Recently the Dallas Business Journal wrote an article which showed that the Dallas Fort Worth office market has reached the highest vacancy rate seen in decades.  They quoted a CBRE study which claims the vacancy rate at the end of 2020 was 23.4%.  Bob and Jan talk about whether they agree, disagree or if the info is even accurate on today’s podcast.

This number of 23.4% office vacancy comes after four quarters of negative absorption.  Absorption is simply the net change in occupied square footage from one period to the next.  What was interesting about the article is that it quoted statistics from a CBRE quarterly report and their numbers don’t agree with those from CoStar, which is the largest commercial real estate information database in the United States.  CBRE’s numbers show 3.9 million negative square feet while CoStar said it was 5 million negative square feet.  That’s a big difference and it continues-CBRE’s numbers show the 23.4% vacancy figure mentioned earlier while CoStar says vacancy is only 17.3% unless you add in sublease space in which case vacancy increases to 20.4%.  So there is a 3% difference between the two sources.  That may not seem like a lot until you realize that 3% is about 12 million square feet.

Some markets fared better than others.  The CBRE report showed that the submarkets hit the hardest were Far North Dallas (-1.44M SF), Las Colinas (-955K SF), and Dallas CBD (-826K SF).  The submarkets that did the best were Richardson (+241K SF), Preston Center (+123K SF) and Mid-Cities (+55K SF).

The report also points out that 4.2 million square feet of new space is still under construction so more vacancy is likely coming.  However, CoStar says that 7.5 million square feet is still under construction.  In spite of all this, the report says that average rental rates increased to $25.75/square foot full service (including expenses).  CoStar, on the other hand, says that average rental rates are $27.69/square foot which were down 0.2%.  So unchanged really.

Did CoStar and CBRE agree on anything??  The one thing they agree on is that available sublease space is around 9 million square feet.  That’s about 50% more than when 2020 started.  So, doesn’t this mean that rental rates should be falling?  Definitely, all these factors indicate that rental rates should soften – meaning they should fall.  As landlords fight for the few deals out there, compete with subleases, and see their occupancies fall due to non-renewals and renewals with less square footage, they have to get more aggressive by dropping rental rates.  It should have already happened to a greater degree than it has.  This won’t be uniform among all the landlords, however, since some had high occupancies with long-term leases in place before Covid started and they haven’t felt the pain yet.

There is no guaranty that rents will fall, of course.  And each company’s needs are different.  If a company needs to spend a lot of money to renovate a space, a longer-term lease will be necessary regardless of whether the tenant or the landlord pays the tab.

Tell us some good news!  OK, here’s some-The Congressional Budget Office is predicting the American economy will return to its pre-pandemic size by the middle of 2021 and unemployment will fall to 5.3% by the end of 2021.  These are amazing predictions with the vaccine rollout behind behind schedule.  But, if true, these numbers definitely lead you to think optimism should increase, demand for office space should improve somewhat and rents may not fall as much as originally thought.

Bob Gibbons is a Real Estate Advisor & Tenant Advocate (also known as a tenant rep) 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.