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Although more Texas workers have returned to in-person work than workers nationwide, much of the state's urban office space remains vacant.
Office vacancy rates in the Austin, Dallas-Fort Worth and Houston areas range from 21% to 25%, potentially complicating the post-pandemic recovery of downtown areas that rely on office workers to support restaurants and retail businesses. There is. But it remains to be seen whether the glut of space as developers continue to build more office buildings portends an economic storm to come.
“Is it soft? Yes. Is it a challenge? Yes. Is there going to be a crash? I can't say we're in that situation,” said CBRE Group, who heads a research team that studies trends in commercial real estate. Julie Whelan said.
Texas' relatively strong economy, growing workforce and large numbers of workers returning to offices are raising hopes that the office market is not in dire straits.
Still, some real estate and office market analysts are concerned about so-called “shadow vacancies.” Even though employees are spending more time in the office, they aren't coming in as often or as often as before the pandemic. This means that office space that appears occupied on paper may be relatively vacant, and vacancy rates may rise as companies do not renew leases.
“We're never going to go back to the heyday when everyone was in the office four or five days a week,” said Stephen Pedigo, director of the LBJ Urban Lab at the University of Texas at Austin, which focuses on urban policy. Told.
“Perfect Storm”
Less than 6% of Texas employees were working from home before the coronavirus outbreak, according to the U.S. Census Bureau. Last year, remote employees made up more than 15% of the state's workforce. This percentage is even higher in urban areas of the state.
Thanks to its technology sector, the Austin area has a higher percentage of remote workers than any other large city in Texas. The 28% figure is down only slightly, even though the rate of employees returning to the office is higher than in other parts of the country.
Before the pandemic, office vacancy rates in the Austin area remained below 10%, according to CBRE. As of the end of the third quarter of this year, that percentage was nearly 22%.
Some of this vacancy is due to some large employers scaling back their office plans. About 11% of the 15 million square feet of office space in Austin's central business district is available for “sublease,” real estate analysts say, a result of employers reducing the amount of office space they need.
Meta, the parent company of Facebook and Instagram, was planning to move into a 589,000-square-foot office in downtown Austin. Instead, the company plans to cancel those plans and lease the space to other tenants, along with the 100,000 square feet it had planned to occupy elsewhere downtown.
“What's happening is companies are realizing, 'We're measuring[office space]utilization, so we don't need all the space,'” said Phil, national director of office analytics at CoStar.・Mr. Mobley says. Track commercial real estate. “So they are taking the opportunity of lease expirations to reduce space and offer more space to the sublease market.”
More than 5 million square feet of office space is under construction in Austin, nearly half of downtown. Much of it was planned when builders bet that there would be a demand for new space when these buildings eventually opened, given the city's strong economic strength.
“The environment these buildings are being delivered into looks different than the environment they were originally placed in,” Mobley said.
Less than a quarter of the space under construction is leased to tenants, according to a recent report from Cushman & Wakefield.
Austin is experiencing a “perfect storm of decreasing demand and increasing supply,” Mobley said.
In Dallas-Fort Worth and Houston, the rise of remote work has exacerbated already high vacancy rates caused by overbuilding in the '80s and '90s, which still casts a shadow over the current office market.
“Dallas, like many Texas cities, built huge, beautiful, tall, shiny buildings,” said Jennifer Scripps, who heads the economic development group Downtown Dallas Inc. ”
Key drivers of current vacancies: Employers are trying to lure employees back to the office by leaving older spaces and setting up shop in fancier, more modern locations. This is a trend office market observers refer to as a “flight to quality.”
In Dallas, Bank of America plans to trade space in the most prominent tower on the downtown skyline for a new building just outside the central business district. So the company will join JPMorgan Chase, which made a similar move in 2021.
In downtown Houston, NRG Energy plans to move its headquarters in 2026 to a recently renovated skyscraper billed as an “urban mixed-use office campus” with an upscale gym and access to the downtown tunnel system. is.
But that “flight to quality” has left older and less appealing spaces vacant. More than a quarter of office space in downtown Houston is vacant, according to CBRE. Chris Larson, Central Houston's president and CEO, said about half of the vacant space is so outdated it's essentially “unmarketable.”
New buildings and those that have recently been renovated “perform much better than older building stock, which is essentially losing many tenants to newer buildings.” [additions] to the market,” Larson said.
There are few options to improve the situation.
Office vacancy rates are high in other parts of the country, including New York and San Francisco, raising concerns about an urban “loop of doom.” This is a term used to describe an economic downturn in which office closures lead to the closure of nearby businesses, such as restaurants and shops, that rely on office worker traffic. This many closures could result in blight, reduced property tax revenue, and reduced city services.
Houston Commissioner Chris Brown said office vacancies alone, if allowed to continue, can lead to a decline in commercial real estate values, which in turn hurts the budgets of cities and school districts that rely heavily on property taxes. He said it was possible.
“They are huge assets,” Brown said of the downtown office buildings. “So how do we predict tax base growth? We need to be more conservative with our assumptions. But we don't know what's going to happen.”
Some Texans are bullish that the state's major metropolitan areas are safe from any kind of “doom loop.” First, the state's economy is rapidly growing and population growth is strong. More employees have already returned to the office than in any other major city. The number of people living in downtown Texas has exceeded pre-pandemic levels, according to a report from Philadelphia's Center City neighborhood. Tourists have also returned to downtown, although the hiring of workers is still slow, the report said.
Still, excess vacant office space remains a major challenge. And that's true all over the world. Demand for office space in nine major cities, including Houston, could be up to 20% lower in 2030 than it was in 2019, according to a recent report from consulting firm McKinsey & Company.
Even if demand for office space returns to pre-pandemic levels, it could take decades, the report said. Meanwhile, a McKinsey study found that due to the drop in demand, $800 billion in real estate value could disappear in these nine international cities, posing a major challenge to municipal property tax collections. There is.
And Harold Hunt, a research economist who studies commercial real estate at the Texas Real Estate Research Center at Texas A&M University, says owners of office buildings with high vacancies have few options to turn things around. They can either keep the building as is and deal with the loss of revenue, or upgrade it to compete with fancier office properties, Hunt said. The owner can also sell or demolish the building.
Hunt said building owners could also convert vacant office space into housing, an idea that's gaining a lot of attention as the nation faces a glut of vacant offices and a housing shortage. However, not all office buildings are suitable conversion candidates.
“What do you do with 1.5 million square feet when no one wants it anymore?” Hunt said. “Everyone is just scratching their heads.”
Disclosure: Bank of America, Facebook, NRG Energy, Texas A&M University, and the University of Texas at Austin are nonprofit, nonpartisan news organizations funded in part by contributions from members, foundations, and corporate sponsors. is a financial supporter of the Texas Tribune. Financial supporters play no role in the Tribune's journalism. See the complete list of them here.
