The coronavirus spread its impact in the Dallas-Fort Worth office market in the most recent quarter, with the largest declines in leasing in more than a decade.
North Texas office occupancy dropped by almost 2.5 million square feet in the third quarter, following a smaller decline in the previous three months.
It's the first time in 10 years that the D-FW area has had two consecutive quarters of such office declines, according to a new study by commercial real estate firm Newmark Knight Frank.
Another report by property firm Transwestern shows that Dallas area office vacancies have risen to more than 17%.
"At least 25% of this new vacancy attributable to move-outs and expirations unrelated to COVID-19," Transwestern says in the just-released report. "The resulting impacts to space turnover have caused direct vacant availability to increase.
"One positive development this quarter was the number of new lease and pre-lease transactions among midsize and larger users, although these are likely moves from necessity that may not portend a return to normal leasing volumes."
With almost 60% of office employees still working from home due to the pandemic, it's unclear what the long-term impact on building leasing will be.
About 1.7 million square feet of the net negative office leasing in the quarter was in the Dallas area.
"While absorption is expected to remain negative for the two upcoming quarters in the office sector, the industrial sector and other property types should rebound more quickly, by year-end 2020 and as the calendar turns to 2021," Newmark Knight Frank's Director of Research and Marketing Graham Hildebrand said.
The biggest declines in office occupancy were in downtown Dallas (568,894 square feet), along North Central Expressway (304,039 square feet) and in the area north DFW International Airport (295,967 square feet)
Some of the largest tenant move-outs were in the Grapevine and Westlake areas, where businesses were relocating to other areas, according to Newmark Knight Frank.
Far North Dallas, West Plano and Frisco continued to gain office tenants during the quarter.
The latest office leasing figures probably underestimate the true amount of surplus space up for grabs in North Texas. Recent studies suggest that there is more than 8 million square feet of sublease office space available in the area.
At the end of September, about 6 million square feet of additional office space was under construction in North Texas, according to estimates from Transwestern and Costar.
The biggest blocks of new space were on the way in Dallas' Uptown district, in West Plano and in the DFW Freeport and Coppell markets north of DFW International Airport.
About 40% of the offices under construction in D-FW are already leased, Transwestern estimates.
"Beyond this, we expect speculative development to remain limited without significant pre-leasing," the researchers said.
So far the surge in vacant office space hasn't put a big dent in quoted office rents. But property brokers say tenant concessions and other incentives' are growing.
"Sublease space has contributed to softening of average rents across the market in Class A space," according to Transwestern.
