On Friday, 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%.
This was a result of 4 quarters of negative absorption. Absorption is simply the net change in occupied square footage (SF) from one period to the next. The article states that absorption for all of 2020 was a negative 3.9 million SF.
This vacancy is much worse than the 17.3% reported by CoStar after annual absorption of negative 5 million SF. If you add in available sublease space, the total vacancy is 20.6% per CoStar.
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 fared the best were Richardson (+241k SF), Preston Center (+123k SF) and Mid-Cities (+55k SF).
The report also points out that 4.2 million SF of new space is still under construction, so more vacancy is likely coming.
In spite of all this, the report says that average rental rates increased to $25.75/SF full service (including expenses).
CoStar, on the other hand, says that average rental rates are $27.69 (down 0.2%) and there is still 7.5 million SF under construction.
The one thing that CBRE and CoStar appear to agree on is that available sublease space is around 9 million SF. That’s about 50% more than when 2020 started.
All indications are 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. This won’t be uniform among all landlords, however, since some had high occupancies with long-term leases in place before Covid started and they haven’t felt the pain yet.
I still recommend doing short-term lease extensions (12-18 months) if your lease expires between now and the 2nd quarter 2021. If the lease expires beyond that, don’t do anything yet if you can wait. Landlords will try to force a 3-year or longer extension and at rates equal to or higher than rental rates being paid under current leases. Flexibility can be expensive, but it may be better to pay a little higher rate and have another shot at lower rents in a year than to lock in higher rents and later see them fall.
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.
As always, use an experienced corporate real estate advisor with extensive office expertise. That will put market knowledge on your side when negotiating the uncertain waters of commercial leases.
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.