How 3 Texas Cities Came To Lead The Nation In Empty Offices — And Why There May Be Further To Fall
Vestiges of the pandemic continue to grip the office market, and four years later, hopes are fading for a return to normal. In a state where higher-than-average vacancy rates are accepted as the cost of doing business — and build, build, build is the norm — a Texas-sized threat now looms over three of its largest metros.
The Lone Star State’s economy was one of the first to reopen after the onset of the pandemic, and its leaders were quick to trumpet a big comeback a year later. Office occupancy rates rose swiftly, and the state continued its streak of piling up corporate relocations.
But the self-proclaimed leader of the return-to-work movement is now staring down some of the emptiest office buildings in the country. Houston, Dallas and Austin are the first-, second- and third-most-vacant office markets among the nation’s largest 50 metros, according to Moody’s Analytics. Only much smaller Tulsa, Oklahoma, Charleston, South Carolina, and Dayton, Ohio, are more vacant.
Meanwhile, millions of square feet of expiring leases and dozens of new projects threaten to twist the knife, according to data provided exclusively to Bisnow. What comes next is sparking concern across the Texas Triangle.
“Texas is in a chicken-and-the-egg scenario,” said Wesley Prato, a partner and commercial real estate leader at CohnReznick. “The people keep coming, but at the same time, you’re still building. Eventually you’ll have to stop building to catch up on the vacancy rates.”
A historic supply-demand disconnect has done little to slow new construction. Developers chasing steady job growth, corporate relocations and the state’s booming population have turned dirt on dozens of new properties, keeping vacancy rates high even as office-return rates outperform the U.S. as a whole.
More than 25% of office space across Dallas-Fort Worth, Austin and Houston was vacant as of the end of last year, according to Avison Young. Compounding the issue are 43 office projects comprising nearly 11M SF under construction across the three metros. On average, those projects are only about 40% pre-leased, per CBRE data provided to Bisnow.
Sun Belt metros of a similar size have pipelines that pale in comparison. Atlanta had 2.6M SF of office under construction in the fourth quarter, while Phoenix had about 636K SF. Dallas and Austin each have about 5M SF in the queue.
But rapid-fire building in Texas is nothing new, CRE leaders with historical knowledge of the market told Bisnow. An abundance of cheap land and a low-tax, low-regulatory environment tend to keep development humming.
“There have been a lot of companies moving here and a lot of new developments,” said Sean Dalton, managing principal and partner at DFW-based Younger Partners. “We don’t have barriers to entry here, so you can pretty much grab a land site and build wherever you want.”
New deliveries will benefit from the flight to quality, but the pressure on older stock could lead to more conversions. Demolitions to make way for other uses have already begun to occur, and that trend could accelerate, especially among buildings where conversions aren’t feasible.
“We are not necessarily overdeveloped,” said Brooke Armstrong, CBRE’s president of advisory services for Texas, Oklahoma and Arkansas. “We are under-demolished.”
More than 50M SF of leases are set to expire through the end of 2025 across Austin, Houston and DFW, according to CoStar data analyzed by Partners Real Estate. Tenants today are looking for 34% less space on average than they were 10 years ago, per CBRE, and companies that have embraced hybrid work are taking lease maturities as an opportunity to downsize.
“No one can really predict what’s going to happen,” said Ariel Guerrero, the Texas and Denver regional lead for innovation insight advisory at Avison Young. “But from looking at how much space is facing expirations here in the near future, that's a concern among a lot of landlords, a lot of owners.”
The story behind Texas’ empty office buildings varies from city to city, and each large metro has its own plan of attack. But with several market-specific variables at play, most concede the situation will likely get worse before it improves.
“We’re going to see vacancy continue to rise in the year ahead among all markets,” Guerrero said.
DFW: ‘Crickets' From Big Tenants
Dallas-Fort Worth’s reputation as a magnet for corporate relocations has made it one of the hottest markets for office construction. Early in the pandemic, developers looking to attract the next Fortune 500 company flocked to the region in droves.
That’s one reason why there was roughly 5.2M SF of construction in the pipeline as of the end of last year, the vast majority of which being sought-after luxury, Class-A space planned for Uptown/Turtle Creek or Far North Dallas. But more than half of that space, around 59%, is not yet spoken for, and demand from larger tenants has fallen off a cliff since many of those projects were conceived.
