DFW Clocks Negative 709K SF Q1 Office Absorption — Far North And Class-A Are To Blame

Dallas-Fort Worth’s office market slid into a valley in the first quarter with net office absorption falling to negative 708K SF, a new report from Younger Partners says.

The decline is tied directly to the exodus of large corporate office tenants (including HPE and Bank of America) from the Legacy area of Far North Dallas, the commercial real estate firm said. That submarket saw 904K SF of negative office absorption in Q1, which counteracted the positive 195K SF in the rest of DFW. 

That submarket also includes West Plano, home to several major corporate headquarters and a slew of office buildings.

Younger Partners is not predicting a slowdown marketwide or linking the sudden drop in absorption to larger office trends just yet. 

“I don’t think it’s necessarily a sign of things to come as far as that level of absorption, especially in one submarket,” Younger Partners Research Director Steve Triolet said. “The underlying reason for it though is tech companies have been one of the bigger tenants that have been leasing space and as they move into newer properties, they are shrinking their footprint.”

The choice to downsize from larger to smaller offices is somewhat new for tech firms, but not for landlords that experienced this scenario with another type of tenant several years back, according to Triolet.  

“We are seeing consolidation in the tech industry similarly to what we saw with the law firms several years ago, where they are not necessarily decreasing their employee count but the physical amount of space per employee is decreasing fairly significantly on the tech front,” Triolet said. 

He painted a much more nuanced picture of the entire DFW office market in his report than the initial number would suggest. 

Technology and financial services firms continue to be active in the leasing segment, and coworking spaces continue to grow across DFW with another 500K SF of coworking-related space committed in just the first few months of this year, he said. In 2018 alone, coworking companies added 400K SF in DFW, according to Younger Partners data. 

Triolet predicts it will be a soft landing in 2019 with office demand pulling back just a bit, rates flattening and deals taking a bit longer to complete. 

New construction is showing no signs of abating, and that is where some of the pain is coming from as older buildings, particularly Class-A buildings, compete with newer product, he said.  

The DFW area had 7.9M SF of rental office space under construction last month, with 6.9M SF expected to be delivered this year alone, Younger Partners said. 

That new competition is hurting existing Class-A properties, and negative absorption occurred mostly in those top-tier properties in the first quarter. Class-A during this period reported negative absorption of 1.1M SF, according to Younger Partners. Class-B spaces, on the other hand, recorded positive absorption of 440K SF, while Class-C absorption remained flat at negative 31K SF. 

“There doesn’t seem to be much of a slowdown for the appetite for new construction. I guess one of the potential pain points is older properties that are losing some of these larger tenants might have a challenge backfilling them,” Triolet said. 

Despite experiencing negative net absorption in the first quarter, the overall DFW occupancy rate remained flat at 83.8% due to demolitions and conversions of properties to other uses. 

Class-A and B occupancy rates increased to 94.5% and 85.4%, respectively, while Class-C’s occupancy rate declined to 81.3%.