Why Is Texas Leading in Return to the Office?

Office landlords across the country are hurting, but there’s one place where workers are returning to the workplace more so than anywhere else.

Three top Texas office markets continue to lead the nation with weekly badge swipes as a percentage of pre-COVID rates, starting with Austin at 60.4%, according to a new report from JLL, which cites data from security tech provider Kastle Systems. Houston (55.7%) and Dallas (51.3%) are the only other major U.S. office markets that report even half the rate of pre-pandemic badge swipes among those who use Kastle’s services.

Experts who spoke with LoopNet agree that in-person work may never return to pre-pandemic levels, but the three Texas markets may offer a blueprint to recovery for the rest of the country.

“We have all the right metrics for growth for many different industries,” including tech, energy and financial services, said Torrey Littlejohn, a Dallas-based managing director at JLL who specializes in tenant representation.

One reason so many workers are returning to the office in Texas is because their employers are opening new offices in the state, and they want employees in those new offices. Tesla, Samsung and Google are among the big-name companies that are either expanding or relocating to Austin alone.

Littlejohn said she recently represented a financial services company from the Northeast that opened a new office in suburban Plano, Texas. She said many companies are simply following the population growth in Texas, which added more than 300,000 new residents, the most of any state, between July 2020 and July 2021, according to U.S. Census data.

“It's a very tight labor market,” Littlejohn said. “So you want to go places where you know that you can attract and retain and grow your labor base.”

The latest CoStar data paints a different picture for each of the leading Texas office markets, however, showing that challenges remain despite bringing more workers to the office.

Austin is in an enviable position, with companies like Amazon, Oracle, Wayfair and Apple conducting major expansions in the Lone Star State’s capital. Office leasing activity in Austin totaled 9 million square feet last year, double 2020’s levels and nearly reaching 2019’s peak of 9.5 million square feet, according to CoStar data. No U.S. market leases more office space as a percentage of total commercial real estate leased since the start of the pandemic than Austin. The office market reports a 12.9% vacancy rate and 2.6% rent growth over last year, according to CoStar.

Still, some risks threaten Austin’s office momentum. Despite leading the country in bringing workers to the office, Austin ironically is also one of the most prevalent remote-work locations in the country, with 13.4% of workers working from home compared to the 7.3% national average, according to the latest U.S. Census data.

Austin also has 11.5 million square feet of new office space either under construction or opened in the past year, further testing the market’s historically strong office absorption. The Austin market has the most office construction of any major market in the country as a percent of inventory, and with office vacancies remaining above pre-pandemic levels, this construction pipeline presents a considerable short-term risk to Austin’s office market.

On the other hand, Austin continues to enjoy strong population growth and relative affordability compared to other tech-heavy markets, and this supply of new office space could be beneficial to getting ahead of a post-pandemic office resurgence.

Dallas’ office market is also reporting positive momentum, with the first quarter of 2022 marking four consecutive quarters of positive net office space absorption. Many large build-to-suit office developments contributed to this trend, led by Charles Schwab moving into a new 580,000-square-foot campus in suburban Westlake, Texas, and JPMorgan Chase moving into a 540,000-square-foot space in Plano.

The amount of office space under construction is also relatively restrained, at 7.4 million square feet. A CoStar analysis shows speculative office buildings built during the pandemic have leased well. One example is the 215,000-square-foot Stack in Deep Ellum, which opened in early 2021 in downtown Dallas and is now fully leased. The Dallas-Fort Worth market is also reporting office rent growth, at 1.8% year over year.

Still, the overall office vacancy rate remains high, at 17.7%, and there is now more than 10 million square feet of office space in the metro available for sublease, adding stress to the market.

Houston has an even higher office vacancy rate, at 19%, which remains among the highest in the nation among other major markets. The latest CoStar data also shows zero rent growth over the last 12 months, lagging the national average.

But there are still some signs of an office recovery in Houston. Office leasing volume rose 8% in 2021 compared with 2020, and the 4.8 million square feet of office space leased during the first quarter was the most in one quarter since 2018. This momentum will be tested by the 5.1 million square feet of office space under construction in the Houston market.

There are mixed signals in each of the Texas office markets, but along with the office badge swipes data, these Texas markets do offer encouraging contrast compared with the nation’s biggest office market: New York.

The number of workers swiping into New York office buildings remains low, at 37.4% of pre-COVID levels, according to the JLL report, and other indicators like negative rent growth and negative office space absorption are trending the wrong way as well.

The nation-leading 17.5 million square feet of office space under construction in New York will likely result in elevated vacancy rates for some time, as well as a reduced appetite for classic “value-add” opportunities in Class B and older buildings.

There’s another competitive advantage that these Texas office markets enjoy: shorter commutes. A Gallup survey last summer found that 52% of remote workers listed avoiding commuting as their top reason for not working in an office.

The New York metropolitan area had the longest average commute time in 2019, the latest period data was available, at 37.7 minutes, according to the Census Bureau. In the Austin metro, the average commute was 10 minutes less.

The commute times in Dallas (28.6 minutes) and Houston (30.7) were also shorter than in other leading markets including Los Angeles, Chicago, Washington and San Francisco.

Read more on LoopNet about how to outfit post-pandemic office spaces.