Office Sublease Space In DFW Remains High, But 'The Bleeding Has Stopped'

The amount of office space up for sublease in Dallas-Fort Worth remains at a decade high, but at least it hasn't gotten worse in months, CoStar Group data shows. 

The DFW market has 9.25M SF of sublease space out of a total inventory of 399.5M SF, CoStar said.

While that's still up substantially from 6.2M SF in Q1 of 2020 prior to the coronavirus pandemic, CoStar Group Director of Market Analytics Paul Hendershot said sublease space has remained at roughly the same level for the past three quarters after shooting up quickly in Q2 of 2020. 

"We are in unchartered territories in terms of the amount of sublease space that has come into the market in the last year and as quickly as it has," Hendershot said. "But, the fact that it has slowed, we can say the bleeding has stopped to a point. And while I'm not comfortable with it, I do think it is a sign of things heading in the right direction in terms of the amount of space coming online."

Roughly 11% of the entire DFW office market is on the sublease market in which a previous tenant is looking for another end user to take over an existing lease term. 

Hendershot said it could take at least a few years to clear up the inventory of sublease space, but he believes 2021 is a bellwether as to how severe the issue gets before it gets better. 

While 9.25M SF remains a high number, the fact it hasn't escalated further in the past five or so months is a good sign for the market, Transwestern Research Manager Andrew Matheny said. 

The Class-A DFW office market has held steady for a while at 5.4M SF of sublet space, but steady doesn't mean silent. 

"We have been seeing this kind of stability," Matheny said. "Even though the [Class-A DFW office] market has been sitting at 5.4M SF, it can give you the wrong impression that nothing is happening. But what's interesting is we have been following it, and the amount of space that has been coming onto the market has been about equal to the amount of the space coming off the market." 

Matheny and Hendershot said corporate relocations to DFW could help fill in empty slots in the DFW sublease market as transitioning firms look for shorter leases with favorable rates. Most sublease spaces today have about three years left on their terms, according to Transwestern. 

Many of the groups coming in are smaller and desire space under 25K SF, which makes the region's stock of sublet space highly attractive for those wanting discounted rates and shorter lease terms, Transwestern Senior Vice President Billy Gannon told Bisnow. Gannon is seeing office landlords convert 2,500 to 7,500 SF in their buildings into more flexible, temporary office units. 

Right now, sublease space is not impacting standard market listings that go up for direct leasing, but landlords involved in trying to find subtenants are throwing tenants more incentives like tenant improvements and periodic rent relief upfront, Gannon said. 

"One thing we definitely see across the board is landlords on a direct basis have increased the amount of concessions offered to new tenants and existing tenants in their buildings," he said. "We haven't quite seen a compression in rental rates; it will be interesting to see what happens this year."