Is commercial real estate in DFW gonna die? {Probably not, but it shall change.}

May 7, 2020 by Ted Bauer

This is not our normal topic, no

But it has repercussions for all of us, so let’s evaluate some stats.

What do we know about the April DFW commercial real estate market?

Well, broadly here’s what we know. Q1 (which does not contain April) was overall OK, although March and April started to be sluggish, as one would expect. Even in Q1, there were some signs: the “positive absorption” in Q1 for DFW was only 159,000 square feet. As Stream Realty Partners notes (second link):

Bucking a trend witnessed the past three to four years, Class B absorption outpaced Class A absorption. In fact, Class A space finished the quarter by giving 90,000 square feet back to the market, which marks the first quarter the Class A sector has seen negative absorption since early 2018 and only the second time in the past five years. These numbers are somewhat surprising given the flight-to-quality the market has experienced, especially of late. It will be interesting to see if this negative absorption was just an anomaly or the beginning of a new trend.

Now, all that potential gloom stated, there were still a couple of big commercial deals around DFW inked in April. Some of those deals had likely been in the works for months if not over a year, so the fact they were inked in April doesn’t necessarily mean the commercial market is robust, but, for example, we saw the advancement of Olympus on Main, a 352-unit multifamily property in Carrollton. It was sold to Nimes Real Estate. Trammell Crow Company’s High Street Residential subsidiary and High Street’s partner Olympus Property handled the sale. The property, which also includes 4,025 square feet of ground-floor retail space leased by Barrel and Bones, is the third phase in the Union at Carrollton Square transit-oriented development.

So there has been commercial development, sure. That said, Mac Morse, an advisor at Citadel Partners, came out and said what all of us are somewhat thinking: “Companies that formerly viewed working from home as an antithesis to productivity are now questioning whether it’s worth spending thousands of dollars per month on rent.”

Right. That’s always been the confusing part of this issue. In DFW, cloud and WiFi are broadly at scale. While there are obviously jobs that must be done face-to-face (and that’s admittedly the majority of work), the commercial real estate market -- at least office-wise -- is based on white-collar work. Most white-collar work does not need to be done from an office. Psychologically and physically, some people are definitely “office people” and need that structure, but research has shown for years that work-from-home is very effective. (It would probably help some people if schools opened back up this fall, however.)

So, logically the office market might be down for 2020 --  the word you are hearing a lot is “adjustment year” -- but that also might open up new avenues for commercial realtors. For example, there’s a spike in the request for DFW cold storage facilities as of late April. Someone that previously dealt in office space might need to “pivot” to that. Similarly, retail leasing was slowing even before COVID, but DFW has a robust economy, a good business tax structure, and a nearby successful international airport -- plus an educated workforce. Point being: in “The New Normal,” there will be different business inventions. The same thing happened in 2008-2009, when we got lots of service-driven “unicorns,” i.e. Uber, WeWork, AirBNB. The jury is broadly still out on those companies, but 2021 will create another wave of businesses, and DFW will be an attractive area for many of them -- maybe not in terms of offices, no, but in terms of facilities. That might be the future of commercial, at least near-term.

So what does this have to do with residential?

Well, when we talk to clients about apartments, usually one of the top three factors is proximity to work. If “work” becomes “home,” then that factor of proximity to work is gone. Now another factor can rise up to take its place, such as proximity to friends, proximity to family, proximity to events/bars/restaurants, etc. Plus: while we don’t know or assume anyone is getting raises right now, the fact is that if “proximity to work” is not a factor anymore and “home” is “work,” you probably want a nicer home. So, within budget realities, we could see people go up $100, maybe even $200 a month to get a nicer space because, well, they’ll be working there and living there. So the commercial downshift might lead to a residential upshift. It will be interesting to see.

2020 is definitely an adjustment year, though.

About the Author

Ted Bauer

Ted Bauer is a writer/editor for White Rock Locators focused on as much cool content about the DFW Metroplex rental scene as he can possibly find week-to-week.