While prognosticators have yet to determine the overall direction of the the commercial real estate market (bottom, bounce, or buried), one thing is for sure….
Dallas commercial real estate landlords will see the largest amount of vacancy losses in 2010 than ever in the city’s history.
The reasons for another dramatic decline in leasing activity are as such:
Small business leasing activity, which was tepid in the final months of 2009, remained active up to the summer of last year. But, in the very late stages of 2009 to the present, small business leasing activity has become virtually non-existent. Because local and national gains in employment have primarily come from the service sectors, it is understandable that when money’s movement slows, there is a trickle-down type of effect, that affects businesses that rely on “activity” to survive. So, small businesses that are responsible for over 65% of employ in the city, of which is over 80% service-oriented, are feeling the pressure. Some think that a slowing in the market is a good thing for leasing activity, as companies will downsize and adjust their expenses to a more moderate level. This could not be farther from the truth, as most business owners and brokers will attest that a move carries a heavy burden on a company’s time and expenses, advertising, marketing, operations, and community relations – in a healthy business environment.
Most Dallas “bigs” are choosing stay put or shed space themselves via subleasing – space leased directly by the tenant, rather than the landlord. As recent reseach via REIS indicates, subleasing of space is around 6.5 million square feet and, we feel, is spiking in the Dallas/FW area. The main reason subleasing is of such great quantity now, stems from the tremendous run of business to upgrade their professional appearance and space requirements in the years of 2005-2008, to which rental rates increased dramatically. Additional space, necessary or unnecessary during this period of time, was kept for future growth. So, with the added office space in many of our overpriced pockets of Dallas, it will likely be 2011, possibly 2012, before it will be absorbed or given back all together. Keep in mind, 2012/13 will also see the greatest amount of lease expirations, ever.
Another reason for the slowing of leasing activity will be the difficulty in obtaining financing – across the board. More specifically and importantly, while city is in a merger/acquisition and business selling boom, for deals to occur financing is the key. Because the banks are taking a step back to evaluate not only their operations, but other businesses operations, it is slow, painstaking process. And, with so many parties and so many rule changes involved for deals to occur, most will disintegrate or be pushed out to a later date. So, ultimately this affects the company’s decisions for employee retention and soon thereafter, space requirements. We don’t expect that to occur until 2011, so leasing activity is and will diminish throughout the year.
The final reason that I touched on earlier, is inability to find a middle ground between the business community and the commercial real estate community. Most likely you have heard of banks/lenders not realizing their losses, thus not putting up commercial property for sale -ultimately reducing rental rates. While this was a 2009 phenomenon, the downward pressure that has been applied is breaking support. In our recent evaluations of advertised sale information and space for lease on Loopnet.com and Costar.com, as of the last 3 to 6 months, sale prices and rents are being reduced. But, as most commercial real estate brokers can tell you, when it comes to leasing, landlords are finding ways to make up rent decreases (less tenant improvements, etc), so the net effective rents are not necessarily declining. So, lease expenses are not declining at the rapid rate of business. Until they catch up, and businesses and financing stabilize to move forwared, which will “hopefully” occur in the next few years, our clients are advising us to search for space at the “all-in” price that accounts for the business community’s pain.
Now, the positive – for Dallas. While 2010 will post major square feet losses, we feel a bounce will occur from the lows. As other states budgets and unfunded pension liabilities have gotten so completely out of control, businesses and residents will seek more stable ground. Dallas will become the beneficiary.
