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DFW Records Third Consecutive Quarter Of Negative Office Absorption

More office space is being vacated than occupied in Dallas-Fort Worth, signaling waning confidence in the beleaguered sector and a greater acceptance of hybrid and remote work.

The first three months of this year saw negative office absorption of about 699K SF, a steep decline from the 266K SF of negative absorption recorded in Q4 2022, according to new data from Cushman & Wakefield. Leasing activity was down about 27% year-over-year in the first quarter, JLL data shows, mainly due to economic uncertainty prompting larger tenants to hold off on space commitments.

Downtown Dallas

"The majority of companies are rightsizing in the current market, meaning they are downsizing into more efficient plans to eliminate unused office space," said Robbie Baty, Cushman & Wakefield’s vice chairman and Dallas office tenant representation lead. "The new hybrid work model has caused most companies to require less office space than they did pre-pandemic."

A quarter of DFW office space was vacant in Q1, while sublease availability remained elevated at 9.1M SF, per JLL. The much-discussed flight to quality is pushing demand for new or renovated office buildings, which is causing rental rates to plateau as companies compete for the best space.

The average asking rent was about $34 per SF for direct space and about $25 per SF for sublease space in Q1, per JLL data. 

“Dallas has a record amount of sublease space on the market, over three times the amount of space we had pre-pandemic,” Baty said in a statement. “Despite these statistics, rental rates and occupancy have remained flat because companies are paying premium rates to move to Class-A buildings.”

Declining valuations, increased vacancies and the higher cost of financing mean some building owners might be forced to surrender their properties once loans come due this year. Whether an owner is able to chart a path forward with its lender will likely be determined by the property's performance.

"While many building owners will be able to refinance and keep their buildings, there is a high likelihood that many buildings that are struggling will result in defaults and/or foreclosures," Baty told Bisnow.

The Metroplex’s population and job growth has kept demand relatively strong even as macroeconomic factors force some companies to trim their portfolios. Forty-eight tenants were actively looking for space as of March, according to JLL, and 40% of those tenants were looking for space in the 20K SF to 50K SF range, indicating a desire for more efficient footprints.

The construction pipeline remains robust, per Cushman & Wakefield, with 5M SF of new office space underway.