Avison Young | Dallas Research

Summer 2018

Subbing In
Making sense of DFW’s subleases, absorption, build-to-suits, construction, and leasing trends.
Subbing In: Making sense of DFW’s subleases, absorption, build-to-suits, and construction trends.
Avison Young Dallas Research
1920 McKinney Avenue
Suite 1100
214.559.3900

Report Parameters:
Existing Space | 20,000+ SF Buildings | Office Use

© 2018 Avison Young—Dallas, LLC. All rights reserved. E. & O.E.: The
information contained herein was obtained from sources which we
deem reliable and, while thought to be correct, is not guaranteed by
Avison Young.
Subbing In
In 1964, Bob Dylan released the album The Times
They Are A-Changin’, featuring the same-titled
single, which featured the lyrics
“Don’t stand in the doorway
Don’t block up the hall
For he that gets hurt
Will be he who has stalled”
This call to awareness and proactivity can be
taken from its original social commentary and
applied to the current and future real estate trends
within Dallas-Fort Worth, and even the industry
as a whole. As we enter the next phase of the
impressively long economic cycle, it is clear that
things across the board are much different than
they have been in any other cycle before.
Dallas has enjoyed unprecedented growth and
productivity in the past few years, often being
a national leader in things such as job growth,
population growth, office and multifamily
construction, corporate relocations, and
absorption. The pedal is not quite to the metal
anymore as it was in 2015 and 2016, but Dallas is
still projected to maintain strong growth well over
Subbing In: Making sense of DFW’s subleases, absorption, build-to-suits, and construction trends.
national averages. That being said, there are a few
darkening clouds that could be construed as red
flags. They may not necessarily proclaim a coming
catastrophe, but when viewed with an informed
eye, can represent signs that point to softening,
and at the very least serve to confirm that the times
are indeed a-changin’.
Our core focus is going to be the growing sublease
inventory in DFW and how this is connected to
other trends such as corporate downsizing, owner
occupied office space, coworking, and the flight to
quality as older generation space is left for shiny
new space. The advent of technology disruptors,
economic and demographic shifts, workplace
strategy advancements, data-informed decision
making and a strong supply of single-tenant build-
to-suits make navigating and future proofing real
estate decisions in the metroplex more complex
than ever before.
In order to be prepared and confident
in business decisions moving forward,
Avison Young is proud to present our
summation of the current sublease
market and what it means to you.
 As it stands now, VacantSublease
Sublease as Part of Total Inventory
as Part of Current Inventory

Dallas-Fort Worth has its highest amount of

1.19%
Sublease as Part of Total Inventory
vacant sublease inventory since the dot- com
burst at the start of the century. There is currently
3.6 MSF of vacant sublease space listed, totalling
to 1.19% of inventory. When “soon to be available”
space is included, the number jumps to 6.4 MSF.
For comparison, there was roughly 1 MSF of
sublease space available during the peak of the
Great Recession, totalling 0.68% of inventory. 98.8%

In context, a large chunk of this space is made

up of campus buildings that were vacated when
large corporate users moved into newer build-
to-suits such as J.P. Morgan’s recent relocation
to West Legacy. Still, when the sublease number
reaches a 15+ year high, it deserves consideration
and an evaluation of its implications. Total Inventory
Total Inventory Sublease
Sublease Inventory
Inventory

Vacant Sublease Space by Square Footage & Percent of Inventory

4000000 1.4

3500000 1.2

3000000
1

2500000
0.8
2000000
0.6
1500000

0.4
1000000

500000 0.2

0 0
2008 Q4
2009 Q1
2009 Q2
2009 Q3
2009 Q4
2010 Q1
2010 Q2
2010 Q3
2010 Q4
2011 Q1
2011 Q2
2011 Q3
2011 Q4
2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
2014 Q4
2015 Q1
2015 Q2
2015 Q3
2015 Q4
2016 Q1
2016 Q2
2016 Q3
2016 Q4
2017 Q1
2017 Q2
2017 Q3
2017 Q4
2018 Q1
2018 Q2
QTD

Vacant SF Sublet Vacant Percent % Sublet

Source: Costar

To start, let’s examine where this space is.

