Why do Houston and Dallas have so much vacant office space? (Austin: how much, employment)

[LocalPlanner]

New buildings offering current design and better locations can attract tenants that move from older buildings. Those tenants may even pay considerably more per sq.ft. than their old location. These tenants are typically motivated by the desires of their workforce that wants to be in buildings with certain features like more access to natural light, on-site amenities like bike lockers or cafes, a mixed-use and walkable environment around the building, etc.

Some other tenants, typically not a Downtown / Uptown type of Class A tenant but more a class B or B+/A- tenant (engineering firms are a great example), may have almost all of their employees living in the outer suburbs, and so relocate to a new building there. This is why new buildings in Katy have been able to attract some tenants that had been on the west side of Houston.

[ParaguaneroSwag]

Originally Posted by LocalPlanner

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.

No. I’m saying your assessment is magnetically debunked because you said that what keeps the vacancy rates around the same and lower is older office complexes closing. And that new tenants are merely just local relocations that lower total space or at most stay the same. Were this true, total office space would have had to lower significantly but on the other hand, it’s higher.

The market is relatively unhealthy for plenty of reasons. This just isn’t one. Over saturation, work from home trends, too much investor confidence, among other reasons. The latter reason is what I mentioned in this thread. As a matter of a fact, the stock market took a clean hit this morning because of this.

[LocalPlanner]

Originally Posted by ParaguaneroSwag

No. I’m saying your assessment is magnetically debunked because you said that what keeps the vacancy rates around the same and lower is older office complexes closing. And that new tenants are merely just local relocations that lower total space or at most stay the same. Were this true, total office space would have had to lower significantly but on the other hand, it’s higher.

The market is relatively unhealthy for plenty of reasons. This just isn’t one. Over saturation, work from home trends, too much investor confidence, among other reasons. The latter reason is what I mentioned in this thread. As a matter of a fact, the stock market took a clean hit this morning because of this.

??? I didn't say older complexes are closing or have closed. Very few have done that. Instead there's a very large number of roughly 40 year old buildings that are partially occupied. The ones that qualified as Class A (now often considered Class A-) are at risk of losing what tenants they've got to newer Class A buildings.

I've said many buildings will need to close going forward, because of the excess of space and newer buildings attracting the top tenants. Adding the new buildings (and thus increasing total inventory) is part of what's worsening the overall market statistics. Demolishing or converting older buildings like what has happened in Downtown Dallas will help improve the statistics.

[ParaguaneroSwag]

Originally Posted by LocalPlanner

??? I didn't say older complexes are closing or have closed. Very few have done that. Instead there's a very large number of roughly 40 year old buildings that are partially occupied. The ones that qualified as Class A (now often considered Class A-) are at risk of losing what tenants they've got to newer Class A buildings.

I've said many buildings will need to close going forward, because of the excess of space and newer buildings attracting the top tenants. Adding the new buildings (and thus increasing total inventory) is part of what's worsening the overall market statistics. Demolishing or converting older buildings like what has happened in Downtown Dallas will help improve the statistics.

This is exactly why so many older buildings are renovating so heavily though. That’s already happening.

[LocalPlanner]

Originally Posted by ParaguaneroSwag

This is exactly why so many older buildings are renovating so heavily though. That’s already happening.

If they want to compete for tenants willing to pay Class A-ish rates, they have to, they have no choice. They have to do something to somewhat close the gap with the newer buildings. Otherwise, they have to resign themselves to being Class B. And the pro formas by which most of these buildings were purchased or refinanced assume Class A-ish rates, so they're pretty much obligated to try for those tenants. (Even though the free rent they use to entice those tenants lowers the effective rent.)

When I've asked office real estate professionals about whether there's enough demand at the Class A level to fill up all the renovating buildings, the basic answer has been, probably not, at least under our existing economy.

[ParaguaneroSwag]

Originally Posted by LocalPlanner

If they want to compete for tenants willing to pay Class A-ish rates, they have to, they have no choice. They have to do something to somewhat close the gap with the newer buildings. Otherwise, they have to resign themselves to being Class B. And the pro formas by which most of these buildings were purchased or refinanced assume Class A-ish rates, so they're pretty much obligated to try for those tenants. (Even though the free rent they use to entice those tenants lowers the effective rent.)

