Dallas-Fort Worth Office Market Feeling the Pain

The harsh truth is that this year could further erode the region's more than 183.4-million sf office inventory as companies continue to promote dollar conservation. "I question whether this number indicates that we've even hit rock bottom," Robert Kramp, Grubb & Ellis' director of client services, tells GlobeSt.com. He predicts the sublease glut will "begin to burn off. However, noticeable differences will not become evident for many months to come." The highest sublease space pockets are found in the CBD, with about 1.3 million sf; Las Colinas, just a shade under 1.6 million sf; and LBJ Freeway, nearly 1.3 million sf.

The renewal arena will be the telling factor as to how the year continues to play out. It could, Kramp says, cause vacancy to peak above 25% by midyear "as many leasing professionals expect renewing tenants to contract rather than expand their lease obligations." At the fourth quarter 2001 close, Grubb & Ellis pegged overall vacancy at 22.3% and rising. Kramp's best guess is that 20% to 25% of the year's deals historically are renewals, affecting somewhere between 30 million sf to 40 million sf.

For the fifth consecutive quarter, absorption is in the red. The latest count has the region in arrears by 1.46 million sf. And again, the problem children are the Dallas CBD, LBJ Freeway and Las Colinas, accounting for 66% of the negative growth, according to Kramp's research. A 28.6% vacancy is shrouding the CBD while a 27.9% rate is hanging over Far North Dallas, up another 3.9% from three months ago. Lewisville/Denton made a 4.4% gain since the last reporting period, but it's still a gloomy 33.1% vacancy for the northern end of the metroplex. In essence, just five of 17 submarkets saw their vacancies retreat from fourth quarter numbers. The real bright spot is new construction totals just 1.2 million sf and it's confined to five submarkets.

The first quarter accounting puts rent down across the board. In North Fort Worth, an odd twist has class B rent fetching more than class A: $20.30 per sf in comparison to $17.67 per sf. "It is an anomaly," Kramp says, placing the blame on Alliance Gateway. An Internet data center vacated 209,000 sf at a triple net rate and thus skewed the numbers when they were rolled up to full-service gross, Kramp says.

Overall, class A rent slipped 69 cents per sf annually and class B, 44 cents. Free rent, as much as six months, can be had without a hard search while the sublease sector, much of which is sporting at least two years to go on contract terms, is kicking in incentives of 20% to 40% under direct space rates.