The Dallas Office Market: Where Do We Go from Here?

Here’s a bit of somber news: the hardest hit metro area, in terms of the office real estate market, is Dallas-Fort Worth. In fact, Dallas has seen many companies either delaying plans to expand or build over the last year.

To give you an idea as to the gravity of the office real estate market, consider this statistic: new leases fell by nearly 60 percent over the first six months of 2009 alone. This, of course, then snowballed into increased vacancies and nearly no activity on the construction front.

New – and much stricter –underwriting standards have left many would-be buyers of office buildings on the sidelines. This, for many buyers, is more than unwelcoming news, as sales prices are very competitive.

However, sales prices for office space have remained fairly strong, given that sales prices for office buildings didn’t go through the roof during the height of the real estate market like they did in other coastal markets.
What Does the Rest of 2009 Hold?

The rest of 2009, unfortunately, looks relatively grim in terms of new leases on office space. Many industry professionals expect the vacancy rate in the Dallas-Fort Worth metro area to fall another 2.9 percent by year’s end, thereby producing an overall vacancy rate of 24.1 percent.

The rents for office space are also expected to drop nearly 6 percent as a result, thereby leaving the average price per square foot at around $15.56.

However, construction isn’t at a total standstill, as the area is expected to acquire about 2.1 million square feet of new construction by the end of the year.

Why the Continued Decline in the Office Market?

With the drop in office building prices, as well as the overall decline in office vacancies, the question remains: why has the Dallas-Fort Worth market been hit so hard?

For example, the office building prices, according to PricewaterhouseCoopers, are expected to drop 17 percent over the next 12 months.  This is much higher than the national average drop of 11 to 12 percent.

The bottom line, according to most investors, is that the Dallas-Fort Worth area has seen some of the largest corporate cutbacks in America. Other factors include global downsizing and increased international competition, particularly in the high-tech industry.

Commercial mortgage defaults and distressed property sales have also contributed to the struggling office market industry.

It is important to remember amidst all of the depressing news, is that the Dallas-Fort Worth metro area still boasts excellent job growth and industry growth, which will continue to bring investors back, time and time again.
The sales market in the office industry is, at the present time, simply in a state of flux because both buyers and sellers are confused as to where the market is headed. And, as everyone knows all too well, indecision is not a good sign in an already-struggling market.

The PricewaterhouseCoopers’ forecast, however, sees signs of recovery in both the national and local retail and office markets in 2011.