Q2 in review: Office experts break down the state of subleases, rents and stagnant sales in North Texas
This article was originally published by the Dallas Business Journal.
Following a slow first quarter that saw more than 150,000 square feet of negative office absorption in North Texas, things continued to slide during the second quarter.
Net absorption fell to negative 639,155 square feet, according to a report by CBRE, while office vacancy rose 110 basis points to 21.8 percent. This is the highest office vacancy has been in North Texas in more than a decade. Even during the Great Recession, local office vacancy peaked at just over 21 percent.
Drops in net absorption were most pronounced in the following submarkets:
Mid Cities (includes Arlington, Grand Prairie): -309,804 square feet
Far North Dallas (includes Frisco): -136,170 square feet
South Fort Worth: - 135,035 square feet
Though most submarkets experienced negative net absorption, the Stemmons Freeway and Dallas CBD submarkets saw the most growth during second quarter, with 58,489 square feet and 42,689 square feet respectively. Vacancy rates followed closely with net absorption. The Mid Cities vacancy rate grew by 970 basis points, jumping from 20.3 percent to 30 percent. Elsewhere, vacancy within the Dallas CBD fell slightly by 30 basis points to 27.6 percent.
New lease deals are still being done, but many companies are putting off these decisions if they can, experts say. Below are three of the largest renewals, expansions and new leases from the second quarter, according to reports from Transwestern and CBRE.
Varsity Brands: 14460 Varsity Brands Way, Farmers Branch - 135,888 square feet
Hilltop Securities: 717 N. Harwood, Dallas - 130,756 square feet
Goosehead Insurance: 1500 Solana Blvd., Westlake - 123,631 square feet
More subleases hit the market
Along with increased vacancy and less net absorption, more sublease space came to market during the second quarter.
"We weren't seeing much in March, April and May, but once June came around, we started to see some larger subleases hit the market," said Andrew Matheny, research manager at Transwestern. "Most of this space is not being listed by really large companies. It's the kind of company that might have been too big to qualify for PPP and has more than 500 employees, but isn't a Fortune 500."
Dallas-Fort Worth has just over 3 million square feet of available sublease space in the market, according to a Cushman & Wakefield report. This is an increase of almost 500,000 square feet from first quarter 2020. The submarkets with the most available sublease space are Legacy/Frisco with 595,088 square feet and the core of downtown Dallas with 506,223 square feet. One of the quarter's largest new subleases came courtesy of Pier 1 Imports Inc., which listed nearly 270,000 square feet at its headquarters in Fort Worth, according to Transwestern.
New subleases will continue to come to market, experts say, meaning the next few months could continue to be a tenant's market.
"These subleases are a fantastic opportunity for a company, like a startup, to get into nice plug-and-play space that they might otherwise not have been able to afford," said Maschera Usrey, senior vice president of Cresa in Dallas.
Tenants are also benefiting from additional concessions from landlords.
"I was talking to one of our guys the other day who was representing a tenant. The tenant was looking to relocate. When they came back to their landlord, the landlord lowered their rent by 18 percent to keep them. In my opinion, that's a smart move because of how expensive vacant space can be," said Scott Morse, managing partner at Citadel Partners.
Asking rents haven't changed much
Depending on the quarterly report cited, a number of answers exist about what's going on with asking rents. CBRE indicated that average full service gross asking rents increased by $0.80 quarter-to-quarter. JLL reported direct and sublease rents have stayed the same. Cushman & Wakefield, which compares rents on a year-over-year basis, said rents have gone down and could continue to do so.
"It’s easiest to judge this by looking at periphery submarkets, like Grand Prairie, which is not one of those prime office markets. We’ve seen downward adjustments in asking rents there. With most other properties in most other submarkets, asking rents have been flat to slightly down, or showing a growth rate of about 2 percent," said Matheny. "I think, generally speaking, landlords are holding asking rents and doing different deal structures and offering concessions like free rent to get deals done. I think we’ll see that hold continue."
Office sales stagnate
Though some new leases are crossing the finish line thanks to necessity, office transactions aren't on the same time crunch, resulting in few notable deals during the second quarter. For those that did close, experts say many were in the works prior to COVID-19 while a few closed thanks to motivated buyers and sellers. Here are some of the most notable office sales from the second quarter:
Former American Airlines HQ, 1.4 million square feet
Buyer: Capital Commercial Investments Inc.
Mockingbird Towers, 448,761 square feet
Buyer: Albany Road Real Estate Partners
Douglas Center, 398,970 square feet
Buyer: HPI Real Estate Services & Investments and Bandera Ventures
Uncertainty in regards to the office leasing market is one reason why many deals have hit pause. Another reason is the continued price discrepancy between buyers and sellers.
"We had a deal blow up last week because of the gap between buyer and seller expectations. Sellers are viewing deals through a pre-COVID lens, while buyers are looking at them from a post-COVID perspective. That gap is so great it's hard to quantify," said Morse.
Construction continues despite fewer starts
Along with landlords and tenants, developers have been feeling the squeeze from COVID-19. Many planned speculative office projects have been delayed until an anchor tenant is found. Because of this, less office space is currently under construction today verses a year ago. Nearly 6.3 million square feet is under construction in North Texas today verses some 8 million square feet during second quarter 2019, according to Transwestern. Just over 639,000 square feet of new office space was delivered during second quarter, according to CBRE. Here are the most active submarkets for new construction:
Upper Tollway/Legacy - 1.3 million square feet
Frisco/The Colony - 942,644 square feet
Deep Ellum/East Dallas - 752,730 square feet
Though some of the area's largest projects still have not announced an anchor tenant, like Victory Commons or The Link at Uptown, others will be fully occupied upon competition. They include JPMorgan Chase & Co.'s 540,000-square-foot expansion to its corporate campus at Legacy West, phase two of The Epic where Uber will eventually office, and Keurig Dr Pepper's 350,000-square-foot build-to-suit in Frisco.