DFW MARKET INSIGHTS – OFFICE – 4Q 2023

Dallas - Fort Worth Office Summary - 4Q 2023

4Q 2023 DFW Office Market Commercial Real Estate Bradford Companies

Summary

Dallas-Fort Worth's office market faces continued challenges, including fragile demand and elevated availability. There is 89 million SF available for lease, a record level that has risen 25% since the end of 2019. The vacancy rate is holding near a 20-year high of 18%, expanding 330 basis points since the end of 2019. That expansion is below the U.S. norm, which has risen 390 basis points, and Austin, where vacancies have expanded 810 basis points.

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 forecast calls for vacancies to peak at 21%, with similar vacancies coming out of the dot-com bubble. The trend reflects tenants adopting more efficient use of space as leases approach expiration.

Leasing activity is characterized by smaller leases with the average size shrinking 19% since 2019. Meanwhile, the number of leases captured is up 8%, reflecting brokers' activity partnering with tenants to identify spaces to fit their needs. This dynamic demonstrates how firms are now adopting more efficient space requirements 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 continue to garner attention from tenants. Newer buildings feature welcoming shared spaces, natural lighting flush with tall glass windows and green spaces. Buildings less than three years old drive net absorption with 13.5 million SF of move-ins since 2020. Meanwhile, buildings 10 years old or more report cumulative net move-outs of 15 million square feet. About 74% of vacant space is from buildings from the 1990s and earlier; roughly 44% is from buildings from the 1980s alone.

Tenants continue to seek spaces in high-quality office nodes in suburban submarkets. Suburban submarkets report cumulative net absorption of 35 million SF in net absorption since 2020, while urban submarkets including those in the urban core report cumulative net move-outs of 30 million SF. Vacancy expansion is most pronounced in urban submarkets, up 4% since 2020 whereas vacancies in suburban submarkets have expanded 0.7%.

New construction traces office nodes with stable demand and is driven by owner-occupied projects. 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. The current pipeline is 48% pre-leased with several owner-occupied projects underway, including Goldman Sach's 700,000-SF project in Victory Park, Wells Fargo's 800,000-SF campus in Irving, and Ryan's 410,000-SF tower in Plano.

Pricing power skews in favor of tenants due to the volume of available space on the market. Owners are courting tenants with generous concessions and accounting for inflation, real rents are falling on an annual basis. Market participants cite concessions offered may be one month per year of term for leases 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 in Dallas are $35/SF, compared to the U.S. average of $30/SF.

Office transactions remain tepid, but some deals are executing that involve greater equity or owners facing bankruptcy. Year-to-date estimated sales volume are $1.9 billion, ranking as the slowest year since 2011. Few large assets have traded in 2023; some are tied to broader redevelopment plans, including The Comerica Tower in downtown Dallas; others include suburban mixed-use developments like CityLine in Richardson.

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

Leasing

The Dallas-Fort Worth office market is marked by move-outs of 470,000 SF over the past year. Smaller leases for high-quality spaces with plentiful amenities characterize tenant demand. Demand remains stable in high-quality suburban office nodes in Collin County, with Allen/McKinney and Frisco/The Colony leading the market in net absorption in the past year.

Smaller leases make up a growing share of overall office leasing activity. So far in 2023, leases for spaces 3,000 SF 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.

Office demand in Dallas-Fort Worth is bifurcated between urban and suburban submarkets. Suburban submarkets report demand of 1.9 million SF over the past year, slightly lower than 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 a 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 in Collin County are holding steady at 8.5%.

Urban office areas, those identified as immediately outside downtown Dallas, Uptown, and downtown Fort Worth, report move-outs of 527,000 SF over the past year and have shed a total of 5.9 million SF since 2020. Dallas' 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.

Elevated sublet availability weighs on the market with tenants adding 10.4 million SF, or 2.4% of available sublet space. About two-thirds of sublet space is concentrated in Far North Dallas, Las Colinas, Richardson/Plano, and downtown Dallas. 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.

Vacancy rates in Dallas-Fort Worth are up 0.6% over the past year, coming in at 17.9%. That vacancy rate ranks among the highest in the country, close to Houston, another market with a structurally high vacancy rate. 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 21% through 2025.

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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.

February 2, 2024

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