“We’re seeing pretty strong demand in that small and medium-size space,” said Justin Smith, founding partner of Dallas-based TXRE Properties. “Where we are seeing crickets is with the large corporate occupiers. They seem to be really stuck in the mud and not making decisions.”
Corporate relocations have slowed precipitously since reaching a crescendo in 2021. Leasing activity was at its lowest point in two decades at the end of 2023, with only 5.1% of total inventory leased throughout the year, according to Avison Young.
Existing properties are bearing the brunt. Foot traffic to DFW office buildings remains substantially below pre-pandemic levels, with visits down more than 34% in January compared to four years ago, Placer.ai data shows. Many large-scale tenants have succumbed to the seismic shift in work dynamics and are looking to shed office space as a result.
“A lot of the [sublease activity] has a lot to do with higher-end tenants that are not fully back to office,” said Debra Morgan, managing director in CohnReznick’s restructuring and dispute resolution practice. “The overall office work schedule has changed, and I think it may be changed for the long-term.”
Available space increased to more than 70M SF at the end of 2023, up 40% from the market’s last peak during the housing bubble. The share of sublease space inched up to 9.6M SF, Avison Young data shows.
Cases in point: Reata Pharmaceuticals never moved into its brand-new 327K SF headquarters in Plano, while drug and medical device distributor McKesson is hoping to offload an entire building at its owner-occupied campus in Las Colinas.
A pervasive flight to quality should shield some incoming properties against weakened demand, market leaders told Bisnow. But a glut of new supply could worsen vacancy issues at existing buildings, especially as tenants look to level up into high-end office space.
“Brokers are going to use upcoming lease expirations as ammo [to get tenants] to downsize,” Dalton said. “If you think people aren’t going to look at their footprint when they have an opportunity to do so, that’s being a little naive.”
Leases known to expire in DFW through the end of 2025 comprise 23.5M SF, according to CoStar data analyzed by Partners. And tenants in the DFW market are looking for 30% less space than they were 10 years ago, per CBRE.
Owners like TXRE are combating the threat of large-format vacancies by breaking up floorplates. A Fortune 1000 banking company at one of its Dallas properties occupies more than 100K SF and plans to downsize at the end of its term, prompting Smith to structure an agreement where one floor is returned early and divided into spec suites.
The decision was partially loan-driven, Smith said, as a vacancy of that magnitude could jeopardize the company’s ability to pay down debt on the property.
“It’s not really what I want, it’s not what my partners want or what my lender wants,” Smith said of the company’s spec-suite strategy. “It’s what the market is giving us, so that’s what we are dishing up for them.”
Austin: A 90-Mph Market Now Driving In The Slow Lane
Developers saw great opportunity to build offices in Austin before the pandemic amid a tech boom that attracted investments from big-name companies like Meta, Tesla and Google.
Now, that boom is fizzling out faster than the office supply pipeline, leaving more than 5M SF of office space under construction in a market that has a 25.2% vacancy, the third-highest of all major cities in the U.S. With another 6.6M SF of office leases set to expire this year or next, according to data provided to Bisnow by Partners, experts in the state capital’s office market expect things to deteriorate before they get better.
“More supply is coming into the market,” said Carl Condon, principal at Avison Young in Austin. “Then when you layer on top of that sublease space, it just translates into a lot more supply relative to demand.”
More than 5.5M SF of office space was available for sublease in Q4 2023, according to Cushman & Wakefield, while nearly 12M SF was vacant and unleased. Another 5M SF is under construction, with only about 31% of that pre-leased, CBRE data shows.
Austin’s office market is smaller than Houston’s and Dallas’, making it more subject to fluctuations. Space completed since 2020, plus what’s still in the pipeline, will grow Austin’s office inventory by almost 25% over the next few years, the fastest rate on the continent, The Wall Street Journal reported.
Austin counts nearly 6M SF of leases maturing in the next two years. But it has traditionally benefited from a relatively high renewal rate of 55% to 60%, according to Partners data.
