Adapt Or Die: As Foot Traffic Plateaus, Older Office Stock In Dallas Faces 2 Options
The threat of obsolescence in Dallas’ office market is growing as buildings settle into a new normal of being just over half-full compared to before the pandemic.
New Placer.ai data shows that foot traffic to office properties in the Dallas area and 10 other cities has plateaued at about 60% of pre-Covid averages, indicating widespread acceptance of hybrid work even among companies that hoped employees would return five days a week.
Overall, visits to Dallas-area office buildings were down more than 45% in January compared to the same month in 2020, and down more than 51% when comparing all of 2022 to 2019, per Placer.ai.
Those findings dovetail with a new report from Cushman & Wakefield showing that roughly 60% of U.S. office stock is facing competitive obsolescence. In order to survive, the report concludes, owners of that 3.4B SF will need to make significant investments into their properties.
But not every property is worth saving, particularly if its surroundings are also misaligned with evolving consumer behaviors and preferences. The superiority of offices in walkable, mixed-use environments is well documented, yet creating those environments may be outside of an owner’s control.
“It’s going to be a struggle,” said Aarica Mims, senior vice president and director of leasing at KDC. “At some point, you can’t keep putting $10M into a building that isn’t necessarily in what people think of the most highly desired location.”
Despite less foot traffic, Mims cautioned against the notion that Dallas’ office buildings were ever completely full. She estimates occupancy likely hovered around 75% to 80% prior to the onset of the pandemic, and that the Metroplex hasn’t fallen as far as it seems.
“People need to remember that we were never at 100% occupancy,” she said. “We can’t measure ourselves against that number because it’s unachievable.”
To be sure, Dallas’ office market rebounded quicker than most. Texas began its first wave of business reopenings mere weeks after the onset of the pandemic in March 2020, and many companies, like Mims’ KDC, returned to the office almost immediately.
The Metroplex also consistently leads Kastle’s Back to Work Barometer, a weekly occupancy report that studies keycard swipes at 2,600 office buildings in 47 states.
Still, it’s impossible to ignore the impact the pandemic had not just on Dallas, but on the nation as a whole. There was about 52M SF of vacant office space in Dallas at the end of 2022, according to JLL. By 2030, as much as 25% of all U.S. offices — roughly 1.4B SF — is expected to be functionally obsolete if not reimagined, Cushman & Wakefield found.
There has been a lot of chatter around the potential of adaptive reuse to save underutilized office stock, especially in the urban core. Office-to-residential conversions in the Dallas CBD drove negative absorption for the market in Q4, according to JLL. Several high-profile examples, including projects at Bryan and Santander towers, are expected to take 2M SF of vacant office space off the market in the coming months.
Still, not every building is a good candidate for conversion, particularly those with deep floor plates that lack exposure to the exterior, said Marijke Lantz Flowers, senior vice president of investments and build to suits for Billingsley Co.
Cost is also a major factor, Flowers said, with the median cost per unit estimated at $250K, according to Urban Land Institute.
“Some older buildings can be reused if they have a tall footprint, but some of the ’80s buildings, with big atriums in the middle, can’t be converted,” she said. “Those are going to have a really hard time being adapted for any kind of reuse.”
More than 70% of the nation’s office stock was constructed prior to 1990, Cushman & Wakefield found, and those properties were not built with today’s workforce preferences in mind.
As leases at those properties expire, many owners will be faced with the decision of whether to sink millions into upgrades or repositioning projects. Others may choose to let the buildings go.
“People may feel like, ‘Golly, I’ve been trying to lease this thing for two years and it’s not working, why would I throw good money after bad?’” Ben Brewer, a senior managing director in Hines’ DFW office, told Bisnow in a previous interview.
Those who do have the capital to reposition older buildings often see their investments pay off. Rents at Lincoln Centre in Dallas increased by $7 per SF after Nuveen Real Estate sunk $45M into the 1980s-era office complex last year, according to Cushman & Wakefield. The $45M worth of renovations also led the property’s 312K SF anchor tenant to extend its lease out to 2035, the report found.
Not every landlord has the cash to upgrade their property, though, and not every tenant can afford luxury space in a walkable submarket, Mims said. That should keep some level of demand intact for Class-B and C buildings.
Whether that demand is able to sustain DFW’s millions of square feet of lower-tiered properties is still to be determined.
“They’re serving a part of the market that is needed, it just might not be what these large big corporations are going for,” she said. “It’s a different type of tenant.”