As the national office building faces challenges stemming from pandemic fallout and changing work dynamics, Dallas is emerging as a beacon of resilience.
National office vacancy reached 19.7% by the end of 2023, an all-time high, according to a US office market report by Cushman & Wakefield, a global commercial real estate services firm. Meanwhile, the new office construction pipeline continues to shrink, down 5.3% from the previous quarter and now less than half of its 2020 peak, according to the Cushman & Wakefield report.
However, Dallas developers’ decisions to move forward with multimillion-dollar office projects continue to buck the trend.
Office space under construction in Dallas reached 5.21 million square feet in the fourth quarter of 2023, according to CBRE, a Dallas-based commercial real estate services firm. This represents an increase of 34% compared to the level of 2018. In contrast, office space under construction in the US reached 52.28 million in the fourth quarter of 2023, a decline of approximately 46 % compared to the fourth quarter of 2018, according to CBRE.
Both Cushman & Wakefield and CBRE consider Dallas a leader in office space under construction in the US
Most of that office construction in metro Dallas is for Class AA office space, said Ryan Hoopes, executive managing director of Cushman & Wakefield’s Dallas office.
“Given the high cost of construction and capital along with labor issues in the construction industry, [Dallas office construction] it’s certainly in high numbers,” Hoopes said.
Dallas leads all US markets in office construction
Square meters, in millions, of the total running space
In fact, this level of office activity is the highest since activity peaked in 2016, according to CBRE.
In Dallas, megaprojects continue to move forward because the vast majority of these projects are already fully pre-leased, continuations of multi-phase developments that began earlier in the cycle or developed in pockets of the market with significant momentum, Jacob said. Rowden, JLL. director of research for the US office sector.
Key pre-lease for financing
According to CBRE, pre-leasing activity for trophy assets remains strong due to their prime locations and premium amenities.
“These types of buildings are the only type of office buildings that can be pre-leased and in turn obtain construction financing,” said Alexandra Cullins, senior vice president of investor leasing at CBRE . “These are the only types of office buildings that are currently able to start.”
Some of these trophy office projects being released include $500 million Goldman Sachs campusan 800,000-square-foot building in the uptown Dallas neighborhood along with another 800,000-square-foot Wells Fargo campus, Rowden said.
Additionally, 23Springs, a high-rise trophy building in Uptown Dallas, is due for delivery in 2025 and has already signed a large-scale anchor from a prominent professional services firm. Other projects in the area include Knox Street, a mixed-use development with a hotel, retail, restaurant and 150,000 square feet of office space, already pre-leased by ISN, a Dallas-based contractor management platform .
Office building image
While public construction, such as highway and street projects, remains flush with cash, high interest rates, tighter lending standards and labor shortages persist. they weigh heavily on private developersespecially for speculative business projects in the US
Dodge Construction Network forecasts that total office construction will begin to decline by 6% in 2024 and likely never to return to pre-pandemic levels. That pessimistic outlook resonates especially in the speculative segment of the office market, added Richard Branch, Dodge’s chief economist.
“When you think about that spec market, it’s a big part of the total office, but it’s also what’s been going down,” Branch said. “We believe the market continues to decline in 2024.”
The speculative office construction market comprises about 65 percent of office activity in terms of dollar value, Branch said. So while developers are finding ways to move ahead with pre-leased office construction, economists and analysts still widely expect speculative office construction to continue to decline and bring down the sector as a whole nationally.
There are also signs nationally that as developers move forward with luxury office projects hoping to capture tenants’ flight to quality, even those trophy assets have begun to falter, according to data from CBRE.
National rent has started to fall once again after a small recovery post-2020, while rents in even the biggest buildings also continue to fall. According to Cushman & Wakefield, economic uncertainty, combined with the impacts of hybrid work and recent declines in office occupancy, continue to drive occupiers to be cautious about office leasing decisions.
But the picture is different in Dallas.
“Most of the office construction happening in the metro is for AA,” Hoopes said. “These projects are pre-leased with tenants committing to some or all of the available office space in the project, which is why they can move forward. We’ve seen speculative office projects have almost stopped, with only select examples of projects moving forward.”
