Monday, September 28, 2009

Dallas CBD office vacancy nears 30%

Tenant demand for office and industrial space in North Texas will remain sluggish and rents will remain flat for the rest of this year and into 2010, according to preliminary third-quarter research by Cushman & Wakefield of Texas Inc.

Demand for office space dropped 43 percent through September when compared to 2008 levels. The market recorded 7.16 million square feet leased year-to-date, compared to 12.6 million square feet leased at this time last year.

The overall office vacancy rate stands at 21.9 percent, up from 20.7 percent in September 2008. The vacancy rate for the Dallas Central Business District is approaching 30%, jumping from 26.5 percent a year ago to its current 29.1 percent.

The downtown vacancy rate hasn't been this high since the third-quarter of 2005, when it hit 29.8 percent, Cushman's research shows.

Job creation is the key to turning around the high vacancy rate downtown and marketwide, said Matt Heidelbaugh, senior director in the Dallas office of Cushman & Wakefield.

"We need to start hiring again," Heidelbaugh said. "We need job growth, and we need a more stable economy. There are too many unknowns out there. We need stability so decisions will be made rather than delayed."

Complicating the situation is available sublease space, which now stands at 4.5 million square feet -- an increase of 9.5 percent since the third quarter of 2008.

Asking rental rates across classes reached $20.77 per square foot, up 2.2 percent over third-quarter 2008 levels. Rates saw a jump in the last quarter of 2008, with the delivery of new class A construction completions in the Preston Center, Turtle Creek/Uptown and Legacy/Frisco areas.

According to the Cushman & Wakefield report, landlords of class A product are quoting average rents of $26.29 per square foot, an increase of 3.9% over the same period last year.

Even though quoted rates are up, effective rates are actually falling when concessions such as free rent are factored in, Heidelbaugh said. He estimated that effective rents have fallen anywhere from $1 to $5 per square foot, depending on the submarket and quality of the building.

"The reality is, they have begun to decrease," Heidelbaugh said. "Rental rates are a lagging indicator. Landlords are being very aggressive."

Office projects under construction totaled 1.4 million square feet, with about a quarter of the total being speculative. Developers are building office projects in the Turtle Creek/Uptown, Far North Central Expressway and Legacy/Frisco submarkets.

On the industrial side, overall vacancy increased to 12.4 percent from 10.1 percent a year ago. The rise was attributed to construction completions, which totaled 7.6 million square feet through September 2009, a decrease of 47.5 percent over 2008.

Speculative projects accounted for 95.2 percent of the industrial total, adding 6.1 million square feet to the market. The glut of vacant industrial space has developers holding back: Just 1 million square feet remains under construction, compared to 10.6 million square feet under construction one year ago.

Bill Hethcock

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