DFW Office Leasing Activity On Pace To Hit Lows Not Seen Since 1997
Roughly halfway through the second quarter of 2021, things are not looking good for the Dallas-Fort Worth office market: There is a risk of the sector reaching a 24-year low in leasing activity this year, according to CoStar Group Director of Market Analytics Paul Hendershot.
There has been 1.3M SF of office leasing activity so far in Q2. At this rate, Dallas won't reach 3M SF of leasing for the quarter, Hendershot said — and that would be significant.
"The last time quarterly leasing activity dropped below 3M SF was the second quarter of 1997," Hendershot said. "Basically, we are not on pace to reach 3M SF this quarter ― not a good sign."
The metro clocked just above 3M SF of office leases in Q1.
Office tenant brokers and landlord reps around Dallas said they are not surprised by the CoStar data, but they said it's hard to predict whether a rebound or downturn is around the corner with the coronavirus pandemic still going strong in parts of the world and vaccine distribution still relatively low. About 40.4% of residents in Dallas County have received at least one shot, and 52.02% of residents in Collin County, 39.01% of people in Tarrant County and 47.82% of people in Denton County have received at least one dose.
"I think we are still trying to figure out what we are going to be," Bradford Commercial Real Estate Executive Vice President Leigh Richter said. "Everybody is still waiting to see if their employees will really come back because there is a lot of pushback, particularly in office buildings. People are just not wanting to go back into high-rise buildings."
The best strategy for both sides of a potential office lease transaction may be to wait it out until the end of the year to see whether the vaccinations hold and whether coronavirus variants create further real estate disruptions.
"What I am hearing is if you have to make a decision about renewal right now, you might renew for a year," Richter said. "But, if you can wait another six months, if you are the building, you have a better shot at getting someone to sign a long-term commitment."
Dominus Commercial Vice President Aaliyah Haqq agrees uncertainty reigns supreme in office leasing today. She described what her office clients want as a bit of a mixed bag that's difficult to predict as well as dependent on the needs of each client.
"Some clients are a little bit more bullish with their approach and others are still a little bit more tentative," Haqq said.
Haqq has one client that sent its call center employees home to work during the pandemic, but it also brought other employees into the call center where they were able to work on-site while social distancing.
The formation worked out for them, making them committed to having the space for distancing efforts for those who had to return to work.
"I have another client who has a tutoring service and they had to really change their model, and now they are talking about taking on more space than they had before because they want to social distance the children," Haqq said.
Whitebox Real Estate President and co-founder Grant Pruitt said overall he remains bullish on the DFW office market and believes the slowdown in second-quarter leasing is simply carried over from a slowdown in activity during the pandemic last year.
He said interest in office leases continued to pick up this quarter, but some of the newer transactions have not been finalized yet or counted among the final office stats. Now also is the time to get concessions and deals on office space before the market returns to normal, he said.
"You are seeing all of that in the rearview mirror," Pruitt said of leasing droughts.
"I think it's hard to make a generalization based on any one year or any one quarter ... because DFW is in a really unique position for a lot of different reasons and continues to attract people and businesses. The biggest mistake I saw people make in the last recession and people are making it again today, and that's people trying to time the market. You have to play the hand that you are dealt. It's a good time to be looking at your real estate options, it really is."