Office Market is Tightening: Dallas Leads Nation in 3Q Vacancy Decline

  Leading the country in a statistic that measures decline doesn’t sound like a good thing; but when that statistic is office vacancy, it’s very good news indeed. Most major U.S. markets saw a tightening of office availability during the third quarter; Dallas led the way dropping a full percentage point in the last three months, from 19.1 percent to 18.1 percent.

The professional services sector—including insurance, IT, and financial services firms—is driving demand, CBRE reports.

“We haven’t seen this kind of consistent market activity, demand, and positive absorption across virtually every submarket in DFW in several years,” said Baron Aldrine, senior vice president at CBRE. “Other than a couple of submarkets where new construction is under way, because of limited supply and increased demand, this market will continue to see the same kind of results for the foreseeable future.”

Following Dallas were Phoenix and Washington D.C., with .40 drops (23.9 percent to 23.5 percent for Phoenix, and 14.4 percent to 14 percent for D.C.). Markets seeing a slight increase in vacancy were Boston (up by .50 to 12.8 percent), Los Angeles (up by .20 to 16.7 percent) and Miami (also up .20, to 17.8 percent).

The tightest major market in the country is New York, which has a vacancy of just 7.4 percent. It’s followed by San Francisco (9.1 percent) and Houston (11.9 percent).

Dallas’ industrial market also continued to show improvement in the third quarter, CBRE reports, with demand coming from third-party logistic companies, the food service sector, home construction, automotive, and automotive suppliers.

Brook Scott, CBRE’s interim head of research, Americas, said the U.S. office market continues to benefit from slow but steady job growth and limited office development, despite rising interest rates and weak growth overseas.

Baron Aldrine
Baron Aldrine

Locally, Dallas employment growth accelerated during the third quarter on sharp increases in the financial and professional/business services sectors, which fueled the strongest quarterly office demand in more than four years, said Sara Rutledge, director of research and analysis for CBRE. “Large, corporate user activity, led by State Farm, has reduced available office space by 25 percent to 30 percent over the past year in the Richardson/Plano and Las Colinas submarkets,” she said.

Aldrine said Richardson has a history of running either hot or cold. “It’s typically one of the submarkets that is slower to heat up, but when it starts to heat up, it happens fast—which is exactly what has happened in 2013,” he said. “With no new speculative construction under way or planned, lower rental rates, and still some supply, demand in Richardson will continue, and that submarket will continue to stay hot.”

Most major U.S. cities are seeing an upward trend in rents. Eight markets reported no new office space deliveries during the third quarter. A big exception is Houston, which saw 10 new projects wrap up during the third quarter, for a total of 1.6 million square feet—the most in the country. Of that new space, 75 percent was preleased.