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Energy Changing Spaces: Downtown office market shifting with oil price, new buildings

Changing Spaces: Downtown office market shifting with oil price, new buildings

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Downtown Office Space Occupancy Rate

89.5 percent – 4th Quarter 2016

90.7 percent – 4th Quarter 2015

87.9 percent – 4th Quarter 2014

Downtown Class A Office Space Rents

$28.56 per square foot – 4th Quarter 2016

$28.57 per square foot – 4th Quarter 2015

$28.74 per square foot – 4th Quarter 2014

Source: Downtown Fort Worth Inc.

Months ahead of the opening of Frost Tower, the new skyscraper is generating buzz as a 21st century marvel with exquisite design features and amenities that is raising the bar for office development in Fort Worth and throughout North Texas.

But this new jewel of the Fort Worth skyline is also causing some jitters among economic development officials and realtors about the addition of more office space when the downtown office market is just finding some stability after the oil crash.

The new 25-story Class A office building will add about 260,000 square feet of office and amenity space into a market that now has about 200,000 square feet of sublease.

“Vacancies are going up,” said Todd Burnette, managing director of the Fort Worth office of JLL commercial brokerage. “We could see a vacancy rate this year of 18 percent or greater, which is the largest we’ve seen in a long, long time.

“It’s definitely a tenant’s market,” he said.

Frost Tower is a welcome addition and is already nearly 50 percent preleased to Frost Bank and Jetta Operating. Co. Developer Anthracite Realty Partners, an affiliate of Jetta, is building and owns the building.

As construction churns toward completion by the end of the year or early 2018, the downtown office market is stabilizing after being smacked by plunging oil and gas prices that caused energy companies to dump sublease space on the market, Burnette said.

Ironically, oil and gas companies fueled the downtown office market and helped drive recovery after the recession.

Downtown sublease availability began rising in 2015 and hit its peak of 260,000 square feet in the second quarter of 2016, Burnette said. Since then, Class A sublease space has dropped about 20 percent and leveled off at about 200,000 square feet at the end of the fourth quarter of last year.

Downtown has close to 11 million square feet of office space, which was 89.5 percent occupied, according to fourth quarter data from Downtown Fort Worth Inc.

“When oil and gas prices turn around, it will turbo charge the market,” Burnette said. “That will create a sense of urgency and right now there is no urgency.”

Economic development officials said the glut of space offers opportunities for companies to move up from Class B space to Class A or to move into downtown from other areas of Fort Worth.

“We are seeing the space being backfilled,” said Andy Taft, president of Downtown Fort Worth Inc. “There are many good opportunities right now.”

And, many companies are seizing those opportunities. Bank of America will expands its presence in downtown Fort Worth by leasing three full floors of the space being vacated by D.R. Horton in Sundance Square. The bank will take over about 68,000 square feet in Sundance Tower, with plans to open its consumer banking center on the ground floor. The building with be renamed Bank of America Tower in Sundance Square.

The bank’s move will leave about 56,000 square feet available in its former building at 500 W. Seventh St., originally built in 1961 for First National Bank of Fort Worth. Jack Clark, president of Red Oak Realty, which is listing that building, said renovation of the ground floor for retail space is among the options under consideration.

Meanwhile, to the east in downtown, there has been some activity with leases surrounding energy firms. French oil and gas company Total S.A. has leased 20,752 square feet at 777 Main St., according to Xceligent Inc. That building has nearly 30 percent of its 954,000 square feet available, accounting for about 75 percent of the Class A office vacancy downtown, Burnette said.

Traditional office users such as law, engineering and accountancy firms as well as insurance agencies, investment brokerages and others are the most reliable businesses for filling downtown office vacancies but don’t have the space demands of corporate firms like D.R. Horton, Taft said.

“Downtown is a great location for most businesses because you get so much more value for the money,” Taft said, citing the immediate access to Sundance Square, 60 restaurants, City Hall, the Tarrant County and federal courthouses and much more. “In a suburban location, you get an office building and a parking lot.”

While the amenities sell themselves, Taft and others recognize the challenge of getting businesses to come take a look.

“We need to build a robust pipeline of new prospects for office users in downtown Fort Worth,” Taft said. “The east side of the Metroplex is getting a lot more office prospects than the west side. “We have a lot of good opportunities here, we just have to get prospects to look at the west side as well as the east side.”

Brandom Gengelbach, the new executive vice president of economic development for the Fort Worth Chamber of Commerce, plans to introduce a new marketing strategy he calls the Dallas Broker Road Show to help commercial real estate brokers in Dallas better sell Fort Worth to prospects.

“The Dallas-Fort Worth market is so large and complex,” Gengelbach said, “it’s hard for anyone to understand the whole market so the more knowledge and information they have to sell the Fort Worth market, the better it is for them to make a deal and for us.”

Gengelbach said he is also optimistic that the downtown office space will fill in but it could be a long, slow process that requires a coordinated strategy. The goal is to attract more diversified users to bolster the market against factors such as falling energy prices, he said.

“Downtown is the heartbeat of Fort Worth,” Gengelbach said. “We’re excited about the opportunity for economic growth in downtown.”

Despite the glut of downtown office space, rents have held steady at just below $30 per square foot, Burnette said. Rents could even rise slightly with the opening of Frost Tower, which will reach “a high water mark” of $40 per square foot.

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