When I've asked office real estate professionals about whether there's enough demand at the Class A level to fill up all the renovating buildings, the basic answer has been, probably not, at least under our existing economy.

Well this is why vacancy rates are so high. Hence the post, but so far they’ve managed to balance out. We’ve already bottomed out in 2020, so while it looks bad presently, the benefit of bottoming out is it can only improve going forward. That’s the business cycle. When things are sour, it never fails that people will question the future and those who failed to invest when things went south missed out on the opportunity. It’s the same story told over and over again.

The point of the post wasn’t about why vacancy rates are so high in 2021 across the country. It’s why Dallas and Houston are so high as compared to the rest of the country. The reason is obvious: investor confidence here. The surprise for me is how long they continue to invest.

[LocalPlanner]

Originally Posted by ParaguaneroSwag

Well this is why vacancy rates are so high. Hence the post, but so far they’ve managed to balance out. We’ve already bottomed out in 2020, so while it looks bad presently, the benefit of bottoming out is it can only improve going forward. That’s the business cycle. When things are sour, it never fails that people will question the future and those who failed to invest when things went south missed out on the opportunity. It’s the same story told over and over again.

The point of the post wasn’t about why vacancy rates are so high in 2021 across the country. It’s why Dallas and Houston are so high as compared to the rest of the country. The reason is obvious: investor confidence here. The surprise for me is how long they continue to invest.

Yes, I agree it's basically bottomed out, though it may stay there for a while longer. I also agree that it's investor confidence that allows the larger new buildings to get built when they also contain some amount of spec space. You're not seeing any new buildings built full spec, which is a good thing. They get financing, get announced and go forward when they have a committed anchor tenant, so risk is mitigated. But there's still extra spec space to get filled up, and therefore the financing wouldn't happen without some level of confidence in Houston.

I think Hines' most recent building technically started full spec a few years ago, but I bet they had pretty good certainty that they would get the anchor tenants that they did.

[ParaguaneroSwag]

Originally Posted by LocalPlanner

Yes, I agree it's basically bottomed out, though it may stay there for a while longer. I also agree that it's investor confidence that allows the larger new buildings to get built when they also contain some amount of spec space. You're not seeing any new buildings built full spec, which is a good thing. They get financing, get announced and go forward when they have a committed anchor tenant, so risk is mitigated. But there's still extra spec space to get filled up, and therefore the financing wouldn't happen without some level of confidence in Houston.

I think Hines' most recent building technically started full spec a few years ago, but I bet they had pretty good certainty that they would get the anchor tenants that they did.

Supposing you’re talking about the Texas Tower, they’re actually one of the largest tenants there. They are moving their headquarters from the Williams Tower to the Texas Tower and are renovating their former space along with additional vacant space for future tenants to capture Uptown’s resurgence.

[dallasboi]

Same thing in Dallas...

DFW Office Vacancy Nears 23%

A report from Madison Marquette notes that despite a slowdown in Q2 occupancy losses — 350K SF lost versus 1.6M SF lost in Q1 — the sector notched its fourth straight quarter of negative net absorption, with a 4.8M SF net loss over that time frame.

Added to 2.7M SF of new and renovated space coming on the market over the past 12 months, the losses have driven up DFW’s direct vacancy rate 370 basis points to its highest level since the early 1990s.

https://www.bisnow.com/dallas-ft-wor...ears-23-109500

[LocalPlanner]

Originally Posted by dallasboi

Same thing in Dallas...

DFW Office Vacancy Nears 23%


https://www.bisnow.com/dallas-ft-wor...ears-23-109500

Dallas' vacancy has always been spurred primarily by the constant additions to supply, plus the large amount of "permanent" vacancy downtown (permanent until it gets demoed or redeveloped). Regardless of the extent of demand, Dallas seems to just operate at a high vacancy rate.

Right now, as your cited report notes, total demand is down somewhat. Given the continued expansion of white-collar employment there, I have to guess that firms are just occupying less space per employee than they used to. Plus digitization continues to eliminate filing / storage space.