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 Dallas CBD

All Other
Submarkets

Upper Tollway/
West Plano

Las Colinas
(DFW Freeport/Coppell
Urban Center/Wingren
Office Center/West LBJ)

Subbing In: Making sense of DFW’s subleases, absorption, build-to-suits, and construction trends.
Major Submarket Concentrations
Sublet Available Sublet Vacant Available Vacant
Submarket
Space Space % Inventory % Inventory
Allen/McKinney 69,670 13,680 7.5 1.5
Central Expy 220,710 121,743 3.7 2.0
Dallas CBD 978,642 659,285 6.0 4.1
Frisco/The Colony 79,614 63,104 5.1 4.0
Las Colinas 1,560,073 1,101,389 15.9 11.3
LBJ 528,567 144,243 6.9 1.9
Preston Center 71,897 39,189 5.2 2.8
Quorum/Bent Tree 453,496 335,732 5.1 3.8
Richardson/Plano 340,414 197,318 11.6 6.7
Stemmons 151,691 44,035 9.7 2.8
Upper Tollway/West Plano 1,015,906 769,722 18.1 6.9
Uptown/Turtle Creek 411,068 315,295 5.7 4.4

West Legacy

West Legacy

The clear bulk is concentrated in Dallas CBD, Las
Colinas, and Upper Tollway/West Legacy. This makes
sense considering these submarkets have several
large block buildings, between skyscrapers downtown
and single-tenant campus buildings around Las
Colinas and Upper Tollway/West Legacy. All of these
spaces were prime candidates for large users to take
100,000 sf blocks with ease. So naturally, when they
relocate or downsize earlier than expected, they
leave behind larger gaps. The dynamic this creates
however is both a problem and a benefit depending
on who is in question. Large vacancies can offer great
value options for tenants looking for deals in high
demand areas as they stand a chance to get a rental
rate that may be 10-15% lower than current averages.
For landlords though, these large blocks of space
are harder to “mulit-tenant”, so they end of having to
search for another large block user to fill in.
Landlords may not get too concerned about sub-
leases at first because they are still getting revenue
for net operating income, but what Dallas is seeing is
a longer period of spaces’ “months on market”
measurement.

Partnership. Performance. avisonyoung.com

Cooling Off
As sublease space continues to grow, and the
longer it sits on the market, the more it threatens
rent growth. DFW has seen consistent rent growth
every year since the recession recovery began, but
whereas 2011-2016 saw an average of roughly 4%
rent growth, 2017 saw a drop to 2.5% growth, with
2018 and 2019 trending to 2% or below. It is worth
noting that rent growth at all this far into a cycle is
still very impressive, but it is clear that a cool down Months

has begun over the last three years.

Nothing exists in a bubble though, so let’s look at how this sublease inventory
interacts and corresponds with other trends in the metroplex.
Subbing In: Making sense of DFW’s subleases, absorption, build-to-suits, and construction trends.
Build-to-Suits for “ The Bigs”
Dallas is historically overbuilt, and cycles such as the early 80’s
and pre-Great Recession usually end with a crash. For once, it
seems like the majority of important players have noted this. Pioneer Natural Resources is vacating 300,000 sf
Even though Dallas has built a hefty amount of office product, at Williams Square for their own building in
we’ve seen a much more sustained and responsible pipeline Hidden Ridge.
that has kept demand in check and vacancies near historical
Net Absorption SF Total
averages. One reason for the steadiness is because a large portion Year (Owner-Occupied included)
of this cycle’s construction was for owner-occupied space. This
2000 7,295,750
means should a recession occur in the coming years, there won’t
be as staggering an amount of empty speculative buildings and 2001 178,673
piles of bad debt. 2002 -1,528,552
2003 654,512
Dallas has made plenty of headlines recently as it was second 2004 5,952,857
in the nation behind San Jose with absorption for 2017, but
2005 4,827,640
that number is not as straightforward as it seems. The majority
of that absorption was for large build-to-suit projects such as 2006 5,887,600
Toyota (2.1 million sf ), JP Morgan Chase (1.1 msf ), TD Ameritrade 2007 4,482,708
(355,000 sf ) and Fannie Mae (324,000 sf ). In contrast, net 2008 4,275,216
absorption for just multi-tenant buildings was actually 2009 -203,622
negative for the year, finishing at -119,951 sf. 2010 2,034,806
2011 3,222,980
Indeed, looking at just multi-tenant leasing for 2017, three of the
four quarters had negative net absorption, and sublease absorption 2012 2,084,142
has been negative every quarter since the start of 2017. 2013 3,268,917
2014 6,347,582
Things have rebounded for 2018. For YTD, when Owner- 2015 6,205,898
Occupied space is included in absorption, the number is
2016 2,974,137
2,136,031 sf, which is halfway because Liberty Mutual moving
into their new 1,100,000 sf campus. When Owner-Occupied 2017 4,827,203
space is excluded, the number is still a strong 907,644 sf. 2018 YTD 2,136,031

