A drop in net leasing hit the North Texas office market in final months of 2022.
As interest rates have soared and fears of a recession have risen, many companies are hitting the pause button on office leasing. Other large office space users are dumping sublease space on the Dallas-Fort Worth market.
Net office leasing was down 1.1 million square feet last year – the third year in a row of declining Dallas-Fort Worth office space demand, according to a just-released estimate by commercial property firm Avison Young.
A 1.6 million-square-foot negative net leasing total in the final three months of 2022 wiped out modest gains in the first three quarters of last year, Avison Young reports.
Office leasing nationwide has taken a hit since the start of the COVID-19 pandemic when workers were sent home. Office employees have been slow to return to the workplace, and many businesses have delayed or shelved their leasing plans.
Avison Young estimates that only about half of workers were back in the office in 2022.
“The year was choppy as companies adjusted to hybrid work patterns,” the company’s analysts said in the new report. “Office users continue to wrestle with their unique business needs with some in the office and others remote.”
Just over 25% of D-FW office space was empty at the start of this year.
“Despite D-FW’s strong employment growth, office vacancy and availability inched higher in 2022,” Avison Young senior insight analyst Walter Bialas said in a statement. “Total vacancy is the highest since the 1980s, and sublet vacancy is where it was at the 2000s tech downturn.”
Net office leasing last year was the highest in Uptown Dallas (413,347 square feet), Addison and Far North Dallas (289,376 square feet) and along Stemmons Freeway in Dallas (223,183 square feet).
Most of the recent leasing demand has come from companies in the business services and financial sector, studies of local office employment growth indicate. The D-FW area has created more than 170,000 office sector jobs since the end of 2019.
The largest net declines in D-FW office leasing in 2022 were in Las Colinas (-901,848 square feet), the Mid-Cities area (-582,295 square feet) and in buildings along LBJ Freeway (-411,008 square feet).
More than 6 million square feet of additional office buildings were under development in North Texas at the end of the year, according to Avison Young.
Most of the construction is in Uptown Dallas and along the Dallas North Tollway in West Plano and Frisco.
Adding to the supply of offices on the market is the millions of square feet of sublease space businesses are offering for rent.
Almost 11 million square feet of sublease office space was available in D-FW at the end of the year — up from less than 10 million square feet at the end of 2021, according to the latest numbers from commercial real estate firm Transwestern.
The surplus office space has been slow to attract tenants, Transwestern’s research chief Andrew Matheny said.
“We see some absorption happening from the smaller and midsized companies that find this as an attractive option,” Matheny said. “But every time we see these numbers start edging down, a company will put a large block of 100,000 square feet on the market.”
Matheny said the sublease offices in D-FW aren’t as much of a bargain as they were in previous cycles.
“Typically sublease listings will go for 60 cents on the dollar,” he said. “We are seeing subleases done at 80 cents or 90 cents. The reason they are getting it is a lot of these sublease spaces are fully furnished and ready to move in.”
Even with the weaker demand, average asking office rents in the Dallas area moved up to more than $34 per square foot annually in 2022.
Quoted rents typically don’t include concessions, which Transwestern estimates are at the highest level in more than 20 years.
Overall rents are being driven higher by the newest office buildings, which are attracting most of the leases, Matheny said. “The intensification of a flight to quality in the market has driven demand to these higher-end properties,” he said. “With the rise of construction costs of those new properties, there is such a significant spread between existing buildings.”
Transwestern is reporting that fourth-quarter D-FW net office leasing was down almost 700,000 square feet.
But it estimates that for the full year, net leasing increased by about 1 million square feet.
Office leasing numbers by real estate firms typically vary because of when they count the transactions as completed.
For the fourth quarter, Transwestern listed some of the biggest Dallas-area leases as Texas Capital Bank’s expansion to 175,000 square feet in in Uptown Dallas and Sol-Ark’s 115,200-square-foot headquarters lease in Allen.
Matheny said office leasing has declined in North Texas since the first half of 2022.
“We saw momentum kind of fade in the market,” he said.