OFFICE MARKET ASSESSMENT
The DFW office market recovery is well underway as return-to-office momentum builds, now with a third consecutive quarter of positive absorption largely driven by leasing activity accelerating in recent quarters due to expanding and relocating businesses.
The DFW office market kicked off the year with 495k SF of direct net absorption in Q1, after recording its strongest quarterly gain since the pandemic’s onset to close out 2021. The trailing 12-months absorption total improved to nearly 1.5 MSF, which has helped reduce the direct vacancy rate by 30 bps to 22.1% since hitting its peak in Q3 2021.
The Class A sector registered 616k SF of direct net absorption in Q1, improving the trailing 12-months total to nearly 1.7 MSF of occupancy gains. The flight to quality trend remains prevalent as new buildings have captured a large share of the leasing demand. Class B properties witnessed 78k SF of occupancy losses in Q1 but has exhibited signs of stabilization with only 14k SF of red ink over the prior 12 months.
Leasing activity has rebounded to 15.2 MSF over the trailing 12 months, up 27.8% year-over-year. Leasing volume totaled 3.9 MSF in Q1, up 66.9% compared to a year ago, but remains 25.5% below 2017-19 pre-pandemic levels. Tour activity has picked up as occupiers are re-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 declined by 252k SF in Q1 after hitting an all-time high of 10.2 MSF in 4Q21. Sublet space additions have considerably decelerated in recent quarters but have increased by 1.2 MSF over the prior 12 months as companies rightsized their footprints to meet the challenges of the pandemic.
The construction pipeline remains robust with 5.7 MSF underway currently 29% pre-leased. There were no construction deliveries in Q1 due to several projects being delayed but developers broke ground on numerous spec projects totaling 1.3 MSF. Looking ahead, approximately 2.7 MSF of new product is scheduled to deliver by year-end 2022.
Higher construction costs and a tight supply of new office buildings in some high-demand areas are pushing rents higher. Rising operating expenses and inflation also continue to exert 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, newer and amenity-rich Class A buildings in prime locations are expected to capture a large share of the demand activity and experience a faster recovery at the expense of lower quality assets.
Dallas remains one of the top U.S. markets leading in the share of employees who are back to their workplaces. The impact of hybrid and remote work strategies is still unclear as many occupiers are still exploring ways to optimize and reconfigure their workspace to meet new challenges and work patterns.
The long-term outlook for Dallas-Fort Worth remains positive as the region is expected to outperform and recover faster than other major markets as pent-up activity and inbound corporate relocations positively impact the market in 2022.