“[The maturations] will certainly be a factor, no question,” said Brandon Lester, Transwestern’s managing director and market leader in Austin. “But as it relates to my experience here in Austin, I’m confident in how we have historically trended in these downturns. We can recover very quickly.”
Projects funded years ago, before interest rates shot up, are still delivering today, Condon said. More than 1.7M SF of office space delivered in 2023, according to Avison Young, contributing to a negative 1.1M absorption for the year.
“We put a lot of new product on the ground,” Lester said. “Covid and all that occurred with remote working created some slowdown on the absorption front.”
A significant portion of 2023’s deliveries came from Sixth and Guadalupe, a skyscraper with 33 floors of office and another 33 of residential, making it the tallest building in the city.
Meta leased the entire 589K SF office space in late 2021. By the time the building was complete, Meta ditched plans to move in and put the space up for sublease. There haven't been any takers.
Google also seemed to bet big on Austin in 2019 when it fully leased a 790K SF, 35-story tower on Lady Bird Lake. Now that building sits empty and it’s unclear whether Google is still coming.
High-end tenants, like Google and Meta, are not fully back to the office, resulting in significant Class-A sublease availability, Condon said. And some tenants may never be back.
“Tech is much more comfortable in a remote environment,” Condon said.
Austin’s tech scene is also seeing negative indicators, as startups pull out and venture capital drops. Austin startups raised $3.8B in 2023, a 30% drop from 2022’s $5.5B. In 2021, Austin’s venture capital totaled $6.75B, according to PitchBook data.
“If they can save money in real estate and make their numbers look better for their next round of funding, they’re going to do that,” Condon said.
Austin’s office market still touts some pluses. The city has been an epicenter of corporate relocations, helping it top the list of fastest-growing large metros in the country for 12 years straight.
But job growth slowed last year, and a pullback in office requirements accompanied it. Based on the first half of last year, the number of jobs created through expansions and relocations was on pace to hit a decade-low in 2023 after setting record highs in 2020 and 2021, the Austin Business Journal reported. Things picked up in the latter half, aligning closer with 2018.
“We may have been doing 80 to 90 miles before, but now it’s more like 40 to 50 mph,” Condon said. “That seems slow, but … we haven’t come to a screeching halt.”
The city also ended Q4 with 507K SF of positive absorption and saw vacancy tick down for the first time in 18 months, which Avison Young primarily attributed to more leases in smaller spaces.
“Even though they’re small in nature, there are transactions occurring,” Transwestern’s Lester said.
Lester expects the market’s office vacancy to peak in either Q4 2024 or Q1 2025.
“There is quite a bit of new product that's in the works to be absorbed,” Lester said. “But overall, Austin is still a very attractive place for companies to want to be.”
Houston: Some Buildings May ‘Never Recover’
Houston’s current office woes are the direct result of a cycle that began nearly a decade ago with the oil bust of 2015.
The city has the highest office vacancy rate of all major U.S. cities at 26.3%, according to Moody’s Analytics, which experts attribute to company downsizings, historical supply booms and downturns in a single industry — energy.
But with Partners data showing almost 20M SF of leases expiring over the next two years, many assume the city will carry a higher static vacancy, the space expected to consistently remain empty, until numerous obsolete buildings are removed from the inventory.
“There’s a lot of obsolescence in this market,” Guerrero said. “There’s some office buildings that are unleasable that will likely never get leased up.”
Energy and engineering companies were expanding when oil prices began plunging in 2015, forcing them to reduce their office footprints, Guerrero said. This resulted in record-high sublease space in Houston that the pandemic only made worse.
“It was a double whammy. We had the oil bust and then we had Covid. So it’s been a struggle since,” Guerrero said. “We’ve had negative absorption since then.”
The energy industry’s downsizing and consolidation drove Houston’s availability rate, the space made up of both unleased and sublease vacancies, to about 28%, said Eric Anderson, executive managing director of agency leasing for Transwestern in Houston.
Houston has 54.5M SF of direct availability and 5.7M SF of sublease availability, according to Avison Young data. Another 19.7M SF of lease expirations looms over Houston this year and next, according to data from Partners, which shows Houston’s typical renewal rate ranges from 50% to 55%.