Net Absorption SF Direct Net Absorption SF Sublet Net Absorption SF Total

Quarter (Owner-Occupied excluded) (Owner-Occupied excluded) (Owner-Occupied excluded)
2018 QTD 255,569 186,531 445,100
2018 Q2 203,025 -176,987 15,674
2018 Q1 700,587 -264,081 446,870
2017 Q4 100,094 -273,704 -173,610
2017 Q3 691,959 -427,247 399,912
2017 Q2 -7,595 -67,829 -75,424
2017 Q1 -53,381 -217,448 -270,829
2016 Q4 212,267 22,658 234,925
2016 Q3 1,634,461 -272,162 1,362,299
2016 Q2 911,311 164,262 1,075,573
2016 Q1 229,200 -161,834 67,366

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 This corresponds
with an overall
slowdown in
total leasing
activity for the
market.

Net Absorption- Owner Occupied vs Non-Owner Occupied

8000000

7000000

6000000

5000000

4000000

3000000

2000000

1000000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1Q
-1000000 2018

-2000000

-3000000

Net Absorption SF Total- Owner Occupied Included Net Absorption SF Total- Owner Occupied Excluded

Major Owner-Occupied Deals per Peak Year

Year Client Size Client Size

Bank of America -
2000 Cisco Systems 766,245 266,808
Home Loans
2004 JP Morgan Chase Bank 386,000 Sally Beauty Supply 203,193
N.A.
2005 Hunt Consolidated 405,386 Fluor Corporation 264,494

2014 Bell Helicopter-Textron 230,000 Pier-1 308,817

Headquarters
2015 Trammell Crow Building 200,000 BNSF Railway Company 164,000

2017 Toyota 2,100,000 J.C. Penney 1,142,557

Subbing In: Making sense of DFW’s subleases, absorption, build-to-suits, and construction trends.
 Time will tell
Another influencer in this sublease inventory growth is the flight to quality
that is being seen across the market. Companies that are seeing better profit
margins and have more money to spend are deciding to move to newer Class
A space instead of staying in value options such as Class A or B space built in
the 1980’s. Submarkets such as CBD and Las Colinas experienced the majority
of their supply deliveries in the 80’s so it makes sense that they will see the
most vacancy as companies turn their attention to flagship submarkets like
Uptown/Turtle Creek.

This correlates with the numbers for 12 mo. absorption within buildings
separated by decade:

Sublease SF 12 mo.
Decade Built Decade Built
Vacant Absorption
60's 20,094 60's 132,052
70's 110,163 70's 680,584
80's 2,013,156 80's -1,639,218
90's 429,645 90's -797,874
2000+ 431,037 2000+ -1,125,240
Post Recession 566,877 Post Recession 9,060,324

Sublease SF Vacant
Sublease SF Vacant

60's
60's 70's
70's 80's
80's 90's
90's 2000+
2000+ Post Recession
Post Recession

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Softness ahead
Within these newer buildings, demand has been consistently strong, though down from cycle highs.

In all, of the 8+ msf currently under construction, including single-tenant build-to-suits, 74.3% is preleased.

However, When those owner-occupied build-to-suits are removed, this number decreases to 34.9% for the
roughly 3 msf, which is below the 5-Year average of 44.3%. The pipeline is slowing, but DFW still ranks 2nd
in the nation for construction starts in 2018, only behind the behemoth of NYC. If absorption and leasing
activity are cooling, vacancies are rising, rent growth is slowing, but more inventory continues to
deliver, then, some additional softness in the market should be expected over the next few quarters.

