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Office Leasing Slows…Really?

In today’s Dallas Morning News (DMN), the long-time real estate reporter, Steve Brown, had an article headlined Office Leasing Slows Down. Let me first say that I like Steve Brown. I have read his work for decades and have seen him speak a few times. His understanding of the real estate business is strong and his sense of history is amazing. But I have to pick a bone with him on this article and others which throw out statistics without proper background and context.

In this article, Steve features a Cushman & Wakefield (C&W) report regarding leasing activity in the Dallas Fort Worth area. The main gist of the article is that leasing activity has fallen by 40% in 2016 compared to 2015. Net absorption is the metric quoted and is the best barometer of demand for office space. Net absorption is simply the change in total office space occupied. For example, if 300 million square feet (SF) of space is occupied today and 303 million SF is occupied on March 31, 2017, then there would have been 3 million SF of positive absorption during that quarter.

The C&W report mentioned in Steve’s article states that absorption in 2015 was 5.2 million SF and it was only 2.9 million SF in 2016. Thus the 40% decline. I don’t have a problem with those facts. What I have a problem with is the impression given in the article that this is somehow an indication that the market is in bad shape. The first sentence of the article states, “Demand for Dallas-Fort Worth office space stalled in the fourth quarter.”

What does “stalled” lead you to believe? That it stopped? Or that it just slowed down a bit? I think most people would assume it means the market has stopped and we should be worried. But it didn’t and we shouldn’t…at least not based on the facts presented. Another 2.9 million SF was occupied and that still represents growth.

The article gives two primary reasons for the slow down. First, companies packing more people into the same space. This is accurate because I’ve seen it with my own clients. For example, it used to be that a law firm would lease 700-1,000 SF per attorney. Many firms these days are only leasing 400-600 per attorney. That’s significant, but it’s also more efficient and technology has provided this opportunity. Law firms have everything online and no longer need law libraries with hundreds of books.

The other main reason given for the slowdown is that large tenants like State Farm moved out of office space into their own buildings. Again, I don’t dispute that fact. State Farm moved out of several buildings and consolidated into its own campus in Richardson.

But was that negative absorption? The C&W report says it was and the DMN article spreads that word. And this is my real problem with the article. It doesn’t mention that only multi-tenant buildings are considered in the report. That is, buildings with more than one tenant occupying it. So when State Farm moved out of 1 million SF of multi-tenant buildings and moves into nearly 2 million SF in its own single-tenant campus, the C&W report (and Steve Brown at the DMN) tell you that represents 1 million SF of negative absorption and, by implication, the sky is falling.

That is misleading. Steve Brown should have disclosed that the report only considers multi-tenant office buildings and should have gone on to shown that absorption of all office buildings is actually 5 million SF if single-tenant properties are considered too. That would have provided a more-accurate picture of what’s going on in the market. A quote from one of the C&W brokers provided an oblique hint to this, but it should have been more explicit in the article.

So while the owners of multi-tenant office buildings may not be filling up their buildings quite as quickly in 2016 as they were in 2015, the overall health of the office building market of all types is strong. If not, rents wouldn’t still be rising. And they are.

You can read the DMN full article here.

Bob Gibbons is a Real Estate Advisor & Tenant Advocate with REATA Commercial Realty, Inc. which is a tenant advisory firm based in Plano, Texas. Bob serves companies in Plano, Frisco, McKinney, Allen, Richardson, Addison, Dallas and the surrounding areas and specializes in companies which lease or buy office and warehouse properties.

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