North Texas office leasing experienced a rough patch in the third quarter of 2023 as total sublease space rebounded to new highs.
The Dallas-Fort Worth office market declined by more than 716,000 square feet in the third quarter of 2023 as businesses right-sized their office space to better accommodate a remote/hybrid workflow, according to a recent office market report provided to The Dallas Express by commercial property firm Transwestern.
According to the report, net absorption in DFW fell from 950,400 square feet in Q3 2022 to negative 716,800 square feet in Q3 of this year. Transwestern noted in its report that third-quarter declines were largely due to sublease space increasing by 1.35 million over the last 12 months.
Other changes over the last year include the vacancy rate in DFW rising from 17.4% to 19.1% and rent growth remaining unchanged at +4.6% year over year. Regarding the forward outlook, Transwestern expects rent growth over the next six months to remain “compressed by reduced leasing activity.”
“Lower leasing volumes are slowing price discovery, leading to slower rent growth overall,” Transwestern said in the report. “Nevertheless, most properties continue to implement annual escalations or hold firm.”
Tight credit conditions and the right-sizing of office space have certainly created headwinds for the North Texas office market. Still, despite the reversal in net absorption, total availability remains at all-time highs of 76.8 million square feet, according to the report.
“Overall office absorption has decoupled from job growth, but this reflects companies right-sizing their footprints in light of work from home, particularly back office and large corporate facilities,” said Andrew Matheny, Transwestern research manager, per The Dallas Morning News.
Although DFW firms added 55,600 jobs over the last three months, many companies are not utilizing the same amount of office space as they did prior to the pandemic. According to the report, the average net absorption across DFW over the past five years is down by roughly 50,000 square feet.
Still, many submarkets with higher-quality office buildings are not facing the same issues attracting tenant demand as other markets in DFW.
The North Texas office markets with the most significant declines over the quarter include West Plano (-545,243 square feet), Frisco (-205,621 square feet), Allen/McKinney (-81,387 square feet), Southeast Dallas (-69,977 square feet), and Grand Prairie (-53,496 square feet).
“Even with headwinds, ‘flight to quality’ continues creating bright spots of well-positioned properties outperforming the market,” the report states.
However, despite current financial conditions and adjustments to remote/hybrid work challenging the local leasing environment over the short term, Transwestern maintains that the trend over the long run remains positive.
“Dallas-Fort Worth’s nation-leading population and job growth will support a positive absorption trend in the next cycle, rewarding operators who position assets to attract tenant demand,” the firm said.
