DFW MARKET INSIGHTS – OFFICE – 4Q 2022

Dallas – Fort Worth Office Summary – 4Q 2022

4Q 2022 Office Market

While there are signs of a recovery in the office market, headwinds remain. As a result of the pressures of increased work-from-home policies and the amount of sublease space available remains stubbornly high, 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 metroplex is reporting -63,000 SF of positive net absorption over the last 12 months. 22Q1 marked the fourth consecutive quarter of positive net absorption, indicating a stable recovery. Unfortunately, the metroplex experienced a setback in the second quarter with 56,000 SF of negative net absorption. A few of the contributors to this negative net absorption were move-outs in the Galatyn Commons One (-215,400), The Terraces at Solana Building 2 (-124,700), and Legacy Central 1 (-103,700). CoStar is reporting 2.3 million SF of positive net absorption in 2022. A significant increase from the 216,000 reported the year before. CoStar is anticipating the office market to struggle in 2023, with 353,000 SF of net absorption and 5.3 million SF of new deliveries. As a result, the vacancy rate will tick higher to just over 18%—the highest level since 2003.

The amount of sublet space available has put additional 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.

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. Construction activity has been relatively restrained. Due to the uncertainty generated by the hybrid work model, a shortage of skilled construction workers, and rising construction costs, many developers have held off breaking ground on new projects. 4.5 million SF of construction starts in 2022.

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

Leasing

orporate relocations and expansions continue to drive office demand in Dallas-Fort Worth. A highly skilled labor force, low business costs relative to coastal markets, and a central location add to the metro’s attractiveness. 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.

In 2022, the market reported 5,100 new leases signed, totaling 18.9 million SF. One of the more exciting deals of the year was retailer JCPenney moving back into its former corporate headquarters in Plano, which was sold and rebranded as CALWest. The company moved into its 280,000 SF space in late 2022. The CityLine development in Richardson landed a significant new lease. Construction firm McCarthy Companies signed a 43,000-SF lease at 3400 CityLine. In the fast-growing far north suburb of McKinney, California-based healthcare software firm Review Wave is joining Common Desk at 300 E Davis St. with a 34,900-SF lease. The company plans to create 75 high-tech and executive jobs over the next three years, bringing the company’s total employment to 130.

There is currently 7.7 million SF under construction, with 42% preleased. The current vacancy rate is 17.8%. It should be noted that the vacancy rates in the metroplex are notoriously above what is found in many larger markets. Since 2010, the region has experienced an average vacancy rate of 16%. For example, the New York metro had an average vacancy rate of 9% during this period, while Chicago averaged 13%. Even high-growth areas were below the metroplex: Atlanta (13%), Charlotte (10%), Denver (12%), and Orlando (9%).

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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.

January 19, 2023

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