Commercial Real Estate Status — January 2025

Produced by Lester Langdon

Texas Commercial Real Estate Briefing: Key Themes and Insights

This briefing analyzes recent trends in Texas commercial real estate, focusing on office space dynamics, drawing primarily from the Texas Real Estate Research Center (TRERC) “Commercial Roundup” article dated January 6, 2025.

Key Themes:

• Flight to Quality: Post-COVID, tenants are prioritizing premium office spaces (Class A+), driving positive net absorption in this segment while other classes struggle.
• Reshuffling of Office Markets: Texas office markets are undergoing a significant transformation as workplace policies evolve, impacting tenant demand and rental rates.
• Uneven Impact Across Markets: While trends are generally similar, local job growth, industry mix, and existing office stock create unique dynamics in each major Texas metro.

Important Ideas/Facts:

• Office Attendance Lags: Despite office-using employment growing by 500,000 jobs since 2020, office attendance remains at 66% of pre-COVID levels. “This employment growth is not translating into significant office absorption,” states the report.
• Lease Renewals in Flux: Only half of leases negotiated before 2020 have come up for renewal, suggesting the full impact of new workplace policies is yet to be seen.
• Premium Buildings Thrive: Tenants are gravitating towards the best new buildings, with most markets seeing positive net absorption in Class A+ properties. “This trend represents the decisions of newly arrived firms and existing firms choosing to relocate,” the article explains.
• Varied Rent Growth: Asking rent growth varies across markets and classes. Austin sees little difference between A+ and A, while Dallas witnesses higher growth in A+ and C. Houston experiences uniform growth across classes, potentially reflecting the impact of the previous energy downturn.
• Future Outlook: The report anticipates continued reshuffling with varying outcomes across markets and neighborhoods. New buildings in dynamic submarkets are likely to attract prestigious tenants, while older Class A and good Class B buildings will stabilize with different occupants. The fate of other buildings remains uncertain, potentially facing renovation, conversion, or demolition.

Quotes:

• “Tenants continue to evaluate their leases in anticipation of future needs. Brokerages and data vendors like CoStar estimate that only half of the leases negotiated before 2020 have come up for renewal, so the full impact of new workplace policies is yet to be seen.”
• “With ten million square feet of office space delivering in 2024, tenants have ample options.”
• “We are in the midst of an office resorting. Differences in local job growth and industry mix, combined with the unique legacies in each market’s office stock, will influence the outcome.”

Overall: The Texas commercial real estate market, particularly the office sector, is undergoing a period of significant change driven by post-pandemic workplace shifts. While premium office buildings are benefiting from the flight to quality, older and less desirable properties face uncertainty. Understanding these evolving trends is crucial for stakeholders across the Texas commercial real estate landscape.

Texas Real Estate Market Dynamics: A Study Guide

Short-Answer Quiz

Instructions: Answer the following questions in 2-3 sentences each.

1. How has the COVID-19 pandemic impacted office occupancy and absorption rates in Texas?
2. What is meant by the term “flight to quality” in the context of commercial real estate?
3. How have asking rents for different classes of office buildings changed in Austin since the pandemic?
4. What factors contribute to the rent growth observed in Class C buildings in Dallas?
5. How does the Texas Real Estate Research Center (TRERC) gather data for its research?
6. What is the primary focus of the TRERC’s “Outlook for Texas Land Markets” conference?
7. Name three resources available on the TRERC website for individuals interested in Texas housing trends.
8. What are some key factors influencing the rural land market in Texas?
9. Why is the legal industry considered a significant driver of the Texas office market?
10. Aside from reports, what other types of news content does the TRERC provide on its website?

Short-Answer Key

1. Office occupancy in Texas remains at about two-thirds of pre-COVID levels despite job growth. This disconnect has led to significantly lower absorption rates as businesses reassess their space needs.
2. “Flight to quality” refers to the trend of tenants prioritizing newer, premium office buildings (Class A+) with modern amenities and sustainability features over older or lower-class properties.
3. In Austin, the difference in asking rent growth between Class A+ and Class A buildings is minimal due to the city’s generally newer office stock.
4. Rent growth in Class C buildings in Dallas is attributed to interest from boutique firms seeking historic properties and a limited supply of options in lower-income submarkets.
5. The TRERC gathers data from various sources, including Texas MLSs, the U.S. Bureau of Labor Statistics, and the U.S. Census Bureau. This ensures the accuracy and relevance of their research findings.
6. The “Outlook for Texas Land Markets” conference provides a comprehensive analysis of current issues and trends affecting rural land markets in the state, covering topics like mineral rights, water issues, and eminent domain.
7. The TRERC website offers resources like “Texas Housing Insight,” “MSA Housing Reports,” and the “Texas Housing Affordability Index” to provide insights into housing market dynamics.
8. Factors such as mineral rights, water availability, wildlife management, conservation efforts, and eminent domain significantly impact the rural land market in Texas.
9. The legal industry’s need for substantial office space, particularly in major metropolitan areas, makes it a key driver of the Texas office market.
10. Beyond reports, the TRERC website offers news releases, a searchable news database (“NewsTalk Texas”), videos, podcasts, and a blog to keep audiences informed about current developments in Texas real estate.

Essay Questions

1. Analyze the impact of post-pandemic workplace policies on the demand for office space in Texas. Discuss the implications for different classes of office buildings and future development trends.
2. Evaluate the current state of the Texas housing market. Consider factors such as population growth, affordability, and regional variations. What challenges and opportunities do you foresee in the coming years?
3. Discuss the unique characteristics of the rural land market in Texas. Explain how factors like mineral rights and water issues influence land values and investment decisions.
4. How does the diversity of the Texas economy, encompassing sectors like technology, energy, and healthcare, shape the commercial real estate landscape across different regions of the state?
5. Using examples from the provided materials, discuss the role of the Texas Real Estate Research Center in informing stakeholders and promoting understanding of the state’s real estate market.

Glossary of Key Terms

• Absorption Rate: The rate at which available space in a real estate market is leased or sold over a specific period.
• Asking Rent: The rental rate advertised by a landlord for a property.
• Class A Building: A high-quality office building with modern amenities, prime location, and typically higher rents.
• Class B Building: An office building that is generally older and less luxurious than a Class A building, but still well-maintained and in a decent location.
• Class C Building: An older office building with fewer amenities and lower rents, often located in less desirable areas.
• Concession: An incentive offered by a landlord to attract tenants, such as free rent or tenant improvement allowances.
• Eminent Domain: The government’s right to take private property for public use, with fair compensation to the owner.
• Flight to Quality: A trend where tenants seek to upgrade their space by moving to higher-quality buildings.
• Lease Renewal: The process of extending an existing lease agreement for a property.
• Mineral Rights: Ownership of the subsurface resources, such as oil and gas, beneath a piece of land.
• Net Absorption: The change in occupied space over a specific period, calculated as the difference between space leased and space vacated.
• Office Occupancy Rate: The percentage of total office space that is currently leased.
• Tenant Improvement Allowance: Funds provided by a landlord to a tenant for customizing their leased space.