Jump In DFW Office Subleasing Highlights Tenant Woes And Market Uncertainty
A large upswing in Dallas-Fort Worth subleasing activity appeared in the office asset class this summer, creating opportunities for tenants and a source of potential stress for landlords struggling because of the coronavirus pandemic.
A report from CoStar Group shows the DFW office market typically averages 5M SF of sublet space or 8% of total leasable office space. It is a figure that has expanded dramatically in the past seven months in the wake of the pandemic. In the fourth quarter of 2019, DFW had 6.2M SF of total sublease space listed, a number that grew by 1.3M SF to 7.5M SF by the end of July, according to CoStar Group Director of Market Analytics Paul Hendershot.
“Oftentimes, [people] look at subleases, or the availability of sublease space, as a leading [economic] indicator," Hendershot told Bisnow. "It’s kind of the canary in the coal mine in terms of office activity."
Hendershot noted DFW witnessed a drop in general leasing activity after the coronavirus outbreak in March, even as the amount of sublet space increased. While this trend could create more affordable office deals in the DFW sublease market for tenants, it's not necessarily a positive indicator for the office sector as a whole, Hendershot said.
"If you are a landlord, it's a red flag for financial instability [on behalf of the tenant]," Hendershot said. "Obviously, they are looking to make some kind of move that doesn't require them to use their space. If I were a landlord, I would be concerned at this point in time."
Transwestern discovered the same trend, noting in its Q2 office market report that DFW sublease availabilities began to escalate in June, and most are hitting the market with space that is above 15K SF in size.
"On the research side, we have been tracking it since the beginning of the first stay-at-home order in March," Transwestern Research Manager Andrew Matheny said. "Subleasing was pretty quiet in March, April and May. Then, in June and July, it started to pick up to where I think when we were writing our Q2 report, there had been maybe about 400K SF that had come on the market. Then, within the first 39 days of Q3, we are looking at [about] 1M SF that has come to market, so it has really picked up the pace."
An increase in sublease space can serve as a potential Band-Aid for the market, giving tenants facing times of financial hardship the opportunity to stake out shorter, more affordable leases as subtenants, Transwestern Senior Vice President Billy Gannon said.
Growing sublease activity also could suggest tenants are using less space or giving up their existing spaces altogether, as the office market grapples with the workforce staying at home.
"It is something that we do monitor and track because it definitely can be a telltale sign that tenants are giving back some space," Gannon added.
On one hand, landlords with existing tenants who are struggling can benefit if a subtenant takes over a lease and ensures ongoing cash flow. But even under that equation, landlords could be facing a losing proposition in terms of their negotiation power in today's market, according to Transwestern analysts.
"From a landlord perspective, the sublease space becomes important, especially when it comes to large quantities [of sublet space] because it tends to compete directly with other spaces they have available," Matheny said.
In DFW, 10 submarkets hold 80% of all sublet space, with the Upper Tollway-West Plano and Dallas Central Business District markets each having more than 1M SF of sublet space, Hendershot wrote in his latest CoStar sublease report.
“The largest sublease opportunity in a central business district is Energy Plaza, in downtown Dallas, with 570K SF available,” Hendershot wrote. “In the suburbs, the largest is One Legacy Circle in Plano, with 201K SF.”
Contact Kerri Panchuk at email@example.com.