Category: News

By Steve Triolet, Younger Partners Director of Research

While most numbers like vacancy, net absorption and asking rates that are reported in our quarterly reports give a current pulse on the market fundamentals, there are a few that can be leading indicators of where the market is heading in the quarters ahead.  One of those is the availability rate and its relationship with the total vacancy rate.  If spread between the availability rate and the vacancy rate is narrowing that means that there is less of pipeline of space coming to the market or as we’ve seen in 2020 and 2021 (to-date) the availability rate for DFW office market has been steadily climbing, outpacing the rising vacancy rate.  This indicates negative net absorption ahead, along with softer fundamentals like a higher total vacancy rate.

The rapid rise in the DFW office availability over the past year has been due to a combination of direct and sublease space.  While sublease has been gaining more attention in the news, the rise in direct space available (mainly due to new construction) has far outpaced the rise in sublease space.  Available sublease space and direct space have increased by roughly 3.5 million and 6 million square feet, respectively over the past year.

By Younger Partners Research Director Steve Triolet

With roughly 9.5 million square feet of office sublease space currently available, it’s important to take a look at how long the lease terms are for the various sublease spaces.  Traditionally, subleases with 2 years or less of term left are very difficult to lease unless a direct deal is also worked out (due to the high cost of moving into a new space for a short term lease).  As of February 2021, roughly 20% of the current subleases being marketed have lease terms of 2 years or less, making them likely to roll to direct vacant space before a sublessor is found.  

Among the leases with longer terms (5 years plus), several of these are concentrated in newly constructed office properties (Uber 115,995 SF, Liberty Mutual 357,500 SF, DXC 100,267 SF and HPE 71,296 SF, among others).

This year, YP collected new toys, bicycles, scooters and helmets for children from infants to teens for Toys for Tots. This organization’s primary goal is to bring the joy of the holiday season and send a message of hope to America’s less fortunate children.

Our December #YPSpotlight, Byron McCoy, is one of the nine partners at Younger Partners. He joined the company six years ago and focuses on third-party agency leasing and some sales transactions. Byron says what he enjoys most about his role is that every day, every transaction and every client is different. Getting a property to full occupancy is especially satisfying, too. He and his wife of 31 years, Deah, have three grown children – Kent, Caleb and Katherine – and welcomed their first grandchild this year, Brooks Byron.

Salesmanship has been in Byron’s blood since he was a boy: he was a paperboy for the Dallas Times Herald from the third grade until 11th grade. He was enterprising and came up with the idea to include payment envelopes with the newspapers asking for the subscription payments to be mailed in or pinned to the mailbox, The Herald took the idea citywide with the Dallas Morning News following suit. Named Paperboy of the Year twice, Byron did TV commercials for the Herald and used the money to finance his education at Baylor University.

By Younger Partners Research Director Steve Triolet

Rates are a lagging indicator, in other words, they often don’t react initially to changing market conditions. Still, over the past few quarters, DFW office asking rates have remained stubbornly high, especially in comparison to other large markets like San Francisco and New York City (which have both seen rates drop about 10% over the past three quarters). The level of distress for owners in those coastal markets is high, so their rates have reacted more quickly.

Diving into the details of what I’m seeing in DFW office rates:
*Lincoln Centre recently raised its asking rate across the business park by $2 to $32 (NNN). The catalyst appears to be the Huitt Zollars lease signing for 32,519 SF at Lincoln Centre III. Lincoln Centre is currently well leased with an occupancy rate near 90%.

On the flipside, some properties in Hall Office Park have seen some rate reductions for direct space. Property G4, for example, at 3011 Internet Blvd recently went from $23 (NNN) to $22 (NNN). The property’s occupancy is low; 82% of the property is available between a combination of direct and sublease space.

Roughly half of the submarkets recently saw a slight decrease in asking rates while the other half had slight increases, making the overall rates relatively flat.

To date, the biggest movement in rates has been for sublease space. While the typical discount between direct and sublease space remains near 15% (which is the historic norm), more than a quarter of all sublease space being marketed does not have a quoted asking rate. Still. among the individual subleases, discounts of around 50% have been quoted. Ashford at Centura Tower I is quoting $15 Plus E, while the direct space at that property was recently quoted at $30 Plus E.

In the most extreme case at Energy Plaza, there is a very large sublease for 570k SF that has over a 60% discount in comparison to direct space ($9.50 full service rate), but that sublease has only a year of term left and has been listed on the market for over three years with no leasing activity to show for it.

With most properties taking roughly two years between breaking ground and occupancy, the construction pipeline takes time to shift from changing market conditions.  Still, I think it is informative to see how the various property types have changed over the past few years, along with some data on the current under construction pipeline.

As you can see in the chart below, the industrial market seems almost unfazed by the current recession, with almost 30 million square feet of space currently under construction (note this does not include flex properties).  

Office and retail properties are show parallel trend lines of peaking in 2016 and trending downward since (The current office pipeline is 7.1 million square feet, while the retail pipeline is 3.3 million square feet).  

With recent announcements for the office sector though (Cawley is kicking off The Parkwood, a 120,000-square foot office building in Far North Dallas.  First United Mortgage Corp. will occupy about half of the property and 

Harwood announced Harwood 14 in Uptown.  Harwood 14 is a 27 story, 360,000-square foot office project.   Haynes and Boone will be the lead tenant and will occupy about 125,000 square feet).

Of the projects currently under way for office and retail, roughly half of the square footage has been pre-leased (54% and 52%, respectively), so the market is scheduled to have over 5 million square foot of new vacant office and retail space delivered over the next two years (3.6 million square feet for office and 1.7 million square feet for retail).