas-Fort Worth has historically carried a double-digit vacancy rate, a trend going back to the boom and bust during the late 1970s to 1980s.
Over the past year, the market reported 18.9 million SF, steadily rising from the trough in 2020. Leasing activity was dominated by high-quality suburban and urban offices, led by Uptown/Turtle Creek and Upper Tollway/West Plano.
Each submarket reported new, direct leasing volume north of 1 million SF in the past year. For example, Upper Tollway/West Plano, JCPenney returned its former corporate headquarters, which was sold and rebranded as CALWest. Before vacating and undergoing bankruptcy, the national retailer occupied more than 1 million SF, and is one prime example of a firm downsizing their space requirements. Meanwhile in the urban core, Bank OZK signed on for 110,428 SF at 23 Springs, a yet-to-be completed, 5 Star tower led by Granite Properties in the heart of Uptown. The lease is a testament to Dallas-Fort Worth solidifying itself as a financial services center and demand persists for high-quality buildings.
Several large build-to-suits were completed, providing absorption a much-needed boost. Charles Schwab moved into its 580,000-SF Westlake Campus. Additionally, Paycom moved into its 150,000-SF facility. Meanwhile, JPMorgan Chase moved into its 540,000-SF space in Legacy West. In addition to the activity in the build-to-suit environment, high-quality, recently renovated product in downtown Dallas is drawing interest from office occupiers. For example, Integrity Marketing Group moved into its 100,000-SF space in the iconic Fountain Place. In addition, Galderma moved into the 15th and 16th floors of the Trammell Crow Center, occupying 51,900 SF.
In addition to the glut of available sublease space on the market, the amount of available direct space in existing or under-construction buildings has reached a decade high of 86.7 million SF. There are nine existing buildings with over 500,000 SF available. These include 5400 Legacy, Renaissance Tower, CAL West, and Fountain Place. In terms of buildings under construction, the 496,000-SF Tower at Hall Park is expected to be completed in 2023; it currently has 387,000 SF available. Granite Park Six is also anticipating a 2023 delivery; the 422,000-SF building has 369,700 SF available. The 339,000-SF Quad in Uptown has 319,000 SF available.
The information contained herein was obtained from CoStar; however, Bradford Companies makes no guarantees, warranties, or representation as to the completeness or accuracy thereof. The presentation of this property is submitted subject to errors, omissions, change of price or conditions prior to sale or lease or withdrawal without notice.