Despite several ongoing projects to erect office towers in North Texas, the first quarter of 2023 has shown a decline in leasing activity in the office sector.
According to Transwestern, a commercial real estate firm based in Houston, net office leasing in Dallas-Fort Worth fell by almost 680,000 square feet in the first three months of the year.
“The numbers are starting to reflect a softening market,” Andrew Matheny, a research manager at Transwestern, said, per The Dallas Morning News.
In the first quarter, more than 18% of DFW office space was empty. The highest vacancy rates were seen on East LBJ Freeway at 29.3%, in downtown Dallas at 27%, and in the Irving Freeport district at 21.1%.
This poor showing marks the second consecutive quarter of sluggish leasing activity and follows a drop of more than 1 million square feet in DFW office leasing in 2022.
As The Dallas Express previously reported, commercial real estate lenders have grown concerned about the turbulent market amid looming economic uncertainties.
As a report from Morningstar Credit Information & Analytics LLC published on March 23 showed, office buildings appear to be the most vulnerable.
Six Dallas-area office properties are currently on their watchlist, and two office properties worth $100.8 million are with the special servicer.
For instance, the 2100 Ross office tower located in downtown Dallas has over $86 million in loans and its occupancy rate dropped below 60% last November.
Morningstar data indicated that the local office vacancy rate rose from 18.3% to 22.4% between 2017 and 2022, while the average rent has barely changed at all in that same time frame.
Moreover, the growing supply of sublease space is adding to the pressure on the office market.
Companies have dumped more than 11 million square feet of excess offices in the DFW area, seeking to sublease to other tenants.
Evidently, strong job growth in North Texas has not translated into an uptick in office leasing in most local business districts.
Yet not all properties or areas are experiencing the same difficulties.
While properties along the Dallas North Tollway in West Plano and North Dallas saw an increase in tenants, Las Colinas, Uptown-Turtle Creek, and downtown Dallas all experienced net leasing declines.
Most of the recent office leasing activity has been concentrated on the newest and highest-quality buildings.
This may positively impact the new office towers currently under construction in DFW.
For instance, Stonelake Capital Partners plans to build a new 17-story office tower in Uptown, as The Dallas Express reported. The Dallas-based real estate private equity firm purchased the lot for the 180,000-square-foot project in 2021.
Alongside Uptown Dallas, Frisco has seen 1.5 million square feet of new office construction in the first quarter of 2023, per the DMN.
Despite this, Transwestern’s recent report predicts that the overall office leasing market will continue to weaken due to tightening financial conditions and a hiring slowdown.
“Availability and vacancy will continue to edge up and rent growth will likely remain modest. Space demand will remain below average as credit conditions tighten,” read the report, per the DMN.