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10 Months Into Pandemic, DFW Office Straddles Highs And Lows

Ten months after DFW shut down temporarily to deal with the first wave of the coronavirus pandemic, it's still unknown what the ultimate impact of the virus will be on the local commercial real estate economy, market leaders said while speaking at Bisnow's Dallas State of the Market Digital Summit on Monday.

Office landlords are holding their breath, knowing change is coming but uncertain of how much transition to expect and seeing almost equal shares of good news and bad, caution and optimism.

"When I talk to a lot of our tenants, they still don't have even at least a plan that they are willing to articulate to us about when they are bringing back a lion share of their employees into the office space," Billingsley Co. partner Lucy Burns said. "Yet, you have leadership making huge decisions on a long-term basis in spite of all of that."

Downtown Dallas

On one hand, corporate relocations are hot in DFW right now, and DFW appears to be outperforming the rest of the country. On the other hand, the market has 10M SF of sublease office space sitting on the sidelines and contributing to price compression. 

"Will pricing get back to where it was? Absolutely," Granite Properties Chief Investment Officer Bill Brown said.

But before that happens, Brown expects some price pressure to impact the office segment with a greater supply of space on the books. Brown said 10M SF in sublease space is alarming and Granite's office utilization rate remains less than 50% across its portfolio.

"It took in previous downturns about two years to hit the bottom, and it took about five years to get out," he added. "The question marks around this one is how much of this has been an economic recession versus a disruption to demand in our office space?"

Despite all the uncertainty, office leasing has continued.

Billingsley has been the beneficiary of sustained activity, even as large vacancies have opened up. Its Cypress Waters in Irving quickly backfilled sublease office space after one tenant moved out after being acquired and a second tenant changed its overall spatial needs. Having coveted Class-A office space available in the Irving submarket helped get a chunk of that space backfilled rapidly, Burns said.

"I'm incredibly optimistic about the amount of leasing we will probably see this year in the Dallas area," Burns said. "When I look back on 2020, I am honestly stunned by the amount of leasing that took place when buildings were empty."

Burns said current discussions with tenants and potential end users suggest they're not giving up on the office segment altogether. As evidence of the segment's long-term stability, Burns points to the fact office rates have remained firm over the past 10 months. 

Gaedeke Group CEO Sabine Gaedeke Stener said DFW office fared incredibly well this past year and is on course to perform better than most markets, particularly as more relocating businesses search the area for space.

Some tenants have received concessions since the outbreak and no one knows where the office market will end up in a year or two, but Gaedeke Stener said DFW office remains on solid footing overall compared to the rest of the country.

"What we've had economically is a massive shock to the system and yet despite the massive shock to the system, we have 1.9% of our total inventory in sublease space," Gaedeke Stener said. "Compare that to Manhatten [where it's] 4.4%, and in San Francisco, it's even worse, 7.2%, and that is in a span of 10 months."

Corporate relocations are a part of the strength — the Dallas Regional Chamber reports the number of active potential corporate relocations jumped from about 40 a year ago to 90 today. 

"If you look at Dallas-Fort Worth as a whole as a market, we have weathered this storm exceptionally well and the fact that plug-and-play sublease spaces are being snapped up is a testament to exactly that," Gaedeke Stener said.