$3B Of Lost Office Value In Dallas, Houston 'Hurts All Parties'

With more than 100M SF of office space sitting vacant, Houston and Dallas property owners are missing out on billions in lost rent.

Dallas had about 53M SF of empty office space at the end of the first quarter, putting it behind only New York and Chicago for the most vacant office square footage in the nation. Houston wasn't far behind in fifth place with 50M SF of vacancy.

Combined, the cities are losing out on nearly $3.2B in rent because of the vacancy, according to a study by Switch on Business, which calculated the estimated loss by multiplying the amount of vacant office space by each city’s average asking rent per SF using data from Cushman & Wakefield’s first-quarter office report. The study estimates $250B of lost income nationally.

“Lost revenue from vacant office space hurts all parties involved,” said James Barnes, creative director at NeoMam Studios, which produced the study for Switch on Business.

“Landlords and property owners bear the brunt of the loss, as vacancies mean no rent is coming in to cover mortgage payments, maintenance costs, or other operating costs associated with the building,” Barnes said in an emailed statement.

Texas-based office insiders say the study doesn't paint a complete picture because of the amount of undesirable office space in the markets that would never obtain the asking rental rate. But swaths of empty office space do create a financial drain.

The impacts of those costs go beyond the lenders and owners dealing with loan distress and ripple through communities. Local governments levy property taxes based on value, and reduced rental income can decrease a building’s valuation. 

“At some point, it’s going to eat into the tax base,” said Jay Wall III, a Houston-based senior vice president for Moody Rambin. “You've only got two alternatives if you're a government leader … you've either got to raise taxes or cut services.” 

When the commercial property tax base is compromised, residential real estate holders will pay higher taxes for fewer services, he said. 

“That’s just inevitable,” Wall said. “And by the way, the market has not bottomed out, no matter what anybody's telling you.” 

In the Dallas-Fort Worth market, ownership groups with high leverage and near-term debt maturities are feeling the value loss after acquiring properties at low interest rates, TXRE Properties President Justin Smith said. Those groups likely acquired the properties anticipating occupancies would remain above market levels, he said. 

Now many are coping with significantly reduced rent rolls, but banks still want mortgage payments. 

“Rising interest rates across America coupled with these buildings’ declining occupancy rates and lower property valuations may cause landlords to be stuck with significantly higher payments that may not be able to be paid,” Barnes wrote in the email.

Texas has had some of the nation's highest office vacancy since the pandemic began, largely due to its sheer supply volume. 

Construction tends to boom in the state due to an abundance of cheap land, a low-tax, low-regulatory environment and a growing population. But when hybrid and work-from-home trends became the norm and office occupiers fled to the newest, highest-quality buildings, average vacancy rates rose and stagnated.

DFW has a disproportionate share of office vacancies because so much of the region’s stock was built in the 1970s and 1980s following the oil boom, Citadel Partners Managing Partner Scott Morse said. 

“The majority of that vacancy … will be in product that was built prior to 2010,” Morse said. “When you look at that product and you layer in what's going on in the workplace today, it is dramatically impacting tenants’ decisions.”

Houston has also seen numerous supply booms dating back to the '80s, leading office analysts to believe the city will carry a higher static vacancy until numerous obsolete buildings are removed from the inventory.  This means a significant proportion of value will never return in the form of rent revenue, Wall said. 

“The kitschy response to that is that Houston is not overbuilt, it’s under-demolished,” he said. 

Cushman & Wakefield’s Marketbeat Houston Office Q3 2024 Report found that Class-C buildings only accounted for 9.6% of new leasing activity. But these office spaces still contribute to the city’s overall vacancy rate and don’t produce rental income. 

“While brokers may downplay their significance when compared to higher-value Class A or Class B properties, these Class C buildings still affect tax revenues and the potential for economic revitalization in the surrounding areas at the end of the day,” Barnes wrote to Bisnow. 

Wall said he believes 2025 will be a great year for office leasing, but it won’t necessarily include “needle-moving, big deals.” And lost value could cause more pain before it gets better. 

“We are all, as residents of Houston, Harris County, going to be affected,” Wall said. “Just because office building values, for the most part, are going to continue to decline.”