At the beginning of 2021, the Texas Real Estate Research Center at Texas A&M University in College Station released its annual housing and economic outlook report for the new year.
The predictions found in the report are nothing too shocking if you’ve been following along with previous reporting by the Dallas Business Journal.
“Office occupancy will probably not improve significantly until the second half of 2021 when employees could start returning to the office safely. Only then will the effects of remote working be apparent to the office sector,” the report says. “Still, the office market has been exposed to some pervasive underlying changes in the work environment that are not yet fully evident. Given the longer-term nature of office leases, the pandemic’s full impact on the market may not be evident for a couple of years.”
In terms of actual numbers, the report predicts that Dallas-Fort Worth could see office vacancy rise to 19.3 percent, up from today’s 19.1 percent, while asking rents may rise slower than previous years.
A slight rise is also predicted in retail and industrial vacancy while asking rents are expected to drop by 1.5 percent for retail, the same rate at which they dropped in 2020. Industrial rents are predicted to rise by 4.8 percent, the highest rate predicted in Texas.
To dig further into these numbers and more, the Business Journal spoke with Dr. Harold Hunt and Dr. Luis Torres, two research economists from the Texas A&M Real Estate Research Center. Topics discussed include the future of downtown office markets, the rise of suburban offices and whether or not industrial is being overbuilt locally.
Speaking generally, what are your thoughts about downtown office markets right now? Could they be in trouble in the near future?
Dr. Hunt: It’s probably too soon to say whether downtown markets are in trouble due to the unknown success of the COVID vaccinations. If the vaccine is the silver bullet that allows us to go back to a “normal” world of shaking hands, sitting next to each other, etc., then I think many office workers will choose to return to downtown. I think people will still want one-on-one exchanges of ideas, the benefits of networking and social interaction. It’s just unknown whether this can be undertaken safely in the months ahead at this point.
Dr. Hunt: They could be more attractive from a commuting standpoint and possibly from a cost standpoint. But this would be firm-specific based on companies’ ability to partition their staff across suburban markets. Also, existing leases will prevent some migration to the suburbs immediately. The situation would have to be assessed at the end of the lease, which will bring in the vaccine’s success up to that time as an important factor. A lot is riding on the relative success of the vaccine.
In the economic outlook report says that the office market has been exposed to some pervasive changes in the work environment that are not yet fully evident and won’t be a couple of years. What do you think these changes could be?
Dr. Hunt: I would say a major unknown is the actual level of productivity attained from folks working at home versus working together where they can generally collaborate and communicate better.
Dr. Torres: The idea of a mixed working environments with some days working at home and other days coming into the office. That would have an effect on office demand, since you would need to come in only some days into the office, not needing a permanent office and sharing during the off days you are not in. Also, some people have enjoyed the freedom of not having to come into the office every day and flexible working hours, not being subject to a 9 to 5 schedule and found that they are still being productive.
Do you all have any specific predictions for the DFW office market in 2021?
Dr. Torres: Overall office vacancy rates should register an increase to 19.3 percent in 2021 and asking rent growth should slow to 1.2 percent. Class A office space should also register an increase in vacancy rates to 22.7 percent accompanied by a fall in asking rents of negative 0.4 percent.
During and after second quarter 2021, commercial real estate will benefit from the federal government stimulus enacted during the final days of 2020 and the wide distribution of the vaccines.
Moving to industrial real estate, have you seen any signs that suggest industrial is being overbuilt in DFW?
Dr. Hunt: Again, it’s too soon to tell. The success of the vaccine will determine whether online sales will continue to increase versus brick-and-mortar sales. Although many people have discovered that they enjoy the convenience of ordering online, the level of returns has also increased due to folks not receiving exactly what they were looking for. Also, I think many people are ready to get out and actually go places to shop after this extended period of limited personal shopping.
What do you make of all this talk of corporate relocations coming to Texas?
Dr. Hunt: Texas is currently being viewed as a state that has lower cost of doing business, less regulation and a more business-friendly environment in general. I think that view will continue into 2021.
Are there any other commercial real estate trends you’re keeping an eye on for 2021?
Dr. Torres: Financial trends regarding loans for commercial development that would affect new construction and other financial trends like delinquencies and foreclosures. The full effects of the pandemic on the commercial market haven’t been felt yet and some issues going forward could be financial difficulties faced by some commercial developers.
This interview has been edited for brevity and clarity.