DFW's 22.3% Office Vacancy Leads US Metro Pack

Researchers calculate vacancy inched up 0.5% from Q3 2001 and 3.19 million sf was under construction at year end while 72% of the 1.9 million sf of 2001's new product was still empty. However, the actual fourth-quarter numbers are somewhat better than Grubb & Ellis predicted in its early-on 2002 forecast, which factored in market volatility and called for a 23.2% vacancy.

The DFW is sure to lead the metro pack once again in office vacancy, just as it did at the Q3 2001 close, says Robert Kramp, Grubb & Ellis director of client services in Texas. At that time, metro DFW registered 21.8%; San Francisco, 15.6%; Los Angeles, 14%; Houston, 13.4%; Downtown Chicago, 11.7% and the suburbs, 17.5%; Washington, DC, 9.6%; and New York City, 8.4%.

Of the product coming out of the ground, 207,000 sf is in the Ft. Worth CBD and the balance in the region's suburban markets. Nothing is under way in the Dallas CBD. Still, builders build to earn a living and the best way to get through this year will be to take on build-to-suit projects to give the market a breather, Kramp believes. "In my opinion, Dallas-Ft. Worth has a hyper-supply of office product. If Dallas-Ft. Worth can control its new supply for 12 to 18 months, it will see a notable drop in its vacancy," he tells GlobeSt.com.

Kramp expects lenders not builders will deliver the control that's needed to get office supply in check with demand. Pre-leasing right now is riding at 40% to 50%, but watch for it to spike to 50% or 60% by year's end, he says. "That's not just in Dallas, but in multiple markets," he is quick to point out. "It's just an effective way of tempering the construction cycle."

To register on the firm's vacancy count, the office space must be physically empty. Thus, the 22.3% also includes the region's 8.4 million sf of sublease space. Kramp says Grubb & Ellis is the only firm using this methodology to get a "true" picture of the market's state of affairs.

According to Kramp, multi-tenant buildings and owner-occupied projects will be passe this year as builders chase the security of a B-T-S and tenants warm up to the office campus possibilities despite the plethora of concessions available at multi-tenant buildings. Right now, a year's free rent is commonplace; TIs are running north of $20 per sf; and parking rewards are being tossed out at the bargaining table. Still, there's the lure of an office campus, where a long-term lease gets a custom-tailored environment without the headaches of ownership.

Kramp describes North Texas as an ideal B-T-S market due to its ample land, pro-business municipalities, excellent transportation network and diversified economy. There's also the job growth, which has come under fire for being such a slacker of late, but is still strong when stacked up against many other US markets. "Only the rate of the growth is slower," Kramp says. "Fundamentally, Dallas-Ft. Worth is a market that prevails in the long run." New jobs, he stresses, are still coming to town.