8.7 msf including single-tenant

74.3%
preleased 3 msf excluding single-tenant

34.9%
preleased

Subbing In: Making sense of DFW’s subleases, absorption, build-to-suits, and construction trends.
 Total
Sublease
Inventory:
3.6 MSF

Total
Coworking
Inventory:
340,000 SF+

Coworking
Another major disruptor for leasing activity is the
growing use of coworking spaces. Coworking is a
style of work that uses shared workspaces within
an office space which can be utilized by multiple
organizations.
The reason coworking is affecting sublease numbers
is due to the fact that it is listed on Costar and other
databases as a sublease, even though the coworking
company, such as WeWork, is a direct tenant. We-
Work lease the space as a whole, then “subleases” its
individualized workspaces to clients.
A detailed Costar survey shows that over
340,000 sf of coworking space is included
within its sublease listings. That would
equate to roughly 10% of DFW sublease
space as being part of this subgroup,
which means it isn’t sitting vacant or a
victim of downsizing or relocation.
It could be argued that a sublease was once
considered a more low-risk/flexible alternative
compared to a traditional lease, especially if the
sublease was plug and play. Now however, coworking
has pushed this even farther by allowing complete
flexability in its lease terms and offering tenants
fully built out space. This trend carries over to
general market situations as well. Coworking is
becoming a better draw for startups and small
businesses because of its flexibility compared to a
traditional lease, and its shared amenities.
This signals how coworking is integrating itself
more into the commercial real estate industry. Its
popularity only continues to grow, so more of this
“sublease” space is going to continue to show up
in databases, and for those not paying attention, it
could make the sublease situation seem more grim
than it truly is.

Partnership. Performance. avisonyoung.com

Costar predicts that by 2022, coworking space could double in the US.

National Cumulative Growth in Coworking Occupancy Over the Past Decade

Largest Coworking Firms by SF Occupied in the U.S.

Subbing In: Making sense of DFW’s subleases, absorption, build-to-suits, and construction trends.
 7
Dallas ranks 7th in 65% of coworking tenants
nation for coworking sf are between 20-39 years
old, versus 47% in general
workforce
Coworking is also growing in usage with major
companies who are looking for hoteling options for
lower priority employees. Tech giants such as Verizon,
Facebook, Starbucks, IBM, and Microsoft are now
using coworking spaces to connect to innovative
startups. This is allowing them to spot tech disruptors
up close, track acquisition targets, attract millennial
talent, and use a more agile coworking location for
temp workers, short term clients, or entry positions.
Large corporations are taking note of these benefits.
The number of corporate users with over 1,000 em-
ployees using coworking space has doubled since last
year. 25% of industry giant WeWork’s revenue comes
from large corporate users.
Another point worth highlighting is that many
coworking companies such as WeWork are taking
space in Class A-AA buildings, not bargain Class B
buildings. This is leading the investors holding these
higher class buildings to put restrictions limiting
coworking to only 40-50% of their buidling footprints
as to not affect their cap rates in revenue.
Partnership. Performance.
14,000+ 200% global growth
coworking spaces rate last 5 years
in the world
It is clear industry has changed. If a company
needing a cost-effective space is in the market,
instead of just searching out subleases, they now
have far more options available than they did
even just a decade ago.
Some landlords and users are getting creative in
the face of this evolution. Disruptors such as
Liquidspace have arrived on the scene.
Liquidspace is a marketplace for
professional meeting and workspace that allows
users to rent space from landlords and tenants
themselves. Therefore, if a tenant has 400 sf of
vacant furnished space that it hasn’t used in a year,
it can rent this space within its office to outside
users for however long they need it.
What these trends show is a growing lack of desire
for structured, long term leases, but coworking is
just a single piece of a larger puzzle. As the economy
continues to evolve and gig economics take over
larger portions of the workforce, that need for
flexibility will have to be addressed. There is also
a coming generational shift where millennials are
less capable or expectant to own or commit to
long term products, which could roll into office
leasing decisions.
Couple this with companies who are
looking for cost effective staffing, including
a growing interest in contract workers,
and the future shows a shrinking demand
in overall office footprints.
avisonyoung.com
The Big Shrink
Another major factor that plays into the reduction of
overall leasing activity, both direct and subleases, is
the growing trend of efficient workspaces.
Businesses are trying to fit more into less, and now
they are armed with empirical data through practices
such as Workplace Strategies, which are showing
users how to create more modern, collaborative
spaces that help reduce shadow space and wasted
finances.
According to NAIOP, many companies claim to
underutilize +30% of office space. Considering real
estate expenses make up one of the largest budget
items for most companies, it would make sense that
they wish to find as efficient a space and layout as
possible to cut down overhead. This is leading to a
general reduction in office sizes as the average SF
per employee continues to shrink.
2010 2012
U.S.
Average SF
Per Employee
225 sf 176 sf
Avison Young Dallas’s new office utilizes many of the above mentioned, focusing on a more collaborative, open environment, with fewer
and smaller private offices, and more connected workstations.
Subbing In: Making sense of DFW’s subleases, absorption, build-to-suits, and construction trends.
According to Costar Portfolio Strategy, in 2010, the
average usable SF per employee was 225 sf. In
2012 it had reduced to 176 sf per employee. By
2017 it was 151 sf. This is in comparison to Canada’s
average of 140 sf, and the EU’s average of roughly
115 sf. Some experts predict the U.S. could get
below 120 sf per employee in the coming years.
One aspect that benefits DFW as compared to Tier
1 cities like NYC, Miami, SF, or Chicago, is that DFW
doesn’t have “natural boundaries” such as major
bodies of water or mountains. We have room to
sprawl so developers and tenants aren’t quite as
pressed to make the most of every square foot.
This means footprints for businesses will continue
to shrink even as more supply arrives. Thus, leasing
activity will need to increase just to maintain current
occupancy rates.
2017 2020
151 sf 120 sf
 Economy & Job Numbers
The positive outlook for Dallas and Texas jobs as a whole should
keep investors and landlords optimistic for the remainder of
the year.

