3 Is The New 5: Jittery Texas Tenants Halve The Length Of Average Office Leases

Three-year office leasing terms are the new sweet spot in Texas, according to research from Partners Real Estate finding tenants in four major metros have cut the length of leases nearly in half over the past 12 months.

A report released Thursday analyzed about 5,000 office leases signed in Austin, Dallas-Fort Worth, Houston and San Antonio over the past year. In each market, 44% to 56% of new lease terms were for a three-year period, down from the historic long-term average of five years.

Less than one-year terms made up the next highest proportion of new leases, ranging from 16% of leases signed in DFW to 30% of leases in Austin.

“There’s been a lot of uncertainty in the office market. Tenants are a little bit hesitant to commit to longer terms in general,” Steve Triolet told Bisnow. Triolet is Partners’ senior vice president of research and market forecasting and author of the monthly Partners Market Edge report.

Factors contributing to the increasing popularity of shorter leasing terms include the continuation of remote work and the general consensus that a recession is approaching, he said.

“Those things make business leaders, the ones that are signing these leases and making these decisions, a little bit more hesitant to pull the trigger on something that’s traditionally more five to seven years," Triolet said. "They’re doing about half that."

The only real exception to the shorter-term trend has been larger tenants moving into new construction. Generous tenant improvement packages are successfully motivating those tenants to commit to longer terms, sometimes up to 15 years, the report indicates.

Those only represent 1% to 2% of deals, however, Triolet said.

Houston has the lowest proportion of three-year terms at 44% and the highest proportion of five-year terms at 21%, according to the report. Triolet generally attributed Houston's showing to the fact it is an energy-centric market, although he said that was a bit of an oversimplification.

Including energy companies and professional services, half or more of the businesses in Houston are focused on energy, he said. 

“It creates some interesting dynamics for Houston in that you have to not just look at the macro U.S. economy, you have to look at the energy sector and what that's doing to the local market there,” Triolet said. 

Energy companies also tend to acquire each other more than other companies, he said.

Three years is also the sweet spot for sublease space terms over the past year, according to the report.

Subleases are “kind of like a Goldilocks thing,” Triolet said, explaining that in the case of many new completed buildings, tenants advertised more available space than they actually needed to get rid of. For example, a tenant might list six floors for 10-year terms, but give potential tenants options of which floors to take and for how long. 

The numbers can be misleading because not all the space listed for sublease is available space, he said.

“They’re casting a wide net as far as trying to have their space be attractive and affordable to get it off their books [and] to control cost,” Triolet said.

Any time there’s a big economic shift, companies and industries are wont to pivot, he said. Going forward, a big “tug of war” between management and the rank and file will help determine what companies need from their office spaces.

“Companies want to be decisive and go forward with their business, but they’re getting a lot of pushback from a portion of their employee base,” Triolet said. “That’s one of the things outside of the economic uncertainty that’s driving these shorter term leases.”