Overview:
The office leasing and construction market in Fort Worth is slowing, but compared with the rest of the country, the situation looks rosy.
To drive through Fort Worth and see construction underway at the Texas A&M campus, the Crescent Fort Worth project and other developments, it is hard to imagine any economic worries.
But plenty of real estate and business leaders are still concerned about a slowdown in the office market.
Real estate observers point to the impact of higher interest rates and the continuing effects of the pandemic in the slowdown in office leasing and new office construction.
“The office market is going to take a while to come back, but it will,” said Todd Burnette, managing director for JLL in Fort Worth. Burnette said North Texas will likely weather any slowdown in the office market because of continued population and job growth.
Alex Bryant, co-founder of Fort Worth’s Street Realty, the developers behind The 701 mixed-use project in the Near Southside, said nationally there has been a pullback in office leasing and office construction, primarily because those areas are not seeing the same population and business growth as North Texas.
“Areas like Fort Worth that have a perceived ‘cool factor’ and sectors like medical that are dictated by population growth are still very vibrant,” he said.
Population growth may be a big factor for all Texas cities in avoiding an office crisis, said Andrew Matheny, research manager at real estate broker Transwestern, which just released a second quarter report on the Dallas-Fort Worth office market.
In the report, office vacancy in Dallas-Fort Worth has continued to increase with no clear sign of a rebound in leasing. Net office leasing was slightly positive, but would have been negative except for a large lease by Wells Fargo in Irving, said Matheny.
Fort Worth’s office market has held up better than Dallas’ over the past year, Matheny said. According to the Transwestern second quarter report, Fort Worth’s Class A office vacancy rate is 15.1% while Dallas’ is 28.3%. Vacancy rates calculate all the office space that is available to rent in a given market.
“Fort Worth has had positive absorption in space,” he said. “There hasn’t been as much move-out activity as there has been in Dallas, so that’s worked in Fort Worth’s favor.”
Fort Worth’s office leases tend to be more medium-sized companies and less back-office oriented, Matheny said. Fort Worth’s primary category is not where companies typically make big cutbacks.
“That’s a little bit of an advantage for Fort Worth,” he said. “It may not be the big headquarters office, but in the long run it just seems to be a little bit more stable.”
Some companies that have announced big projects in North Texas are cutting back in the wake of an economic slowdown. Goldman Sachs, which originally announced plans for a three-building, 815,000-square-foot complex north of downtown Dallas. The company has since cut that back by about 100,000 square feet, citing the current economic slowdown, according to a report in the Dallas Morning News.
Will job growth continue?
Hiring continues at a slower pace after nearly two years of record growth, leading to weaker demand for office space, said Matheny.
“The saving grace for Dallas and Fort Worth, in particular, and the whole Texas markets – Houston, Austin included – is that we had the population and job growth that we can kind of grow past some of these problems with office occupancy over the long term,” he said.
In Transwestern’s second quarter report on the Dallas-Fort Worth office market, the company reported an increase of 10,700 “office-using” jobs in the area. That’s a slower growth rate than in the past year, but it’s still positive, Matheny said.
Even so, the office market is weaker, Matheny said. To counter those trends, landlords are offering more free rent and other concessions to attract tenants.
If there’s one strong area in the office market, it’s in upgrades to current office products in the market, said Transwestern’s Matheny.
“The most defining trend for office has been that local flight to quality,” he said. “Before it was your class A users that were wanting to move into new construction, new spaces. After the pandemic, I think everybody’s realized the office can be a place that can really attract talent and where people want to come to.”
Street Realty’s Bryant said there has been a shift in the type of amenities clients are seeking in office properties.
“There is an increasing demand for modern amenities that support employee well-being and productivity,” he said. “These can include on-site gyms, on-site food and beverage options, collaboration spaces, sustainable features, tech-enabled facilities, and access to natural light.”
Those types of amenities were once offered only in class A buildings, but those are moving into nicer class B buildings, said Mathney.
“Companies are willing to pay a little bit more rent to get those amenities and a higher quality finish-out because it means a lot to attracting and keeping employees,” he said. In some cities, companies have had difficulty getting workers back to the office, but that has not been the case in Texas, Mathney said.
The Fort Worth economy is hot, Matheny said. A recent article in the Wall Street Journal touts the city as a commercial real estate “boom town.”
Fort Worth has plenty to celebrate on the economic front. The Journal article cites the usual suspects: John Goff’s Crescent Fort Worth development, set to open in August, the Stockyard upgrades, the convention center construction, new hotels and the recent groundbreaking of the new Texas A&M-Fort Worth campus. There’s plenty more to brag about as well, from Goldenrod’s Van Zandt development on West 7th to the residential development downtown.
“Those are the kind of developments you aren’t seeing in many other places,” said Matheny. “The rest of the country, particularly on the coasts, are not seeing this kind of activity.”
How long will this office market slowdown last?
In a recent Fortune magazine interview, Ross Perot Jr., chairman of the Perot Group and Hillwood, said high interest rates and tightened credit has made borrowing more expensive. That, along with the continuing impact of pandemic-era issues will lead to a commercial real estate slowdown, he said.
“It’ll be years before we really understand the damage the pandemic did to the world,” Perot said in Fortune. Perot said the pandemic “broke the habit patterns of millions of people that used to go to work every day in a real office.”
Economists are also concerned about office projects that will require refinancing in this new higher interest rate environment, Transwestern’s Matheny said.
A recent report by CommercialEdge’s Yardi Systems says that 18.7% of Dallas-Fort Worth office building loans will come due in the next two years. That’s about 50 million square feet of North Texas office property that will need to find affordable new financing, according to the report.
Metheny believes they will be able to find that refinancing in Texas.
“Companies want to be in this market, so they’ll be willing to refinance here because of the fundamentals of job growth and population growth,” he said.
Key Fort Worth Office Vacancy Stats Second Quarter 2023
Fort Worth Central Business District – 11.7%
Southwest Fort Worth – 14.7%
West Fort Worth – 17.6%
Northwest Fort Worth – 24.3%
Alliance – 11.7%
Westlake/Grapevine – 16.4%
HEB/Mid-Cities – 11.8%
Northeast Fort Worth – 12%
Arlington/Mansfield – 17.6%
Southeast Fort Worth – 10.7%
Total Fort Worth – 14.2%
Source: Transwestern
Disclosure: Hillwood is a financial supporter of the Fort Worth Report. At the Fort Worth Report, news decisions are made independently of our board members and financial supporters. Read more about our editorial independence policy here.
Bob Francis is business editor for the Fort Worth Report. Contact him at bob.francis@fortworthreport.org.
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