November 2, 2016
CBRE recently issued its “Texas Triangle Office Markets: 60 Degrees of Separation” report, which discussed the unique attributes of the Austin-Round Rock, Dallas-Fort Worth-Arlington, and Houston-The Woodlands-Sugar Land office markets. Connect’s Amy Wolff Sorter obtained extra commentary from CBRE’s Robert Kramp on how the office markets are behaving.
Q. Let’s start first with the Dallas-Fort Worth area. Back in 2001, Boeing decided to move to Chicago, rather than Dallas. How have things changed in DFW to the point that the Toyotas and State Farms of the world want to be there?
A. Boeing’s decision to move to Chicago revolved around cultural amenities, of which DFW has expanded upon over the last 15 years since Boeing’s announcement. The fact that Boeing’s former CEO (who was at the helm during their 2001 relocation) since lived in Frisco, TX after his departure from the aircraft company is a testament to DFW’s continued evolution not just as a corporate hub, but a 360-degree destination for businesses, residents and tourists alike. Downtown Dallas has since woven the AT&T Performing Arts Center, the Morton H. Meyerson Symphony Center, the Perot Museum Nature of Science, and the Nasher Sculpture Center into the fabric of its cultural arts landscape. Additionally, Klyde Warren Park has played a key role in placemaking for Greater Downtown Dallas and serving as an amenity for the expanding urban population.
Also, DFW had been attracting major corporate relocations long before Toyota and State Farm stepped into the frame – the first wave of corporate clustering began in the late ‘70s when Las Colinas first started developing. The momentum has picked up over the current cycle due to DFW’s robust population and job growth, thereby becoming even more of a magnet for regional and national HQ locations.
Q. Moving down Interstate 45 to Houston, you mention in the report that energy is this region’s “fickle king.” Has Houston’s office sector bottomed out?
A. Not at all. Downward movement is still expected as energy companies continue announcing bankruptcies and layoffs. Sublease space continues to grow, surpassing 12.2 million square feet in October. More than 3 million square feet of sublease will come back on the market between now and 2018 as terms expire, and another 1.5 million square feet in 2019.
While leasing activity slowed throughout 2016, sublease activity was at an all-time high. More than 1 million square feet of sublease space has been absorbed so far this year. As occupiers move into sublease space, they leave behind vacant space, resulting in negative absorption. This trend will continue until either landlords get more aggressive or the high-quality sublease space is absorbed.
The good news is that much of the activity has been driven by the legal industry. The medical and downstream sectors have also continued to perform well. Houston’s office market is cyclical and has its ups and downs; although supply is increasing and demand has slowed, Houston is resilient and we could see the market begin to pick up in three to five years.
Q. The third corner of the triangle, Austin, is growing due primarily to tech businesses. Do you see the office sector continuing to expand?
A. Historical office occupying employment indicates that the tech sector will continue to be a significant growth component of office employment. Past and current trends point toward the tech component accelerating its proportional share of space within the Austin office market, relative to other space usage. With the expectation of robust tech demand and record low unemployment of 2.9%, job growth should sustain steady levels of future office demand.
The recent construction cycle, beginning in 2012, has begun to taper after delivering more than 3.8 million square feet through Q3 2016, with an additional 2.1 million square feet still in the pipeline. Throughout this recent development cycle, Austin’s office demand has kept pace, with absorption totaling 7.02 million square feet since the beginning of 2012, driving vacancy to a stable 9.3%—significantly lower than the other major Texas markets.
For comments, questions or concerns, please contact Amy Sorter