DFW MARKET INSIGHTS – OFFICE – 1Q 2024

Dallas - Fort Worth Office Summary - 1Q 2024

1Q 2024 DFW Office Market Commercial Real Estate Bradford Companies

Summary

Dallas-Fort Worth's office market continues to wrestle with fragile demand and elevated availability. There is 88.3 million SF available for lease, a record level that has risen 25% since the end of 2019. The vacancy rate is at a 20-year high of 18.1%, expanding 350 basis points since the end of 2019. That expansion is below the U.S. norm of 440 basis points, and Austin, where vacancies have expanded 740 basis points. More shallow vacancy expansion is traced by robust office-using employment growth in North Texas.

Leasing activity in the year is characterized by smaller leases, with the average deal size shrinking 19% compared to 2019, reflecting firms' acute focus on spatial efficiency for their employees. Demand is contingent on building age, location, and configuration. Market leaders confirm high-quality, well-placed buildings with proximity to neighborhood amenities receive the most attention from tenants. Buildings less than three years old drive net absorption, with 13.5 million SF of move-ins since 2020, while buildings 10 years old or more report cumulative net move-outs of 15 million SF.

Elevated vacancy is connected to aging, uncompetitive buildings. About 85% of the vacant 76.6 million SF in the market comes from buildings from the 2000s and earlier. Buildings from the 1980s bear the largest share with 44%, reflecting the building boom and bust of that decade. CoStar's forecast calls for vacancies to expand to 20% as more leases approach expiration and tenants continue to shrink their footprints.

Construction levels have remained stable with 8.5 million SF underway, on par with the five-year average of 8 million SF. About half of development is found in Uptown/Turtle Creek and Frisco/The Colony, two high-quality submarkets that offer density paired with high-end retail and upscale residential options. Built-to-suit projects make an outsized impact on the pipeline, accounting for 25% of construction and reducing the impact on the overall vacancy rate.

Pricing power skews in favor of tenants, with record-level availability of 88.3 million SF. Owners are courting tenants with concessions, with market participants indicating that concessions may include one month of free rent per year for longer-term leases. Counter to the market trend, new high-end buildings push the threshold for asking rents in premier urban and suburban office nodes. Average market rents are $31.00 per SF, below expensive costal markets where market rents range from $40 to nearly $60 per SF, making Dallas-Fort Worth a more attractive option for national corporate users. 

Deal activity in Dallas-Fort Worth remains muted due to tepid demand, anemic rent growth during the most aggressive rate hike cycle in 40 years, which has weighed on NOI. Office transaction volume was $3.1 billion in the previous 12 months the slowest year since 2011. Even so, large assets that are transacting involve buyers with greater access to equity, groups focused on office-to-residential conversions in downtown Dallas and owner-users seeking opportunities to buy buildings at a lower basis.

Take a look at the individual Submarkets in our DFW Office Market Report:

Leasing

After briefly rebounding in 2022 thanks to new commitments from a mix of major financial services firms, leasing has pulled back in Dallas-Fort Worth. New lease volume in the 12 months ending in January is 15.9 million SF, 21% below the annual average reported from 2017 to 2019. In turn, office availability has risen to 88.3 million SF, up 28% since the end of 2019.

Lower levels of leasing reflect smaller leases, which have shrunk from an average of 5,500 SF from 2017 to 2019 to about 3,500 SF. As a result, just over 50% of new leases in 2023 were for 5,000 square feet or less, a share that has steadily grown since 2020. The trend reflects firms' refocus on spatial efficiency as leases roll over. Elevated availability encourages tenants to seeking out and commit to newer spaces, many times for less space.

Vacancy rates in Dallas-Fort Worth are 18.1%, up 0.5% over the past year. While the vacancy rate ranks among the highest in the country, the Metroplex has historically carried a structurally higher vacancy rate compared to the U.S. norm, a trend coming out of the boom-and-bust of the mid-1980s. The Metroplex is among a small cohort of markets that report positive net absorption with tenants moving into -240,000 SF in the past 12 months.

While the demand picture has shifted since 2020, office-using employment in Dallas-Fort Worth remains steady at 3.8%, well above the U.S. norm of 0.9%. The market is galvanizing itself as a financial services hub with some of the largest leases coming from this sector; the financial activities segment leads office-using employment, registering nearly 4% in the past 12 months. Meanwhile, the market has ranked among leaders for return-to-office initiatives based on Kastle Systems' building access data, hovering just below 60%, a rate that has mostly remained unchanged over the past year.

Office demand is bifurcated between the urban core and suburban submarkets. Suburban submarkets report consistent demand over the past three years, with a cumulative net absorption of 10.8 million SF since the end of 2019. The CBD and urban submarkets, those identified as immediately outside Downtown Dallas, Uptown/Turtle Creek, and Downtown Fort Worth, report cumulative move-outs of 5.1 million SF since the end of 2019.

Resilient suburban office demand reflects continued robust demographic tailwinds and developers following said path of progress. The poster child for demographic growth in Dallas-Fort Worth, Collin County has grown its resident base by 45% since 2010 and includes submarkets of Upper Tollway/West Plano, Frisco/The Colony and Allen/McKinney. Office inventory skews newer, with many firms selecting high-quality suburban areas for their workforces. Leaders from major brokerages underscore continued interest in new space entering the market, including The Star, The Link, and Granite Park. As a result, vacancies for space delivered from 2010 to 2020 in Collin County holds steady at 8.0%, below the market average of 18%.

Downtown contains a disproportionate share of aging towers that have shed tenants seeking newer spaces, often in favor of neighboring Uptown/Turtle Creek. Bank of America penning a 238,000 SF lease at a yet-to-break-ground tower and Deloitte's commitment to 104,500 SF at 23Springs are two examples of financial services firms driving larger leases and Uptown/Turtle Creek siphoning occupancy from downtown. Aging, uncompetitive towers in Downtown Dallas have led to more examples of office-to-residential conversions, with over 90% of units under development stemming from renovations. While the result is a reduced office inventory of about 4.6 million SF since 2010, vacancies in downtown remain structurally high at 25%.  

Elevated sublet availability weighs on the market with tenants adding 4.5 million SF, nearly doubling since the end of 2019. The total of 10.7 million SF accounts for 2.5%  of inventory, near the U.S. average of 2.4%. The largest blocks of sublease space are newer, including Reata's 327,400 SF built-to-suit in Plano that completed in 2021. Thwarted by market forces in the pharmaceutical industry and acquisition by Biogen, the company was forced to place the building on the sublease market. Tenants have committed to 1.8 million SF in sublease leasing activity over the past year, taking advantage of greater flexibility and shorter lease terms.

Office demand is expected to remain tepid through the near term as firms continue to assess their office utilization, which will keep office vacancy rates elevated. CoStar's forecast calls for vacancy rates to peak near 20% in 2026 to 2028, before stabilizing. That will be the highest vacancy rate reported in Dallas-Fort Worth since the late 1980's when the market wrestled with the fallout of the S&L crisis.

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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.

April 24, 2024

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