The Federal Reserve Bank of Dallas predicts that Texas will add 444,100 jobs
this year, with employment at 12.8 million come December 2018. Texas led the
nation in job growth last year with 2.4% growth, with Dallas having a solid
3.5%; well over the 1.6% national average.

DFW specifically, saw 122,000 new jobs added in the last 12 months, and
103,700 jobs added in 2017. Also, with more people and businesses fleeing pricier
coastal hubs and relocating to North Texas, Oxford Economics projects DFW to
have North America’s largest population growth to 2030 with 2.5 million people
being added, bringing the metro population to 10+ million.

Dallas has seen an astronomical 20.3% job growth over the last five years.
Unemployment still sits below the national average at 3.7%, but this may be an
indicator that we are reaching peak employment, which could hinder growth
as unemployment levels this low usually lead to higher wage growth as
companies have to compete more for quality talent.

DFW Bragging Rights

7,102,796
Total population

122,000
Jobs added in the last year

3.4%
Unemployment in Dallas.

3.5%
Increase in employment
over the last year

#1
Places for business and career
2 years in a row -Forbes

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Looking Ahead
In summary, DFW metroplex has arguably led the
nation in growth following the Great Recession. The
market saw unprecedented growth and is becoming
more of an international business hub every day.
That said, the best days of the cycle are most likely in
the rearview mirror, as job growth slows along with
a historically low unemployment rate. Population
growth has slowed from over 450 people moving to
DFW a day to roughly 300. Home sales have slowed,
leasing activity has slowed, but the economy is
strong, and if hiring continues at projected rates, the
metroplex will remain an international business hub.
Rising costs of construction and labor shortages are
also going to put a damper on new development
projects, which should keep vacancies consistent,
even though Dallas’s vacancy rate sits several points
higher than national averages. This slowdown in
new space will make sublease space more competitive
from a rental rate sense as demand will continue to
drive new space rates upwards. Landlords, investors,
and brokers who are more market savvy may do
well to continue pushing large sublease spaces to
large corporate users who are considering following
the trend and relocating to DFW or oil companies
looking for a shorter termed cyclical expansion. This
could position those sublease spaces as value plays
that are lower risk. Shorter lease terms and lower
Subbing In: Making sense of DFW’s subleases, absorption, build-to-suits, and construction trends.
rates could be seen as a draw to frugal companies
looking to capitalize on the favorable business
climate here but are wary of making large investments
up front.
Bob Dylan is as right today as he was a half
century ago. The times are a-changin’. Subleasing
may no longer be as safe an option as it once was,
but in the opening of that uncertainty, smart users
will utilize economy, social, and technological
changes to adapt and thrive. Truly, those that refuse
to adapt and continue to do business as they did in
the 80’s may soon see holes in their NOI’s and cap
rates that are the same size as the sublease vacancies
in those 80’s buildings. To those that are smart and
proactive however, now may very well be some of
the best days in DFW’s economic history, and with
international spotlights shining on our buildings and
business model, this is as good a chance as has ever
come to make moves.
-Avison Young Research
Micah Rabalais
1920 McKinney Avenue, Suite 1100
Dallas, TX 75201
214.269.3108
micah.rabalais@avisonyoung.com