DFW MARKET INSIGHTS – OFFICE – 3Q 2023

Dallas - Fort Worth Office Summary - 3Q 2023

3Q 2023 Office Market

Summary

Dallas-Fort Worth's office market faces continued challenges including anemic demand and elevated availability. There are 89 million SF available for lease, a record level that's expanded 30% over the past three years. Vacancies are holding at a 20-year high of 18%, expanding 330 basis points since 2019.

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. CoStar's House View calls for vacancy rates to rise further with more tenants expected to consolidate space as lease terms expire over the next few years. The outlook reflects vacancies shifting higher close to 20%, similar to those coming out of the dot-com bubble.

Tepid demand comes as firms continue to evaluate their need for space with a spectrum of workforce arrangements. Texas office markets have led the country for return-to-office efforts based on Kastle's occupancy barometer, and office attendance in Dallas-Fort Worth has risen to 54% but that movement has been sluggish over the past year. Leasing is supported by smaller leases with the average lease size declining 17% since 2019. The trend reflects tenants' apprehension in committing to larger spaces as firms continue to evaluate their space needs and as leases roll over.

Demand is contingent on several factors including age, location and configuration. Market leaders confirm high-quality, well-placed buildings with proximity to neighborhood amenities continue to garner attention from tenants. Newer buildings feature welcoming shared spaces with natural lighting and green spaces. Buildings delivered since 2015 carry a vacancy rate of 9%. Meanwhile, aging, homogenized assets have become less competitive over time. Almost 60% of total vacant space is from buildings from the 1980s and 1990s.

Market participants have cited instances where tenants may choose to downsize their footprint but opt for higher-quality space. The latest example includes Bank of America seeking to relocate to Parkside Tower, taking 256,000 SF and vacating the 1.2 million SF tower in downtown where they have had a presence since the building delivered in the mid-1980s. The Parkside project is still in proposal stages with plans to begin construction at the end of 2023.

Demand is resilient in high-quality office nodes in suburban submarkets, led by areas in Collin County including Allen/McKinney and Frisco/The Colony. Suburban submarkets report 1 million SF in net absorption over the past year, while urban submarkets including those in the urban core report net move-outs of 2 million SF. Vacancy expansion is most pronounced in urban submarkets, up 5% since 2020 whereas suburban submarkets see vacancies rising just 1%.

With a glut of available space, pricing power is firmly in favor of tenants. Owners courting tenants with generous concessions and accounting for inflation, real rents are falling on an annual basis. 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 in Dallas are $35/SF compared to the U.S. average of $30/SF.

Despite headwinds, construction volume has risen in high-quality office nodes in urban and suburban settings. Both Uptown and Frisco/The Colony account for roughly half the market's office construction volume. The trend is a testament to developers' confidence in high-density mixed-use concepts and has enabled the area to evolve as the primary hive for trophy office, high-end retail, and residential options. Owner-occupied projects continue to move forward with Wells Fargo's 800,000 SF campus in Irving as the largest example currently underway.

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 corporate campuses. Firms selecting the Metroplex span several industries and include Toyota, American Airlines, Fidelity, and Liberty Mutual. Companies continue to tap into the business-friendly environment, deep pool of talent, central location and diverse economy. Frontier Communications is the latest example to relocate their headquarters, moving from Connecticut to Dallas with plans to expand their current presence, committing to 95,000 SF in Uptown.

Office sales have stalled amid rising interest rates and headwinds facing the office market sow caution among buyers. Year-to-date estimated sales volume are $1.9 billion, ranking as the slowest year since 2011. Few large assets have traded in 2023 and those that have are part broader redevelopment plans, including The Comerica Tower in downtown Dallas.

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

Leasing

Vacancy rates in Dallas-Fort Worth are trending higher over the past year due to greater move-outs in 2023. The market is reporting -2.6 million SF vacated through the fourth quarter of 2023, yielding a vacancy rate 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 rise to 22% through 2025.

Office demand in Dallas-Fort Worth is bifurcated between urban and suburban submarkets. Demand for suburban office has remained consistent over the past three years, providing stability to the market at a time when firms are taking less space to support their workforces.

Suburban submarkets report demand of 1.9 million square feet over the past year, slightly lower the five-year average leading up to the pandemic of 2.3 million SF. Even so, these areas have continued to report positive demand over the past three years, with cumulative net absorption of 7.8 million SF since 2020. Office inventory skews newer, with developers following population growth to the north. For example, office inventory in Collin County, serving as the engine for population growth, has grown 22% since 2010. Leaders from major brokerages underscore continued interest in new space entering the market, including The Star, The Link and Granite Park. Vacancies for space delivered from 2010 to 2020 are holding steady at 9%.

Urban office areas, those identified as immediately outside downtown Dallas, Uptown and downtown Fort Worth, report steep move-outs of 527,000 SF over the past year and have shed a total of 5.9 million square feet since 2020. Dallas's urban core is bifurcated between downtown and uptown. Downtown Dallas pulls the central business district cohort lower, reporting 577,000 SF of move-outs over the past year with a vacancy rate of 27%. Downtown contains a disproportionate share of larger towers that have shed tenants who seek out other prominent office submarkets. Meanwhile, uptown continues to report positive demand over the past three years and attract new firms including Frontier Communications, which recently announced its relocating its headquarters to 1919 McKinney Ave.

Smaller leases make up a growing share of overall office leasing activity. So far in 2023, leases for spaces 3,000 square feet or less account for 38% of total office leasing in the market, translating to 3.4 million SF. This segment's overall share has steadily grown since 2020, registering above 30% over the previous two years. The trend reflects tenants' apprehension in committing to larger spaces as firms continue to evaluate their space needs and as leases roll over. Market participants have cited instances where tenants may choose to downsize their footprint but opt for higher-quality space.

Elevated sublet availability is a weight on the market, with the market accumulating 11.2 million SF, or 2.6% of available space. Some tenants are taking advantage of the flexibility and shorter lease terms through subleasing as tenants have committed to 1.8 million SF in sublease leasing activity over the past year, slightly above the three-year average of 1.6 million SF.

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. 

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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.

November 29, 2023

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