Dallas - Fort Worth Office Summary - 2Q 2023
Dallas-Fort Worth's office market faces headwinds with fragile demand and rising availabilities. Vacancies have shifted to a 20-year high of 18% and the glut of available sublease space is trending at 11 million SF. The trend comes as the market has historically carried a structurally higher vacancy rate compared to the U.S. norm, an artifact coming out of the boom-and-bust of the mid-1980s.
The office market is facing a period of rightsizing with firms continuing to re-evaluate their office utilization. Historically, occupied office space per worker has trended lower in Dallas-Fort Worth over the past three decades, and this theme is expected to continue as utilization patterns normalize. Market experts cite continued uncertainty around future demand at a time when the relationship between office-using employment and net absorption is disconnected.
Further economic headwinds and the specter of a recession in the near term will weigh on demand, keeping vacancy rates elevated. Industries more sensitive to rising interest rates have felt an outsized impact, especially in finance, representing a relatively higher share of employment in the metroplex.
There remain bright spots for demand, despite structural challenges. Suburban office nodes including Upper Tollway/West Plano, Allen/McKinney, and Plano lead the market in net absorption over recent quarters and have served as a stabilizing force. For example, JCPenney signed 280,457 SF at CALWest Legacy, returning to their original headquarters after vacating and undergoing bankruptcy. More trim, the company previously occupied over 1 million SF at the same building.
Higher-quality buildings continue to attract tenants. Since 2021, buildings rated 4 & 5 Stars have registered a cumulative 16 million SF in new leasing activity, roughly double 3-Star and below. These buildings are in more dense locations and may be part of a larger mixed-use project with greater proximity to retail destinations. Firms are tapping into well-educated workforces found in higher-quality suburbs and in the urban core. Owner-occupied spaces have also served as a stabilizing force. Dallas-Fort Worth has a strong track record of seeking to land or expand new companies to the area, and many have planted their flag with expansive corporate campuses. The biggest examples span various industries, including Toyota, American Airlines, Fidelity, and Liberty Mutual.
Construction is moving at a manageable pace with 7 million SF underway. Construction starts have trended lower over the past year, an indication that developers remain constrained in bringing new space to market. Bucking the trend, Uptown, the market's premier office node, accounts for 25% of office construction in the market. The trend is a testament to developers' confidence in high-density mixed-use concepts and has enabled Uptown to become the central hub for trophy office, high-end retail, and residential options in Dallas.
Market rent growth remains stable, but is expected to dip through the near term, tracing broader weakness in the market. Uptown and Preston Center outperform the market on rent growth and feature a heavier concentration of higher-quality spaces. New leases are pushing the threshold on asking rents. Bank OZK committed to 110,428 SF at the yet-to-be-completed 23Springs tower for $54/NNN, among the highest confirmed comps in the market. Elevated sublease space offers prospective tenants a relative discount of $6-10/SF, skewing higher in urban areas.
Office sales are slowing after bouncing back coming out of 2020. Rising interest rates are sowing caution among buyers. Recent sales show wide variance in building quality, building location and proximity to nearby amenities. Despite elevated uncertainty, well-leased, higher-end assets in premier office locations continue to receive investor interest, pushing the envelope for market pricing.
Vacancy rates in Dallas-Fort Worth are trending higher over the past year due to greater move-outs through early 2023. The market is reporting 580,000 SF vacated over the past year, yielding vacancy rates of 17.9%. 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 Base Case scenario calls for vacancy rates to tick higher to 21% through 2025.
Even so, demand persists in high-quality suburban office nodes in Collin County. Allen/McKinney, Frisco/The Colony, and Upper Tollway/West Plano reached reported net absorption above 300,000 SF in the past year. In turn, faster-growing suburban office submarkets have served as a buoy to office demand in the market. Several large build-to-suits provided a boon to net absorption. Charles Schwab moved into its 580,000-SF Westlake Campus; Paycom moved into its 150,000-SF facility; and JPMorgan Chase moved into its 540,000-SF space in Legacy West.
Meanwhile, downtown Dallas continues to shed occupancy, pushing vacancy rates higher. However, some moves reflect new owners vacating space to make way for office-to-residential conversion projects. Todd Interests purchased Energy Plaza last year and vacated the building in early 2023, totaling 400,000 SF. The local developer has already made an outsized impact with other conversion projects, namely The National at 1401 Elm. The project converted the 1.2 million-SF tower to include 324 multifamily units, a hotel, and ground-floor retail.
Elevated sublet availability is a weight on the market, with the market accumulating 11.2 million SF. Some tenants are taking advantage of the flexibility and shorter lease terms a sublease provides. The market matched the previous 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.
Corporate relocations and expansions fuel 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 place Dallas-Fort Worth on the top of the list for firms seeking to land or expand their presence.
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.