By Brett Merz, senior vice president of asset management, KBS
Texas was one of the first states to experience the return of employees to the office post-pandemic. That trend continues today.
Even as work-from-home and hybrid work become further entrenched in some parts of the country, Texas still leads the nation in terms of employees coming into the office. According to Kastle’s Workplace Barometer, office properties in Dallas, Houston and Austin have occupancy rates during peak times that are 10 percent higher than the national average.
Kastle’s data cuts across all building classes, but in our experience, mid-week occupancy at our Class A office properties in Texas is even stronger. Kastle’s data and our experience contrast with the negativity surrounding the office market and point to the potential for greater opportunity throughout 2024 and beyond.
According to JLL’s local market office reports for major Texas cities, vacancy rate increases are slowing down. With new construction in Dallas and Austin trending down, as well as zero new construction in San Antonio and Houston, occupancy rates may begin to grow through the rest of the year. Additionally, rents for Class A buildings are either stable or have seen slight increases over the first quarter of this year.
So what is it about Texas that bolsters commercial office property success? Demographic and business migration trends coupled with office-specific expectations appear to be the primary drivers for the office market for the near future.
Texas Teems With Workers, Businesses
From 2000 to 2022, Texas gained more than 9 million new residents, according to the U.S. Census Bureau. This remarkable figure is a testament to Texas’ appeal.
The largest cities in Texas — Dallas, Houston, San Antonio and Austin — have been among the top 10 U.S. metro areas experiencing the biggest population increases. The Houston metro area saw the highest jump with 92,562 new residents, and Austin was second adding 50,415 people over the same period. In fact, nearly 70 percent of Texas residents live in the state’s four largest metro areas.
According to the Texas Employment Forecast from the Dallas Federal Reserve, employment in the state is expected to increase 2.2 percent (304,200 jobs added) in 2024. The forecast also suggests that job growth will be slightly above the state’s long-term average, and total employment in December 2024 will reach 14.4 million. Job growth this year continues the much longer trend Texas has experienced with the largest net business migration in the country.
The state’s business-friendly characteristics include no corporate income tax, a less restrictive regulatory climate and a large highly educated workforce. Through 2019, Texas saw the biggest net migration of jobs and business in the country — thanks to this business-friendly environment.
More recently, Apple has announced plans to move 121 jobs from Southern California to Austin later this year, and tech companies like Caterpillar, CBRE and HP have either moved or are planning to move to Texas. A 2023 CBRE study on corporate headquarters real estate highlighted that Texas has been the largest recipient of corporate headquarter relocations between 2018 and 2023 with over 209 companies moving to their headquarters to the state.
While working from home remains the norm in some places, large corporations continue to encourage employees to return to the office, and large tenants are seeking Class A buildings with great amenities.
Amenities, Class A Space Lead the Way
Attracting and retaining tenants in the competitive office leasing market comes down to being able to deliver the best workplace experience. Companies of all sizes are rethinking their physical space requirements, but most are more focused on spaces that offer greater flexibility, and more importantly, amenities that help draw employees into the office.
KBS actively incorporates innovative ideas and trends into the capital improvements we make to our buildings. Across Texas, we believe that the investments we make to improve tenant satisfaction will pay off with higher retention and lower vacancies. For example, a few years ago when we were updating Highland Park Place in Dallas, we introduced Fairgrounds Café to the area. The Chicago-based café is a unique craft beverage shop offering sandwiches, salads and local pastries, as well as craft coffee, tea and matcha. It’s been a huge success.
Texans want to take advantage of nice weather, so creating optimal outdoor space is paramount when it comes to adding amenities to properties. With this in mind, KBS recently added an all-new Lakeside outdoor area at Tower 909, a Class A, multi-tenant office building located in the heart of the Urban Center of Las Colinas in Irving.
From the elegant granite and reflective glass exterior to the grand two-story lobby and the breathtaking 360-degree views offered from all angles, The Tower’s new park-inspired outdoor area on Lake Carolyn has been integral in sustaining occupancy and attracting a high caliber of tenancy.
KBS also took advantage of available outdoor space when renovating Preston Commons, a three-building, Class A office park located in the highly coveted Preston Center submarket of Dallas a few years ago. We created two unique outdoor areas with the goal of seamlessly combining the interior with the exterior courtyard. Other building amenities include a state-of-the-art conference facility that includes a training room, large boardroom, small boardroom and kitchen, tenant lounge, Wi-Fi café, spacious indoor/outdoor seating, putting green and collaboration areas throughout the property. We’re also in the middle of adding a new upscale restaurant.
Visible amenities are not the only important upgrades to office properties. KBS is consistently seeking new and innovative environmental, social and governance (ESG) initiatives to implement at our Texas properties and strengthen our sustainability goals. This includes LEED and ENERGY STAR certifications that most buildings are known for, but we’re also seeking ways to incorporate new sustainability practices into our assets.
For example, at Tower 909, we’re working with the International WELL Building Institute to achieve its WELL Health-Safety Rating. To earn the rating, properties are scored annually for their cleaning and sanitization procedures, emergency preparedness programs, health service resources, air and water quality management and stakeholder engagement and communication.
KBS also actively incorporates renewable natural materials, like wood, wool, cotton and bamboo, when implementing new amenities. We strive to create a welcoming, hospitality-inspired environment at each property that will positively impact occupancy.
Remainder for 2024
While not immune to the financing challenges plaguing commercial real estate investment, Texas’ combination of economic and demographic strength is primed to deliver opportunities in the office market throughout the rest of the year. This activity will be mostly concentrated in the Class A segment, as the bifurcation of the market drives a flight to higher quality product.
As the market gets greater clarity on interest rate and inflation trends, there could be select opportunities for acquisition or divestment. Until then, focusing on tenant satisfaction and making investments in tenant-friendly amenities are solid strategies to shore up the financial success of office properties in Texas.