Flight-to-Quality Boosts Dallas Office Market

The Dallas office market posted decreasing vacancies and rising development activity in the second quarter of 2022. At the same time, direct asking rents increased by 5.7% year over year. As these trends continue, significant value increases should be expected.

Vacancy Falls/Absorption Rises

Total office vacancies in Dallas dropped for the first time since the first quarter of 2020 to 23.6%, according to Jones Lang LaSalle. That translates into 1.6 million square feet being leased, 1.2 million of which were Class A. Analysts say it is a sign that flight-to-quality continues as tenants reevaluate their space needs.

Direct absorption was positive for both Class A and B offices, driven by large move-ins by professional services firms in key submarkets like Far North Dallas and Uptown. Vanguard occupied five floors at Liberty Mutual’s Legacy West Campus, with plans to expand further, causing the greatest positive absorption for the quarter at 173,866 square feet.

Sublease availability increased by 0.2% to 8.6 million square feet, mainly because of large blocks available in the Dallas Central Business District.

More Office Jobs

Unlike tech-dominated coastal markets, job growth is still closely tied with office occupancy in the region. Dallas office jobs have grown 8.7% since the start of the pandemic. Oxford Economics predicts office jobs will grow another 5% in 2022. That’s 1.4% above the national rate.

To accommodate these needs, the development supply increased by 1.1 million square feet quarter over quarter at roughly 40% preleased. More than 20 leases over 50,000 square feet have been signed in the first half of 2022, 97% of which came from Class A properties.

Values Rebound

Tax valuations for office property in many cases remained flat over the preceding two years as tenants decreased space requirements or gave up office space completely during the height of the COVID-19 pandemic. Strong post-pandemic demand is having a positive effect on the office market in terms of decreased vacancies and increased rents. This trend is expected to continue. Building owners should expect more aggressive revaluations next year as the market continues to strengthen.