OFFICE MARKET ASSESSMENT
The DFW office market recovery is well underway as return-to-office momentum continues to build, now with its fourth straight quarter of positive absorption largely driven by leasing activity accelerating over the past year as the region continues to be the epicenter of corporate expansions and relocations.
The DFW office sector registered 433k SF of direct net absorption in Q2, marking the fourth consecutive quarter of absorption growth totaling 2.3 MSF, which has caused the direct vacancy rate to subside by 20 bps to 22.2% since hitting its peak in Q3 2021.
The Class A sector registered 309k SF of direct net absorption in Q2, improving the YTD total to 926k SF of occupancy gains. The flight to quality trend remains prevalent as newer buildings have captured a large share of the leasing demand. Class B properties have also exhibited signs of stabilization with 185k SF of absorption gains in Q2, bringing the YTD total to 107k SF.
Leasing activity has rebounded to 16.2 MSF over the trailing 12 months, up 34.4% Y-O-Y. Leasing volume totaled 4.2 MSF in Q2, up 26.1% compared to a year ago, but remains 18.6% below the pre-pandemic quarterly average. Tour activity has picked up as occupiers are evaluating their future space needs and more willing to execute on long-term leasing decisions previously placed on hold due to the pandemic.
Sublease availability rose by 493k SF to reach an all-time high of 10.4 MSF in Q2. Sublet space additions have risen by 1.6 MSF over the prior 12 months as many companies have rightsized their footprints to adjust to a post-pandemic environment.
The construction pipeline remains robust with 5.2 MSF underway (23% pre-leased) as numerous spec projects totaling 3.5 MSF have broken ground over the prior 12 months. Developers delivered 936k SF in Q2, with an additional 1.8 MSF of new product scheduled to deliver by year-end 2022.
Higher construction costs and a tight supply of new office buildings in some high-demand areas have pushed rents higher. Rising operating expenses and inflation have also exerted upward pressure on rental rates, while many landlords are offering competitive concession packages which include tenant improvement allowances and free rent in order to preserve face rates.
As the office market recovery accelerates in the year ahead, the flight to quality trend should continue as newer, highly amenitized Class A buildings in prime locations are expected to capture a larger share of the demand activity and lead to a faster recovery at the expense of lower quality assets.
The DFW employment recovery has been especially robust when compared to other markets across the US. While just over half of major metros that employ at least 1 million people have reached pre-pandemic levels of employment, the Metroplex now boasts 259K more jobs than prior to the pandemic onset. However, higher inflation expectations continue to undermine consumer confidence. The Federal Reserve has begun a sharp tightening of monetary policy. Higher interest rates will cool private investment and reduce consumer purchasing power. Even still, the long-term outlook for DFW remains positive as the region is expected to outperform other major markets as pent-up activity and inbound corporate relocations positively impact the market.