October 07 2021

Dallas Office Market Report – Third Quarter 2021

OFFICE MARKET ASSESSMENT

The DFW office market showed encouraging early signs of improvement in the third quarter as occupancy losses have decelerated considerably over the past year and quarterly leasing activity has sharply accelerated to pre-pandemic levels.

The DFW office market registered its lowest quarterly occupancy loss since the pandemic’s onset with 236k SF of direct space becoming vacant in Q3, following four consecutive quarters of negative absorption cumulatively totaling 4.8 MSF of red ink.

Despite the improving metrics, the market-wide direct vacancy rate slightly rose 10 bps to 22.8% in Q3 and has moved up 180 bps since year-end 2020, approaching its highest level since 1990.

The Class A property sector posted 144k SF of direct net absorption in Q3, improving the YTD total to 570k SF. However, Class B properties continued to struggle with 200k SF of negative absorption in Q3 and has experienced 1.4 MSF of occupancy losses YTD resulting from business contractions.

Leasing activity has sharply accelerated totaling 4.2 MSF in Q3, up 30% from Q2, reaching its highest quarterly volume since the pandemic’s onset. Tour activity and inquiries have picked up over the past 6 months as occupiers that postponed their long-term leasing decisions reenter the market and are reevaluating their future space needs.

Sublease inventory rose by 509k SF in Q3 to hit an all-time high of 9.5 MSF, which largely resulted from Uber and Omnitracs placing 587k SF on the market. Sublease space additions have slowed over the past year, but additional space could become available as companies formulate return-to-office plans.

Though office rent growth had begun tapering off prior to the on-set of COVID-19, inflation is exerting upward pressure on rental rates, while many landlords are offering greater concessions on tenant improvement allowances and free rent in order to preserve face rates.

Developers have delivered 2.0 MSF of new product YTD with an additional 1.2 MSF (33% pre-leased) slated to deliver by year-end. As a result, direct vacancy levels are expected to climb higher through the end of the year, but there are increased signs of stabilization as we move into 2022.

As the economic recovery continues and the office sector enters its recovery in the next 6 months, trophy and Class A buildings in prime locations will continue to outperform the broader market and experience a faster recovery at the expense of older office buildings.

Dallas continues to lead the country in the share of employees who are back to their workplaces following the COVID-19 shutdowns. As more firms return to the office, the extent to which a hybrid work model is embraced will provide a clearer insight into future space demand and shifts in how space is being utilized.

The long-term outlook for Dallas-Fort Worth remains positive as the area is expected to outperform and recover faster than other major markets as pent-up activity and inbound

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