Major metropolitan areas in Texas have had some success in bringing workers back to the office, but with a plethora of office space, Houston and Dallas still lead the nation in office vacancies.
Between 2010 and 2021, Houston and Dallas built more new office space than any region in the country besides New York, according to Yahoo Finance.
Texas’ two largest cities still have millions of square feet of office space still under construction, leading to the highest vacancy rates in the country.
Houston has a vacancy rate of 18.8%, while Dallas sits at 17.2% of office space listed as empty at the end of 2022, according to CoStar and JPMorgan.
Conversely, the national average of empty office space was 12.5%, per CoStar and JPMorgan’s figures.
Despite these high vacancy rates, worker attendance at occupied buildings was over 60% in Houston and over 50% in Dallas, during the week ending April 5, according to Kastle Systems, per Business News.
Commercial office space has struggled with the rise of remote work, compounded by high-interest rates and a tighter lending environment.
In Houston, around $1 billion in outstanding commercial mortgage-backed security loans will become due this year, according to CoStar. At the same time, Dallas will see $334 million in these loans mature by the end of the year. In 2024, that figure jumps to $797 million.
“Refinancing risk over the near term is high and it’s gonna be really tough because interest rates are so high,” Itziar Aguirre, CoStar’s director of market analytics for Houston, told Yahoo Finance. “There’s gonna be a lot of foreclosures. I think there’s gonna be bankruptcies. There’s gonna be a lot of distressed sales.”
Texas’ two largest cities have previously battled high commercial vacancy rates due to the fluctuation in the oil industry and the pandemic, but it did not slow down office development.
Dallas has 7 million square feet of new commercial office space under construction, while Houston has 5.3 million square feet, according to CoStar Group.
“Both cities overbuilt over the last decade when interest rates were low. And remember, Houston and Dallas never shut down during the pandemic. So in theory, they shouldn’t have empty office buildings,” Yahoo Finance reporter Dani Romero said.
“But that’s not the case. Dallas and Houston have long lived with empty office buildings due to booms and busts, including the oil bust that happened in 2014. Houston never recovered.”
Bill Kitchens, director of market analytics at CoStar Group, said that while some properties have been offering deep discounts on subleases in Houston, ranging from 25%-60%, it still hasn’t made a dent.
“The discounts out there really haven’t moved the needle, that’s the long and short of it,” Kitchens said, per Yahoo Finance. “It’s going to continue to be a headache not only for our market, [but] major markets in the U.S.”
While Houston proper has the highest vacancy rate in the country, Drew Morris, an executive vice president at commercial real estate firm Savills said a high vacancy rate combined with discounted commercial leases would make Houston an attractive market for corporate relocation.
“You can get office real estate for 40 to 50 percent off,” Morris told The Real Deal. “But with rents trending the way they are in a city this big, with this much Class A office space, at some point companies looking to relocate will have to seriously take a look at Houston because they’ll be able to get it for half.”
