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D-FW office leasing and employment bounced back in the latest quarter

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North Texas office leasing continued to gain ground in the third quarter, despite a slower than expected return of workers.

Net office leasing in the Dallas-Fort Worth area totaled almost 660,000 square feet of space, according to preliminary third-quarter data from commercial property firm Transwestern.

“This was a very solid quarter for the Dallas market,” said Transwestern’s Andrew Matheny. “Our office jobs are 14% above what they were two years ago.

“Typically the Dallas market adds about 30,000 jobs a year in those industries,” he said. “Since the recovery from COVID, we’ve added office jobs at the rate of 80,000 to 100,000 a year.”

He said North Texas office employees are continuing to return to the workplace after heading home during the pandemic.

And business moves to the D-FW area are also fueling demand for more office space.

“There has been a noticeable uptick in employee presence after the Labor Day holiday,” Matheny said. “The fact that the number of workers is growing so much is helping the market turn around a lot faster.

“Dallas was always ahead of the nation in terms of returning to the office.”

For the 12 months ending with September, expanding and relocating businesses have occupied more than 3.3 million square feet of Dallas-area office space.

Most of the net leasing in the most recent quarters was along the Dallas North Tollway in Frisco (675,844 square feet) and in downtown Dallas (392,587 square feet).

At the same time, buildings along LBJ Freeway, in Las Colinas and Richardson had net occupancy declines, according to Transwestern.

At the end of this month, about 18% of Dallas-area office space was empty — down slightly from midyear. Some of the largest office vacancies are on east LBJ Freeway (30.1%) and in downtown Dallas (24.8%).

But that doesn’t count the growing supply of sublease office space that companies paying rent are seeking to find other businesses to fill. More than 10 million square feet of sublease space was available at the end of the quarter.

The average discount for sublease space is almost 18%.

“Even though we still have this high amount of sublease space, it’s really not competing that much,” Matheny said, except in areas where offices are tight such as Uptown.

With the vacancies in some areas of North Texas, rental incentives are now at the highest level in more than two decades, according to Transwestern.

“The amount of free rent and tenant improvement allowance is at the same high levels they were getting at their highest point after the pandemic,” Matheny said.

But quoted rents on the best and newest Dallas-area office buildings are on average 7.6% higher than a year ago.

Even with the free rent, “it’s still higher than what they were paying before the pandemic,” he said.

Almost 7 million square feet of D-FW office space is currently under construction. That’s an increase from about 5.2 million square feet in third-quarter 2021.

The largest office construction totals are in Dallas’ Uptown and Turtle Creek district and along the tollway in Frisco and West Plano.

With building expected to start soon on Goldman Sachs’ new office campus near downtown Dallas and Wells Fargo’s regional office center in Las Colinas, total office construction in the area is expected to rise in the coming months.

Matheny said about 24% of speculative office projects in the D-FW area have already been leased to businesses. “That’s a pretty healthy amount.” And total construction in the area is below recent highs.

“When you start looking at the leasing velocity, even if we see a recession, in 24 or 36 months we need more product for these companies coming to Dallas,” Matheny said. “When you start looking at the number of tenants in the market and the amount of construction underway, it looks like we are probably underbuilding in Uptown.”

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