As Sublease Space Hits Record High, Some Dallas-Area Companies Are Throwing In The Towel

A slew of office tenants in Dallas-Fort Worth have given up hope of saving money on real estate and are taking space back after hanging their hats on subleases that never materialized.

Eighteen subleases totaling 2.2M SF have been taken off the market for reasons other than a new tenant occupying the space since the first quarter of last year, according to CBRE. Others, still attempting to find subletters, are working in cavernous spaces that offer as much as 10K SF per employee on most workdays.

Companies looking to offload massive amounts of square footage are having the most difficulty finding takers, said Steve Triolet, senior vice president of research and market forecasting at Partners.

“Generally speaking, most of the sublease deals that are happening are 20K SF,” he said. “They’re not 200K SF or 300K SF, which is some of what these big subleases are.”

Watch manufacturer Fossil Group took about 250K SF off the market after failing to sublease half of its Richardson headquarters, Triolet said. In late April, Reata Pharmaceuticals pulled its brand-new, 400K SF office tower in Plano after trying — and failing — to find a subletter. 

“They had some takers for some floors, but they decided they didn’t want to share the building with other tenants,” Triolet said. “They’re just going to occupy their building that was built for them.”

The amount of sublease space in DFW skyrocketed from roughly 6.2M SF to more than 8.5M SF in the third quarter of 2020, CBRE data shows. Gradual increases have occurred almost every quarter since, with available space hitting a record high of 9.8M SF in Q1. 

The majority of sublease space is concentrated in industries with back-office jobs that work well from home, including healthcare, professional services and tech. About 14% is from financial companies, some of which provide mortgage services, an industry Triolet said has been hammered by a slowdown in transaction activity in the housing market.

“In most cases they’re not getting rid of all of their space, but they’re in too much space, and they’re trying to mitigate costs,” Triolet said.

Mr. Cooper, a Dallas-based mortgage company, has put multiple office locations on the sublease market, Triolet said, including about 90K SF at Browning Place II in Farmers Branch. That location has been awaiting a subletter for almost two years, but with the lease term ending in September, Triolet doubts it will get picked up.

“Nothing’s going to happen with that sublease,” Triolet said. “It’s going to roll over to direct space because no one is going to pay the cost just to take it for four months.”

This is becoming more common as a record-high amount of sublease space sits empty, Triolet said. According to CBRE, 66% of available sublease space at the end of Q1 was vacant and available for immediate occupancy.

There simply aren’t enough tenants in the market to make a significant dent, Triolet said, even as rental rates dwindle to as low as 50 cents on the dollar in the most extreme cases.

“When you have more than 10M SF of sublease space, you don’t have enough takers,” he said.

MCS, a company that provides maintenance and security for residential and commercial properties, in early May listed more than 60% of its 120K SF Lewisville headquarters for sublease, a move CEO Craig Torrance said was made after executives realized staff could work just as efficiently from home as they do from the office. 

“We’re able to process, in some cases, more than we used to in our office, and it’s more flexible,” Torrance said. “We weren’t sure there was a ton of benefit to the business to bringing everyone back.”

It’s easy to assume that companies looking to offload office space are reacting to dwindling profits, and in some instances that’s true, CBRE Executive Vice President Chelby Sanders told Bisnow in a previous interview. But in other cases, the influx of subleases is more indicative of companies finally embracing hybrid work.

“People are going to want to associate it with a downturn in the economy, when in fact, it’s just that finally companies are comfortable with how their business has reacted to hybrid,” she said. “It’s worked successfully, and it’s just a positive evolution for companies that can reduce their square footage and cut those costs.”

Only about a dozen people are coming into the MCS headquarters on a regular basis, Torrance said, so a 120K SF footprint no longer makes sense. A sublease could potentially save the company money, though he said he isn’t particularly confident the space will be picked up.

“Everybody who comes into our building goes, ‘Wow, this is huge! But nobody’s here,” Torrance said. “At some point you go, ‘Do we really need this space?’ Maybe we can sublease.’ But that isn’t something we are expecting to happen imminently.”

Whether the massive amount of sublease space on the market will translate to a surge in vacancy once terms end is yet to be seen, as many leases still have another five to 10 years left, Triolet said. Already several large financial firms — including BlackRock, JPMorgan Chase and Morgan Stanley — have called workers back to the office for a majority of the week, which may be a harbinger of more mandates to come.

“Other than a handful of very specific types of jobs, there is pressure on employees to be in the office on a more consistent basis,” Triolet said.