“Some tenants are going to very likely end up reducing their footprint in the process with their leases expiring,” Guerrero said.
One positive for Houston: Since its office downturn began earlier than other markets and it has a dwindling construction pipeline, Guerrero said Houston could have a faster recovery. Only about 546K SF of office space is under construction, according to CBRE data.
Yet, lease expirations remain a worry. What that means for the office market depends on who you ask.
“Expirations don’t necessarily have an impact unless there are mergers and acquisitions that make those tenants go away or their footprint reduces drastically,” said Kristen Rabel, senior vice president for CBRE.
Houston has already seen significant downsizing, to the point that some tenants are realizing they don’t have enough space and are reversing, she said. That means the office market has likely hit its nadir, Rabel said, adding that the clearing out of the construction pipeline should help going forward.
“I think we're very close to our peak of office vacancy in this cycle,” Anderson said. “There’s definitely a lull or a pause in new construction right now.”
The city consistently has one of the highest return-to-work rates in the nation, according to Kastle Systems, but that is happening mostly at newer, nicer office buildings. In Houston, there is next to no construction of new, Class-A office product, yet 79% of the city’s vacancy is concentrated in buildings constructed 20 to 50 years ago, according to Avison Young. Office product built since 2010 is only 12.2% vacant.
“We just have buildings that were built in the late ’70s and probably will never recover,” Rabel said.
The people left in the hardest position by Houston’s high office vacancy are those who own obsolete, vacant offices. There is about 5.5M SF of office space slated for conversions to other uses in Houston, barely a drop in the bucket considering the 54.5M SF of direct availability and the vast bulk in decades-old buildings.
Some Houston office buildings have already been converted to residential, including 1801 Smith and the former Texaco headquarters. Westlake 3 and 800 Bell are also slated for conversion. But it’s hard to make that type of project pencil.
“Hopefully at some point in time some of that space will get converted to another use, but that’s a challenge in itself,” Guerrero said. “The economics aren't there right now, unfortunately.”
Shifting Strategies In A Sea Of ‘So What’ Buildings
The state’s defunct office buildings will likely be converted or demolished over time. But even then, Texas’ largest metros will probably always carry higher-than-average vacancy rates.
“If we’re at 28% availability now, 20% to 23% will be the static vacancy,” Anderson said of the Houston market. “That’s just going to be the vacancy that this city is going to carry forever.”
Owners like TXRE’s Smith are hopeful that a new strategy will save struggling buildings. His company opted to deploy the spec-suite strategy across its 7M SF portfolio after realizing its average lease last year was roughly 4K SF.
More than half of DFW office deals signed in 2023 were for 5K SF or less, per CoStar. Smaller leases between 1K-5K SF also accounted for the majority of demand in Austin, according to Avison Young.
For some buildings, though, the best path forward is another use. Office-to-residential conversions in major U.S. cities have quadrupled in four years, with Dallas holding the No. 3 spot for the number of future apartment units in former office buildings, according to a RentCafe report.
Buildings constructed in the 1970s and ’80s are rarely worth more than the land they’re built on, Anderson said. Yet some tenants will never be able to afford luxury Class-A office space, which is why TXRE and Houston-based firm Tenant Managers continue to buy lower-tier buildings.
“In some cases, we’re buying for almost land value,” Smith said. “Over the last four or five years, you had to pay for vacant space. Now they’re basically giving it away for free.”
In the most extreme cases, vacant office buildings that can’t be converted should probably be torn down, said Scott Morse, co-founder and managing principal at Dallas-based Citadel Partners.
“I am never going to be the guy that says every B-plus and A-minus building might as well have a hand grenade thrown at it, it’s not worth a damn anymore,” he said. “But there are some ‘so what’ buildings that absolutely need to be blown up.”
Though the office market in Texas will probably never return to how it was before the pandemic, market leaders said there are reasons to be optimistic about its future. The state’s largest metros consistently outperform their competitors in terms of population and job growth, and many companies continue to prioritize Texas due to its business-friendly climate, relatively low taxes and skilled workforce.
“Texas is a net importer of people,” Tenant Managers CEO Nirav Shah said. “We believe as people come, companies will follow.”
