Dallas/Fort Worth Stays Ahead in Office Game

For more on the financial crisis, check out GlobeSt.com’s Webinar, “Wall Street In a Freefall—The Winners and Losers.”

DALLAS-With the world’s financial markets in a freefall, the Dallas/Fort Worth office market has closed out the third quarter on a positive note, absorbing more than one million sf. The big question is whether or not it’s sustainable in the aftermath of the global fiscal meltdown.

“Until two or three weeks ago, it looked really good for Dallas/Fort Worth. I can’t answer the question right now,” Greg Biggs, executive director for Cushman & Wakefield of Texas Inc., “because I don’t know how this financial crisis will affect the deals in the marketplace.” C&W reported Q3 office absorption of one million sf, down roughly 500,000 sf in the year-to-year comparison. Analysts for Delta Associates Inc., the Washington, DC-based research arm for Houston-headquartered Transwestern Commercial Services, say it’s more like 1.6 million sf. As always, the difference lies in the method of data collection and amount of inventory included in the assessment.

Regardless of whose numbers are used, the point is Dallas/Fort Worth’s office absorption has stayed in the black all year. C&W puts year-to-date absorption at 1.48 million sf for a 194.5-million-sf inventory and Delta pegs it at three million sf for its 276.9 million sf of inventoried space. C&W places vacancy stands at 20.7%; Delta says its17%.

What lies down the road, though, is a certain hike in sublease space after the region registered a 9.1% drop from its Q3 2007 total, according to C&W. Currently, there is roughly four million sf of sublease space available. “However, we do expect an increase in sublease space of at least 10% over the next year,” the C&W team forecasts.

Biggs stresses it’s too early to tell the impact of the financial industry’s shake-up on the region’s office market, which is home to all giants in the banking and financial industry as headquarters space or regional HQ space. “I don’t know if the reaction has come back down to the brokerage community as yet,” he says. “Everyone is in a wait-and-see mode to see how this shakes out.”

Biggs, like others, says Dallas/Fort Worth is better positioned this time than in previous downturns because it didn’t overbuild. C&W reports 4.82 million sf is under construction; Delta has it at 6.75 million sf, which includes renovations and 3.5 million sf of spec projects. The Delta team tracked 4.5 million sf of deliveries to day this year, an increase of 1.6 million sf from Q3 207. “Forty percent was leased upon delivery, compared to 48% a year ago,” researchers say. At the Q3 close, Delta says 52% of the rising class A had been preleased.

Dallas/Fort Worth has spent years overcoming the Fed’s long ago red flag as an overbuilt metro market. Has the region learned its lesson? “This time, it has,” Biggs says. “The construction level is nothing compared to the past.” And, he is quick to point out that what’s going up has a majority of the space already committed.

What remains to be seen is how building owners will use tenant-improvement reserves in light of the financial crisis. Biggs says he’s not heard of any problems on that front, but does urge tenants and their brokers to exercise caution in their contracts. “You have to have a commitment by landlords that they have the funds for tenant finish-out, but you have to be prepared for all kinds of occurrences,” he stresses. “Know who you are dealing with, know who is trustworthy and make sure you have contingencies in leases to make sure you’re covered. We have that in every lease.”

Biggs also is quick to point out that post 9/11 kept the office market in a slump about one year. “Headquarters will still need locations and people will get back to business. People will figure out a way to make this work,” he concludes. “People are going to be conservative now about growth projections and real estate until they get a handle on what they need.”