Rebounding Return To Office Fueling Retail, Residential Revival In Downtown Dallas

Despite the rise of remote work, the latest quarterly report from Downtown Dallas Inc. predicts a healthy rebound for commercial space heading into 2022. And retailers and residents appear to be buying into that optimism, as evidenced by increased development and leasing activity in the area.

Large leases and positive net absorption so far this year signal a return to the office, per the report. DDI says it is tracking more than 20 active construction and development projects downtown, fueling something of a boost for those businesses that depend on office to rebound strongly and foot traffic to rise.

“We continue to see people coming back to the office,” said Dustin Bullard, executive vice president of economic development and place for DDI. “There may be greater flexibility within the workday or a hybrid environment, but we think it’s really important and a great market sign that people are coming back to these offices and increasing our daytime population.”

The positive forecast by DDI is in line with predictions that DFW’s office market is making a slow but steady comeback. Keyless entry company Kastle Systems estimates that office occupancy in the Dallas metro was at 52.3% the week ending Dec. 1, an increase of about 11% week-over-week. Only Houston and Austin posted stronger numbers of the 10 metros surveyed.

The largest office deal signed downtown in Q3 was for a 51.7K SF sublet at Trammell Crow Center. However, most leases were small, with the average deal coming in at 4.7K SF. This comes on the heels of Q2, which saw the same number of leases but by much larger tenants, including FDIC, Integrity Marketing Group and Lighthouse Dallas, per DDI.

“Our buildings are large here,” said Doug Prude, DDI manager of economic development and opportunity. “When we lose a tenant it tends to be a big one, but we can gain them back in big hunks, too.”

The increase in daytime population created by office leases is driving a need for more retail, Prude said. Since the beginning of this year, downtown has netted 34 new retail businesses, which is up from the 29 retailers netted in 2019 during the worst of the pandemic.

“Your amenities really go beyond the front door of your building; you have to look at what is a quarter-mile around it,” Prude said, noting that there are more than 100 restaurants within walking distance of office space downtown. “There are not a whole lot of markets that offer what we do.”

Mike Mettendorf, who opened Parterre on the ground floor of the Santander Tower at 1601 Elm St. in November, said his all-day café is already seeing heavy traffic despite the absence of a traditional marketing push.

“We don’t launch with big balloons or fanfare; we don’t expect to hit the ground going 100%,” he said. “We’ve already been much busier than we expected.”

Mettendorf owns several businesses in Dallas’ urban core, but he said having a presence downtown has always been a goal. The generous terms of his lease were a big reason why now was the right time to venture into the submarket, he said.

“One of the silver linings of the pandemic … is that the economics of leasing a [food and beverage space] are pretty incredible right now,”  Mettendorf said. “There was a great opportunity to build something that was special, unique and local … and to do it in a way that we were nearly guaranteed was going to be an economical move.”

Mettendorf said he wants Parterre to be an amenity for residents of downtown, the population of which has steadily grown in recent years. According to DDI, downtown is now home to 14,064 people, which is up about 13% since 2019. 

“We see a lot of residential growth on the horizon, and we build our restaurants for residents,” he said. “We want the neighborhood people, the people that will come here three nights a week for five years."

According to DDI, there are nearly 600 multifamily units under construction downtown, adding to the 220 units that have been delivered so far this year. Leasing at the recently completed AMLI, The National and Atelier buildings is brisk, the report said, with renter incentives noticeably down.

A multifamily vacancy rate of 5.8% among stabilized properties and growth in average rent per SF from $2 in Q3 2019 to $2.14 in Q3 2021 indicates strong demand for apartment living downtown, per the report. 

This demand is driven not only by the influx of transplants coming from areas where urban living is the norm but also by the addition of neighborhood amenities, such as green space and parks, Prude said.

Matthews Southwest, the developer behind The Galbraith, a 217-unit multifamily project set to open later this month, aims to cater to that influx of residents. Just over 50% of the units are classified as affordable, which Senior Vice President of Development Kristian Teleki said is a pressing need in the area.

“We were able to [offer affordable units] with a very interesting mix of capital, the city’s participation, tax credit sales … the capital stack is pretty unique just to allow it,” he said. 

DDI’s Bullard said the next evolution for downtown is the infill of residential. Two to three large-scale projects are set to be announced in the early part of 2022 that would provide housing for roughly 1,800 more residents, he said. 

“Years ago, living in downtown was almost considered a novelty, and I think that’s over,” Prude said. “We are watching the emergence of a 15-minute city, and there is a desire for it.”

CORRECTION, DEC. 10, 5:09 P.M. ET: An earlier version of this story contained incorrect information in the photo caption. The caption has been updated.