Why do Houston and Dallas have so much vacant office space? (Austin: sales, real estate)

[ParaguaneroSwag]

After about 5 years of Houston leading the nation in office vacancy, I got the news that this year, we got surpassed. I was a little shocked to see it was our fellow Texas neighbor of Dallas. But even more impressively, the gap between second place and third is rather LARGE!

1. Dallas: 28.7%
2. Houston: 24%

https://www.statista.com/statistics/...ros-in-the-us/
https://www.dallasnews.com/business/...-office-space/

No one else is in the 20s. Now Indo understand that as rapidly growing metros, these will tend to stay high and new developments will continue to blossom as a result of investors trying to capture growth. That plus the COVID-driven layoffs and WFH acceleration go a long way. But these numbers are shocking.

[dallasboi]

When you add a lot of new product it adds to the total number of space. Most new buildings only require 30% pre-leased space to break ground so that 70% adds to the vacancy percentage......It'll balance out.

[LocalPlanner]

Dallas, like Houston, has long had a high vacancy rate, primarily because new buildings there pop up like weeds, especially in the suburbs. Dallas' legacy 1970s-80s buildings have been largely supplanted by newer suburban and Uptown buildings, and the older buildings suffer. Downtown Dallas had a frighteningly high vacancy rate until buildings started being converted to other uses, now it's just typically high. For various reasons, Downtown Houston remained more competitive for office tenants while Downtown Dallas didn't; but Downtown Dallas still had the highest concentration of office space in the metro, so it had an outsized contribution to the amount of unleased space.

[dallasboi]

This explains everything I said in my previous post about everything balancing out....The numbers look waaaaaay worse than they really are.

"30% Vacancy, -1.3M SF Of Absorption — Houston's Office Market Hurt In Q2, But Landlords Expect Q3 Turnaround"
https://www.bisnow.com/houston/news/...he-tide-109421

[ParaguaneroSwag]

Originally Posted by dallasboi

This explains everything I said in my previous post about everything balancing out....The numbers look waaaaaay worse than they really are.

"30% Vacancy, -1.3M SF Of Absorption — Houston's Office Market Hurt In Q2, But Landlords Expect Q3 Turnaround"
https://www.bisnow.com/houston/news/...he-tide-109421

I agree 100% with your post. And I see the cycle going non stop. It just amazes me at how much investor confidence there is to build office space with vacancy being so high consistently.

[TheOverdog]

In my opinion, it's because Texas is not driven by business sales tax but rather by property tax, so the goal is to maximize property tax via building new office buildings. It doesn't really matter if they stay occupied forever, because once they are decade or so old, they start fighting property tax assessments and become less valuable, so empty or full of workers is kind of moot. Austin is also Texas-like in this regard - it has more office sq footage than San Francisco.



As a comparison based on Q1 2021 from Transwestern (transwestern.com/market reports on the left), California is driven by business taxes more than property tax due to Prop 13, and LA has only about 20milllion more sq ft of office than Dallas or Houston (both have about the same a 310m sq ft), and a lower vacancy rate, even though it's metro population is almost twice as much. All 3 also have similar amounts of office space under construction.



So finally the only metros other than LA that have more office sq ft than Dallas or Houston are NYC & adjacent NJ, at 3X the population, and only 2X the office space.



BTW, according to this report, there are other metros close to 20% vacancy like Houston and Dallas:
Atlanta, Denver, DC, suburban MD, East Bay/Oakland, Los Vegas, Los Angeles, Northern VA, and Phoenix all have vacancy rates of 15% or higher.

[LocalPlanner]

Originally Posted by ParaguaneroSwag

I agree 100% with your post. And I see the cycle going non stop. It just amazes me at how much investor confidence there is to build office space with vacancy being so high consistently.

I was just in a discussion about this the other day. Always evaluate leasing brokers' assessment of the market carefully. Remember, they get paid by the deal. So more leasing activity = more deals. The leasing activity doesn't necessarily mean overall white collar employment growth or relocations or new businesses - the vast majority is existing tenants renewing or moving. So as long as that activity is happening, brokers can be happy.

On the other hand, the article also talks about how there's not been any positive net absorption. Really, there's no indication at present that absorption will turn significantly positive in the near future. Even locally relocating companies (meaning not from out of area) are often reducing total space occupied. For the office market as a sector, this is the key statistic. So while every other sector of real estate is turning around or already very healthy, the office market is flat-out poor and not looking to turn around soon. Whatever economic diversity Houston is experiencing is simply not enough to eat up the chunks of office space necessary to improve the situation.

All that said, I have been considering that the health of the office market may be decoupling from Houston's economic health, which would be a shift from the past. With WFH and other trends, we may need to revisit our assessment of how Houston's office market truly reflects the economy. Frankly, much like what Downtown Dallas has had to face over the last 20 years, a lot of legacy buildings from the 1970s and 1980s - even ones that were traditionally considered Class "A" - may have to be redeveloped into non-office uses or just come down. That would significantly improve our market statistics.

[malcorub16]

Anecdotally speaking.

1. Urban sprawal
2. Wfh

[ParaguaneroSwag]

Originally Posted by LocalPlanner

I was just in a discussion about this the other day. Always evaluate leasing brokers' assessment of the market carefully. Remember, they get paid by the deal. So more leasing activity = more deals. The leasing activity doesn't necessarily mean overall white collar employment growth or relocations or new businesses - the vast majority is existing tenants renewing or moving. So as long as that activity is happening, brokers can be happy.

On the other hand, the article also talks about how there's not been any positive net absorption. Really, there's no indication at present that absorption will turn significantly positive in the near future. Even locally relocating companies (meaning not from out of area) are often reducing total space occupied. For the office market as a sector, this is the key statistic. So while every other sector of real estate is turning around or already very healthy, the office market is flat-out poor and not looking to turn around soon. Whatever economic diversity Houston is experiencing is simply not enough to eat up the chunks of office space necessary to improve the situation.

All that said, I have been considering that the health of the office market may be decoupling from Houston's economic health, which would be a shift from the past. With WFH and other trends, we may need to revisit our assessment of how Houston's office market truly reflects the economy. Frankly, much like what Downtown Dallas has had to face over the last 20 years, a lot of legacy buildings from the 1970s and 1980s - even ones that were traditionally considered Class "A" - may have to be redeveloped into non-office uses or just come down. That would significantly improve our market statistics.

Total office space is also up so that debunks half of this.

[LocalPlanner]

Originally Posted by ParaguaneroSwag

Total office space is also up so that debunks half of this.

New buildings are getting built, they are mostly accommodating tenants moving from existing buildings within Houston.

Are you saying that just because new buildings are happening that the market is healthy? That is NOT TRUE.