The recent announcement that XTO Energy Inc., a division of energy giant ExxonMobil, will be moving 1,600 jobs to Houston was not the best news for Fort Worth.
The move, which will occur in waves between 2018 and 2020, will reduce downtown’s private workforce by 3 percent over the next few years and lead to several of the company’s CBD properties hitting the market for sale. Broader economic implications notwithstanding, many tenants, landlords and city officials are wondering what impact XTO’s move will have, not only on the office market, but also on the downtown area’s commercial real estate market.
However, any worries that the move would drastically upset the downtown market’s equilibrium appear to be misplaced. Most office sectors, especially the CBD’s Class A market and the suburban market that includes the West 7th and West/Southwest Fort Worth areas — should see minimal impact. It is even possible that most of the Class B market in the CBD will remain unaffected, as demand for re-development or from existing office users may consume much of XTO’s spaces.
Todd Burnette, JLL
To understand how this move could affect downtown Fort Worth, it helps to look at the bigger picture.
The current CBD office inventory is just shy of 11 million square feet: 5.98 million square feet of Class A space and 5 million square feet of Class B space. Total vacancy at the end of the second quarter was 13.8 percent, with only 7 percent vacancy among Class B properties.
Immediate Impacts
XTO currently owns five historic office properties in downtown totaling almost 615,000 square feet. Its holdings represent less than 6 percent of the current CBD inventory. Media reports indicate that XTO is planning to keep 600 employees in these buildings until 2020, with 300 employees scheduled to remain for the long term.
And while the energy firm is still deciding which building it will maintain for long-term occupancy, its largest office space — the 185,000-square-foot building located at 714 Main St. — appears to be the leading candidate. In that scenario, less than 430,000 square feet, or roughly 4 percent of the current inventory, is scheduled to hit the market for sale. Considering that vacancy over the last five years was 2 percent higher than it is today, even a worst-case scenario would not be unprecedented.
It is also important to note that XTO is not dumping these properties on the market all at once. At this point, only one of the company’s core office buildings has officially been listed for sale, though it has already received multiple offers.
The gradual approach to selling these buildings proves that there is no urgency to dispose of these assets without ensuring that market demand is in line with new supply.
Class-By-Class Effects
Class A buildings will be especially insulated, as none of these would compete directly against true Class A inventory. The XTO-owned buildings have been extensively renovated with above-market improvements. But they don’t meet the traditional characteristics found in Class A assets throughout downtown Fort Worth, and their smaller floor plates do not typically work for most Class A tenants. Thus, it is unlikely that these buildings will significantly impact vacancy, absorption or rental rates for Class A buildings in the CBD, much less for Class A buildings in the suburbs.
There is also a strong possibility that one or more of these buildings may be purchased by someone with a plan to redevelop to hotel or multifamily. If that occurs, the multi-tenant, Class B office market could see less than 50,000 to 100,000 square feet of vacant space — less than 1 percent of CBD inventory — hit the market.
Even if more vacant office space than expected hits the market, Fort Worth would hardly be in uncharted waters.
Currently, Class A vacancy sits at 13.6 percent, which is almost one full percentage point lower than the rate in early 2015. Since none of these buildings are considered Class A, there would be no direct impact on Class A vacancy.
The Class B market should remain strong, especially compared to other Class B properties in other metros. Vacancy of Class B properties in downtown Fort Worth stands at 7 percent. As things currently stand, that number may not rise above 11 percent as a result of this move. By comparison, Class B vacancy was 15.7 percent at the beginning of 2014.
Future Outlook
With the controlled disposition of XTO’s downtown office portfolio and land holdings, what is the outlook for and the impact to the CBD market, which has been reported to be soft? What’s coming next are deals — not only in the office market, but also in the apartments and hotel spaces.
As a result, CBD land values are rising faster than we have ever seen, with few options available. Those that are available are driving premiums of 30-plus percent over prices 12 months age.
In addition, over 625,000 SF of office deals — both new and renewed — have been or are very close to being completed throughout the greater CBD area.
Some of these deals include: EOG Resources’ 123,000-square-foot lease and Bank of America’s 67,000-square-foot lease, both within Sundance Square; JLL’s 17,000-square-foot lease within Wells Fargo Tower; UMB’s 20,000-square-foot lease within 777 Main; Burns & McDonnell’s 22,0000-square-foot lease within Pier 1 Tower; BDO’s 12,000-square-foot lease within Bank of America Tower, just to name a few.
— By Todd Burnette, managing director, JLL. This article first appeared in the October 2017 issue of Texas Real Estate Business magazine.