Huge Office Vacancies in Texas Could Deplete Tax Base

With vast stretches of office space sitting empty, two of Texas’ largest cities are confronting an economic challenge that goes beyond just real estate.

Dallas had 53 million square feet of empty office space at the close of the first quarter, and Houston followed closely with 50 million square feet, Bisnow reported, citing Switch on Business’ analysis of Cushman & Wakefield data. That positions Dallas’ vacancy rate as third in the nation, following New York and Chicago, while Houston ranks fifth nationwide.

The alarming amount of empty space in the two cities has emerged as a multi-billion dollar problem. The 25 percent vacancy rates in Dallas and Houston contribute to an annual loss in potential rental income of $1.62 billion and $1.56 billion, respectively.

The vacancies translate to a national loss of $250 billion.

“Landlords and property owners bear the brunt of the loss, as vacancies mean no rent is coming in to cover mortgage payments, maintenance costs or other operating costs associated with the building,” said James Barnes of NeoMam Studios.

That affects the bottom line for cities.

“At some point, it’s going to eat into the tax base,” said Jay Wall III of Moody Rambin in Houston. This could lead local governments to make challenging decisions regarding taxes and services, creating a cycle of fiscal strain.

Ownership groups that acquired properties during a low-interest rate environment are now dealing with reduced rent rolls while banks still expect mortgage payments.

Texas’ high office vacancy rates have roots in the state’s historic construction boom, driven by affordable land and a growing population. However, shifts to hybrid and remote work have rendered many older buildings, particularly those built in the 1970s and 1980s, less desirable.

“The majority of that vacancy … will be in product that was built prior to 2010,” said Scott Morse, managing partner at Citadel Partners.

Houston’s historical context mirrors that of Dallas, with the city facing a similar landscape of distressed and outdated supply that analysts predict will persist until significant portions of the inventory are redeveloped or removed.

“The kitschy response to that is that Houston is not overbuilt; it’s under-demolished,” Wall said.

— Andrew Terrell