Dallas’ Office Market Is Not Struggling Like So Many Others

Perot’s premonition and skilled real estate play would eventually become the Legacy Business Park, one of the nation’s densest collections of Fortune 500 corporate campuses, including Frito-Lay, PepsiCo, Pizza Hut and Perot’s Electronic Data Systems. While the park is part of North Texas real estate lore, and a development pattern that’s seen highways, hardhats and headquarters continue to move north of Downtown Dallas in search of cheap land, it’s also indicative of the way the office market of the Dallas-Fort Worth metroplex continues to stay resilient and reinvent itself in the face of current challenges. 

Amid a cratering of central business districts nationwide, the region’s continued ability to take big swings with office space, find fresh frontiers, and create new megadevelopments, attracting jobs and HQs, makes it a magnet.

“Dallas is a headquarters town, maybe more so than even a place like Austin,” said Steven Pedigo, director of the University of Texas at Austin’s LBJ Urban Lab. “Its core business functions kind of depend on corporate real estate. These large brands, Fortune 500 companies, have a corporate identity. And with that comes the need for a lot of space.”

Dallas is far from a complete deviation from the commercial real estate norm: Avison Young data from the first quarter of 2024 found regional office space availability hit 29.5 percent, near an all-time high; and the leasing during that period, 2.6 million square feet, was 40 percent below the quarterly average. But, unlike many other metros, the Dallas region has stabilized, on the positive side, for absorbing space new to the market for the last few quarters. 

In addition, landlords and owners have been less likely to give more free rent and other concessions to tenants, according to Bill Cawley, CEO of Cawley Partners, which owns nearly 20 buildings in the city. Tenant improvement allowances have moderated, too, he said, a sign of more stability.

“If I look back through the last few quarters, things have stabilized here, and, so, for me, that’s good news,” said Walter Bialas, a top Avison Young analyst. “Hopefully, this year continues to stay stable and gradually improve.”

Most importantly, the diversity and drive of Dallas’s economic engine hasn’t stopped, placing the metro in growth mode when cities like San Francisco and Washington continue to dig out of a hole of job and people loss. Inbound migration continues to be significant — 1,200 people a day on average are moving to Texas, mostly Dallas and Houston — and remains positive, despite a decoupling from population growth and office leasing due to hybrid work. While office-using job growth exceeds the historical average by 30 percent presently, per Avison Young, office usage has been flat or decreasing. Dallas-Fort Worth was the nation’s fastest-growing metro per the most recent Census info in 2023, and now boasts more than 8 million people. 

The region’s companies continue to diversify, the core’s population continues to grow, and development remains multipolar, with new towers taking shape in Uptown, Las Colinas and Frisco in particular. Goldman Sachs announced an 800,000-square-foot campus in NorthEnd, a site in the city that the bank is developing along with Hunt Realty Investments and Hillwood Urban, while the 204,000-square-foot Southstone Yards A will open in Frisco later this year.

Bank of America has pre-leased nearly half of the approximately 500,000-square-foot Parkside tower planned in Uptown, a project by developer Pacific Elm Properties and KDC that snagged a $280 million construction loan in mid-April, showing appetite for big trophy towers for name clients. And 23Springs, an under-construction project from Highwood Properties and Granite Properties also in Uptown, signed a 117,000-square-foot lease with law firm Sidley Austin in March, the quarter’s largest. 

The new towers also include residential, especially multifamily, to handle that inflow of new Texans. Swiss firm Empira plans a 35-story tower downtown near the Arts District, and Hunt Realty’s $5 billion proposal for 20 acres near its Reunion Tower, also in Downtown Dallas, would include a dozen high-rises that would, in turn, include some 3,000-unit apartments.

As Avison Young’s Bialas says, even though everyone is suffering sticker shock in this economy, Dallas remains generally affordable, especially compared to peer cities that can land a huge new HQ. Both Caterpillar, the heavy equipment giant, and McKesson, a massive medical and healthcare supply firm, relocated to the area in recent years, and new headquarter projects are in the works for Wells Fargo and TIAA. CBRE found that large tenant space requirements exceeded 2023, even if they still fell 11 percent short of the 2018-2019 average. 

Signs of office life remain visible across the metroplex, with 4.9 million square feet of projects underway. Uptown in particular remains a construction zone, filled with cranes and 20 proposed and under construction projects. The draw, said UT-Austin’s Pedigo, is the urban scale, what he calls that “Jane Jacobs density flavor,” as well as an explosion of new apartments and retail to accommodate professionals. 

Dallas remains a car-dependent, sprawling metro, which won’t change anytime soon. But another strength of the region’s real estate market — a focus on placemaking, what Pedigo calls Texas urbanism — has led to a proliferation of pockets of walkability, and more high-value real estate among the freeways and parking lots. Capping Highway 366 a dozen years ago to create Klyde Warren Park links downtown and Uptown. Inner-urban neighborhood cores have been revitalized, sparking development in neighborhoods like Deep Ellum, a hip draw that has seen its office market struggle since Uber closed its office there in late 2021.

There’s still plenty of challenges for the market. The slightly positive absorption metrics of recent months required a lot of tenants: First quarter signings averaged 4,150 square feet, per Avison Young, a shadow of past activity that suggests a long road toward repopulating the area’s 20 million square feet of newly excess space. With last year’s leasing total of 17.3 million square feet 20 percent below the historical average, any further slippage in 2024 is worrying, especially since the flight to quality often means renting less space because of higher rents. Bank of America’s future home in Uptown, for instance, represents an overall downsizing for the financial firm. 

“Three years ago, when everything was crazy, the game used to be big blocks of space and waiting for a big user,” said Cawley, who has focused on pre-built spec suites to suit tenants looking for smaller footprints. “The game has changed. I think it’s more blocking and tackling. I think everybody has to look at it like there’s no exit.”

Yet Dallas-Fort Worth remains “arguably the number one market in the country from an investment standpoint” across pretty much every commercial product type, argues Christian Gore, founder of real estate investment firm G1 Capital Partners. During the first nine months of 2023, it garnered the most investment of any CRE market, pulling in $13 billion across sectors, per investment advisory MSCI.

“Dallas isn’t a roller-coaster market like Phoenix or Tampa or Austin,” Gore said. “It’s very rare that the DFW metroplex isn’t growing. If you look back at the last 30 or 40 years, it just always provides consistent, steady, constant growth.”

Texans will be quick to say they promote a culture that’s open for business. But perhaps one of Dallas’ unsung sources of strength currently is local government getting out of the way almost entirely. In cities across the country, including Los Angeles, Boston and Chicago, progressive politicians have instituted, or attempted to institute, real estate taxes and development fees to pay for safety net programs and social services. Pedigo says Dallas and regional city governments either step aside or encourage commercial development. Dallas in particular has actually been relatively quick to implement office-to-residential conversions, including a handful of completed projects like The National in downtown, developed by Todd Interests, and 3,100 more units coming online this year.

“The idea of limited government that may actually work in Texas’ favor,” Pedigo said, “is that government gets out of the way and lets the market kind of drive it a bit.”