Dallas Office Market's Get-Tough Tact Tempers Negative Signs

The Federal Reserve Bank says Texas possibly is in a recession. Grubb & Ellis Co.'s year-end market report puts 2001 negative absorption at 2.98 million sf, the highest in a decade. Still, the worst could be over, says the firm's research team. Fourth quarter 2001 stats showed just 86,757 sf of negative absorption in comparison to 1.97 million sf in Q3.

There's still the sublease space conundrum that have estimates falling somewhere between eight million sf and 13 million sf in Dallas' 181.8-million sf inventory. The norm is four million sf.

Sublease space and new deliveries have building owners particularly aggressive. One owner in the High Five construction area reportedly gave a discount somewhere between 25% to 50% to a large tenant with one year left on its lease. The tenant renewed.

Charles Bissell, managing director for New York City-based Integra Realty Resources' Dallas office, says 22% of the vacant 40.6 million sf is sublease space. The number, though, is skewed because some bean counters aren't including those empty buildings being held captive by owners not actively seeking tenants for their dark rooms.

The real certainty in the marketplace is "it will be tough for awhile," Bissell tells GlobeSt.com. "How long? I think we're facing two, three four years to get back to the balance level." In Dallas, the "balance level" is 90% in comparison to other metros' 95% norm. The entrepreneurial building spirit of the Dallas-Fort Worth market and empty older product have kept overall occupancy at 90% or below for the last decade, Bissell reports. Grubb & Ellis says overall occupancy is now 77.7%.

John Aldrich, Dallas president for Boston-based Colliers International, says markets like Dallas are the real measure of brokers' ingenuity and stamina. "There's lots of opportunities for brokers who keep their nose to grindstone and ear to the ground. If they do that, they're going to make money in this market," he stresses.

The closing flow might be slow, but negotiations are fruitful as hungry building owners sweeten the pot for bargain-shopping tenants. It's not so much that rent's dropped, says Aldrich, but rather incentives abound. Six months of free rent versus six months of empty office space makes a good bargaining chip for tenant reps. Class A rent slipped just 37 cents per sf annually and class B's down just 13 cents per sf, according to Grubb & Ellis.

Dallas Fed economist Fiona Sigalla says 2001 slammed the Texas economy. She faults the US and Mexican recessions, falling energy prices and sharp cutbacks in high technology. While the "R" word is part of the Texas landscape, it will be less than half as bad as it was in the recessions of the 1980s, she concludes.

Nosedives by high-tech and telecommunications companies translated to more than 500,000 sf being vacated last year in both Las Colinas and Richardson-Plano submarkets. The latest space count has Las Colinas sitting with about 5.1 million sf empty in a 23-million sf inventory and the famed Telecom Corridor with 2.9 million sf vacant in its 14.6- million sf inventory of mostly high-tech buildings. And more space is coming: 202,539 sf in Las Colinas and 448,615 sf in Richardson-Plano. Overall, there's another 3.2 million sf being primed for the Dallas market yet that's the smallest amount in more than two years, say the researchers, who predict an up tick in the second half of this year.

The Grubb & Ellis numbers paint a harsh picture of the brutal reality in much of the market, save for the bright pockets of Central Expressway, Far North Dallas and Uptown/Turtle Creek. Optimists say the turn-around is right around the Q2 corner. The reality, says Bissell, is "the single biggest factor in (Dallas) recovery is getting the tech and telecommunications sectors back up.