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Texas Office Market Update | Q4 2016

by CoyDavidson on February 15, 2017

The State of the Texas Office Market

The cyclical slowdown continued across major office markets in the United States, with more than half the markets seeing an increase in vacancy amid slowing leasing activity. The major Texas office markets were not immune from this trend.

  • The Austin office market remains strong but appears to be leveling off.
  • Dallas office vacancy continues to shift upward in modest increments.
  • Houston is still feeling the effects of the energy downturn but is starting to stabilize.

AUSTIN


Austin’s Office Market Seems to be Leveling Out
While Austin is still very much a landlord’s market, it’s not the same feeding frenzy it was six to twelve months ago. Base rental rates stayed largely flat, while building operating expenses continued to increase (primarily due to increasing property taxes). Our team has seen a number of large office building transactions over the last few years at historically high prices per square foot. As long as this activity continues, Austin will continue to see higher property tax valuations. Our local experts have also seen a great number of new subleases flooding the market in the past few months, with a majority of these opportunities being on or near the 360 Corridor. These include some of the traditional “we don’t need the space” or “we outgrew our space” scenarios, but we’re also seeing a flight to areas that have less traffic or more walkability. Subleases will continue to become more prevalent based on the new co-working phenomenon and a changing workforce that has millennials seeking “live, work, play” locations. In years past, short-term subleases filled quickly with startups looking for furnished spaces and short lease terms. Now, with the influx of co-working options in Austin (short term, furnished, and also having the cool-factor), subleases face increased competition and are likely to sit on the market… read the full report

DALLAS-FORT WORTH


Sales Surge, Rates Rise, but Absorption Eases to Close 2016
The fourth quarter of 2016 wrapped up a strong year for the Dallas-Fort Worth real estate market in terms of office sale activity, but moderate in terms of leasing. After seeing over 6.4 million square feet of absorption in 2015, the highest in almost a decade – absorption slowed considerably in 2016, totaling just over 3 million square feet – less than half of the prior two years. (Gross absorption, the measure of total square feet leased and occupied not accounting for space vacated in the same market was higher than the prior year, indicating more space was vacated even though activity was strong.) Two factors may account for this: fewer deals coming from outside the DFW market and consolidation of tenants already present. Consolidation has been a theme as major companies move dispersed locations into newer offices and firms modernize their space, reducing the square footage per employee. The year saw record prices for office sales. Sale prices in the Uptown submarket for 17Seventeen McKinney and 2000 McKinney both topped $500/sf – the highest seen for urban Class A office, and Legacy Tower fetched $400/sf – the highest ever for suburban office. 2016 was also the year of the sale-leaseback with State Farm completing the sale-leaseback of its CityLine operations center for $822 million, JCPenney selling its Legacy West headquarters for $353 million, and Verizon selling its regional headquarters for $344 million. With record-high sale prices, companies, such as Raytheon whose CityLine campus recently went on the market, are seeking to cash-in their valuable real estate assets… read the full report

HOUSTON


Houston’s Office Market Coasts into 2017
After several challenging years, Houston’s office market saw some improvement over the quarter. The market will most likely remain relatively flat, coasting through 2017. The citywide vacancy rate increased by only 40 basis points between quarters, and absorption, although negative, was only a third of the previous quarter’s total. Q4 2016 witnessed several energy companies remove available sublease space as they began to shift out of the contraction mode and begin looking forward again. Although leasing activity remained lower than normal, deals are getting done and some of those even include pre-leasing of proposed developments. Houston’s office market posted 0.1 million SF of negative net absorption during the fourth quarter, an improvement from the 0.3 million SF of negative net absorption posted in the previous quarter. Houston’s citywide office vacancy rate rose significantly on an annual basis, increasing by 220 basis points from 15.3% to 17.5% in Q4 2015. As stated earlier, the vacancy rate rose by only 40 basis points over the quarter, much less than in previous quarterly comparisons during 2015 and 2016. No new buildings delivered during Q4, however, 1.8 million SF of the 3.1 million SF in the construction pipeline is scheduled to deliver in Q1 2017. There have been several recent press announcements of tenants pre-leasing space in proposed buildings, indicating a preference for newer innovative space. Although this would appear to add vacant space to an already saturated market… read the full report

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