Dallas-Fort Worth building vacancy has risen to its highest level in more than 20 years as companies have taken relief from millions of square feet of office space since the pandemic.
And unless rentals increase, the amount of vacant office space in North Texas will likely continue to grow this year.
As of mid-year, nearly 50 million square feet of D-FW office space was vacant as companies struggled to bring employees back to the office and recession concerns weighed on net rents.
With millions more square feet of office space subleased to the market, vacancy rates are heading towards 27%. The last time regional office vacancies were this high was more than 20 years ago, during the dot-com bubble and shakeouts in the communications sector.
Availability in the metropolitan area is nearly twice the total built-up area of all the large office towers in downtown Dallas.
“Depending on how you slice the numbers, we're going back to the bad old days of the 1990s,” said Walter Bialas, senior analyst at commercial real estate firm Avison Young. “It's hard to say where this situation will spill over. I'd like to see more green shoots than I'm seeing.”
Office space overgrowth is not just a problem in D-FW. Major cities across the country are grappling with what to do with millions of square feet of vacant buildings left behind by the pandemic and changing work environments.
Employers sent office staff home during the pandemic, but they are slow to return. Castle Systems, a security provider that tracks people entering and exiting office buildings, estimates that only about 62% of Dallas-area office workers have returned to their buildings, and only on the highest occupancy days. It is said that Less than 40% of his employees show up to work on Friday, the slowest day of the week.
Net office rents in Washington D-FW fell by more than 800,000 square feet in the first half of 2023, according to a brokerage report.
“Leasing activity in the second quarter was similar to the first quarter, the lowest activity in years, as the market remains disrupted as occupiers adjust their office and hybrid strategies. “This confirms that,” Bialas said.
He said most of the leases signed are with small and medium-sized tenants, while many of the largest office companies have postponed plans for new space.
Nationwide, office vacancy rates are likely to remain below pre-pandemic levels through 2030, according to new projections from the McKinsey Global Institute. In the worst-case scenario, office demand could fall by nearly 40% in the most affected cities.
“Our research shows that employees are still working far less time in the office than before the pandemic,” the report said. “At the beginning of 2020, office attendance in the metropolitan areas we studied fell by up to 90% as remote and hybrid work was introduced in response to lockdowns and health concerns.
“It has since rebounded significantly, but remains down about 30% on average.”
Real estate firm Jones Lang LaSalle estimates that more than 60% of vacant office space is in just about 10% of buildings. The buildings with the lowest vacancy rates are usually older properties in less desirable locations and with outdated facilities.
In Washington D-FW, the office districts with the highest vacancy rates also have some of these older properties. Areas with the highest building vacancy rates in Dallas include East LBJ Freeway, where about 29% of offices are vacant, and Downtown Dallas, where nearly 27% of space is vacant.
Office-based companies have not helped solve the problem by giving back millions of square feet of office over the past three years. Net office rents in Washington D-FW fell by about 900,000 square feet last year and will fall by about the same amount by 2023, according to brokerage estimates.
The majority of the leasing is in new buildings in Dallas' Uptown area and along the Dallas North Tollway in Frisco and Plano. According to Cushman & Wakefield, the best buildings saw occupancy increases in the most recent quarter.
“This story comes as companies pursue the best buildings with the best amenities to bring employees back to the office and attract top talent,” said Matt Schendl, vice chairman of Cushman & Wakefield. is expected to continue for at least the remainder of 2023.” Dallas office agency leasing director said in a statement.
Approximately 5.3 million square feet of office space is under construction in North Texas. More than 65% of his facilities under construction are scheduled to open by the end of this year.
A quarter of the new space along the way has already been negotiated. Two of the largest projects currently underway are fully leased to house Wells Fargo employees in Las Colinas and Goldman Sachs employees at a new campus just north of downtown. It has been.
Speculative office starts have stalled under pressure from high interest rates and stricter lending standards.
With excess space, office owners are increasingly looking to convert vacant buildings into new uses such as apartments, hotels, or even storage space.
But analysts warn that talk of such architectural redoings is probably exaggerated.
“It's a great idea, but the reality is that converting office space into hotels or apartment complexes is very expensive,” Bialas says. “The cost of doing so is very high and cannot be done without significant support from the public sector.”
