'We like to develop in Texas': Why the Lone Star State keeps building offices that remain vacant

• Texas developers continue to build offices, even though office-vacancy rates are high.
• High vacancy rates can be partly attributed to newer developments, but Texas has the space for them.

Americans think Texas is the place to be. From its popular metros to remote locations, the Lone Star State is experiencing fast growth. It has five of the 10 fastest growing counties in the US, and is a popular relocation spot from California.

Texas is a developer's dream — about one in six new-construction buyers purchases a home in Texas, Manny Garcia, a senior population scientist at Zillow, told Insider.

"Texas has historically been an enormous producer of new-construction homes and a lot of those homes are just sort of sprawling out from big metro areas," he said.

Yet offices in Texas are struggling to find tenants, according to the Wall Street Journal. That's because Texas developers build too much. Cheap land and lax regulation encourages developers to overbuild during boom times, Thomas LaSalvia, head of commercial real estate economics at Moody's Analytics, told the Journal.

"If there's demand, why would you stop developing?" Jeff Eckert, JLL's head of US office agency leasing, told Insider.

Three of the top four metros in Texas — Austin, Dallas, and Houston — all had office vacancies above the national average of 19.2%, according to a dataset provided by research firm Moody's Analytics.

In the third quarter, Austin's offices had a vacancy rate of 24.2%. Dallas's office-vacancy rate was 25.8%, while Houston's was 26.4%.

Even with those numbers, Eckert told the Journal that new office completions in Texas eclipsed every other market. "We like to develop in Texas," he told the Journal.

Eckert explained to Insider that new developments can play a role in causing vacancies in older buildings. But the age of a building isn't the only factor in whether or not it will remain empty. Location — and what's inside — generally seals the deal.

"There's plenty of '80s and '90s vintage buildings right here in Dallas that are great buildings, great real estate, and that have all the amenities and they do plenty of leasing," Eckert said.

And of course, broadly many companies are pushing their return-to-office mandates but that doesn't guarantee a full office.

Eckert sees a new life for some of the empty Texas buildings. Some decades-old buildings are in prime locations and lack only the certain amenities. A "cleansing" of outdated buildings is on the horizon, Eckert said. Part of that cleansing is converting office buildings into something new, giving them a chance at a new lease on life.

Older buildings without all of the newer, in-demand bells and whistles can be retrofitted and updated, and will attract new tenants.

For example, 2401 Cedar Springs in Dallas, Texas, where JLL has an office, was built in 1989 but was renovated and updated in 2020, a year before JLL moved in.

Overall, Eckert isn't worried about the office vacancies in Texas, as that is just one data point that doesn't tell the whole story. But there are some buildings deemed "functionally obsolete" that will have little to no chance at bouncing back.

"Buildings at some point reach a functional obsolescence stage," he said. "Maybe it's location, maybe it's quality of construction, maybe it's lack of amenities. Whatever the case may be, it's just never going to lease."