New York City is so bad???
What does Texas and China have in common? Field of dreams belief in the mythical and empty buildings. Should’ve read Man in Full down in the Heart of Texas.
https://www.wsj.com/real-estate/commerc ... 65?mod=mhp
Texas Cities Are Booming, but Their Offices Are the Most Vacant
Overdevelopment is seen as U.S. office market’s biggest problem
Konrad Putzier
America’s highest office vacancies aren’t in the East and West Coast cities that have been shedding population and workers. They are in Texas, a thriving Sunbelt state that has been luring companies away from the big coastal cities.
Houston, Dallas and Austin top the list of major U.S. cities with the highest office-vacancy rates, according to Moody’s Analytics. About 25% of their office space wasn’t leased as of the third quarter. That was more than double New York’s vacancy rate of 12% and well above San Francisco’s vacancy rate of 17%.
Texas office floors are struggling to find tenants even though the state’s workers have been more eager to get back to the office than in most other places. According to Kastle Systems, which measures occupancy by counting keycard swipes in 10 major metro areas, Houston, Austin and Dallas have the highest office-return rates.
Vacancies are high largely because Texas developers build too much. All three cities experienced a surge in construction in the 1980s, when tax rules favored developers and loose lending created a commercial real-estate bubble. Another construction spurt in the late 1990s aggravated the problem.
Texas’ high vacancy rate offers more evidence that the U.S. office market’s biggest problem hasn’t been primarily remote work. It is a glut of buildings across the U.S., which has been decades in the making and helps explain why the country has long had much higher vacancy rates than Europe or Asia. Office markets in other booming Sunbelt cities such as Atlanta are also suffering, despite economic growth and job creation.
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But the Lone Star State is an extreme case. Cheap land and lax regulation encourages developers to overbuild during boom times, said Thomas LaSalvia, head of commercial real estate economics at Moody’s Analytics.
Construction in Texas has slowed from the 1980s, but new office completions as a share of the market still outpaced the rest of the U.S. each year for the past 16 years, said Jeff Eckert, the Dallas-based head of U.S. agency leasing at real-estate brokerage
JLL
. Older buildings have been losing tenants to the new competition.
“We like to develop in Texas,” he said.
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Austin’s office-vacancy rate was 24.2% in the third quarter after much new office construction in recent years. Photo: Tyler Dane Hansen for The Wall Street Journal
Most of the aging office buildings are in the suburbs around the three big cities. They are increasingly out of favor with a new generation of desk workers who tend to prefer modern buildings in walkable urban neighborhoods.
Take Granite 190, a suburban office complex outside Dallas surrounded by fields and sprawling parking lots that was completed in 2001. This summer the property’s biggest tenant, United HealthCare Services, gave up most of its space. As of August, the complex was nearly 70% vacant, according to data from Trepp.
The owner defaulted on the loan. The company handling the mortgage on behalf of bondholders recently said it expects to foreclose.
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Remote work is also hurting Texas landlords, but the impact has been more gradual. Because most companies sign long-term leases, they have to continue paying rent even if they don’t actually use their space anymore. As more leases expire, remote work might push vacancies higher. The supply glut, meanwhile, is already hitting the state’s office market with full force.
Austin saw a lot of new office construction over the past seven years, as developers rushed to cash in on the city’s emergence as a corporate hub. All those new towers are now competing with older buildings built in the 1980s and ’90s.
When some construction projects delayed by the pandemic finally opened, developers found that demand was less than they had hoped, partly because of remote work, said Christopher Rosin, an associate economist at Moody’s Analytics. Although Austin’s office towers are busier than those in other cities, physical occupancy is still more than 40% below prepandemic levels, according to Kastle.
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Austin’s office-vacancy rate was 24.2% in the third quarter, according to Moody’s, up from 12.9% in the third quarter of 2019.
Houston’s vacancy rate has also surged in recent years, but for different reasons. The city’s economy depends on the energy sector. A crash in oil prices in 2014 caused demand for office space to crater, helping push up vacancy from 14.9% in late 2014 to 23.5% in late 2019.
Since then, it has increased to 26.4%—the highest among 79 markets, behind only the much smaller Charleston and Dayton, according to Moody’s.
At Houston’s 4.5-million-square-foot Greenway Plaza office complex, an appraiser recently cut the estimated value by more than half to $425 million, down from $1 billion in 2017, according to Trepp data. The complex was 34% vacant as of September, up from 12% in March 2022.
With housing in short supply, developers are converting more empty offices into apartments. But not all buildings are candidates for reuse, even as more than 1 billion square feet of office space sits vacant across the U.S. Photo Illustration: Amber Bragdon
Write to Konrad Putzier at
[email protected]
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