A Tale of Two Office Submarkets
National Real Estate Investor, July 1, 2005 by Christine Perez
Developing in Dallas isn't for sissies. The land of big cars, big mansions, big hair - and big vacancy rates - can test the grit of even the most seasoned office builders. Even now, with 25% of all office space standing empty, and rents as flat as the Texas panhandle, Dallas developers are fixin' to add another 5 million sq. ft. to the mix.
They've seen Dallas bounce back before. After the collapse of the commercial real estate market in 1992, experts predicted it would take 10 years to absorb all of the vacant office space. But tenants had gobbled up most of it by 1996, and the construction cranes came out again.
Now it appears Dallas is on the verge of another rebound. The market led the nation last year in corporate relocations and expansions, according to Conway Data's New Plant database and Site Selection magazine. There's more good news: The Texas Workforce Commission has adjusted the 2004 employment estimates up from 25,000 to 47,000 new jobs.
Dr. Terry Clower, associate director of the Center for Economic Development and Research at the University of North Texas, says the local economy is improving. "We're seeing solid growth and indications of improving income. The economy is on the right track," he says. "It's not going gangbusters like the mid-1990s by any stretch of the imagination. This time around the growth is slower and more stable, which in some respects is better growth."
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Nearly all of the new office development is occurring in two key submarkets - Downtown/Uptown and Far North Dallas. The two areas are situated at opposing ends of the Dallas North Tollway, a six-lane, 22-mile stretch of concrete that runs north and south through the center of the metropolitan area. That shared link is about the only thing the two submarkets have in common.
Downtown has been the city's core since the 1840s, when John Neely Bryan, a lawyer and real estate developer, claimed 640 acres along the Trinity River for a trading post he named Dallas. Combined with adjacent Uptown, the market contains 37.8 million sq. ft. of office space.
Far North Dallas, the area around the Tollway that runs through the northern suburbs of Plano and Frisco, is a submarket that didn't exist until 25 years ago, when Electronic Data Systems Corp. (EDS) founder and one-time presidential candidate Ross Perot bought 2,665 acres in Plano and began building Legacy business park. Besides EDS, the campus is now home to The Frito Lay Co., JCPenney, Dr Pepper/Seven Up and other major corporations.
Developers in Far North Dallas are continuing to take the "if you build it, they will come" approach, with eight companies recently breaking ground on nine projects totaling 1.3 million sq. ft. None required pre-leasing. Two other speculative projects, which total 345,000 sq. ft., are slated to begin construction later this year.
Although the corporate headquarters buildings in Legacy are quite swanky, most multi-tenant buildings in Far North Dallas are of the large-floorplate, ultra-efficient variety, having been built either during the tech boom, when demand was fast and furious, or after the crash, when companies were laser-focused on the bottom line.
Plano-based Granite Properties is developing what will be the tallest building in the submarket, a 14-story, 369,000 sq. ft. tower. Slated for delivery in August 2006, it's the third building in Granite Park, located at the southwest corner of the Tollway and State Highway 121. Two existing 10-story buildings, totaling 512,000 sq. ft., are 100% leased.
The next Pleasantville
Another player gambling on Far North Dallas is Indianapolis-based Duke Realty Corp. The developer entered the Dallas market six years ago and has since grown its industrial portfolio to 8 million sq. ft.
"A logical next step was to expand into office," says Jeff Turner, senior vice president at Duke. "We did extra research on the market since Dallas has a reputation for being volatile. We knew we needed to find just the right spot."
Duke's search led to Frisco, a suburb at the northern edge of the Dallas metropolitan area. "Everyone is always looking for the next Pleasantville," Turner says, referring to the movie about the idyllic suburb. "Frisco is about as close as you can get."
One of the fastest-growing cities in the country, Frisco's population has swelled from 6,000 in 1990 to about 75,000 in 2005. The city also has become a shopping mecca, with close to 5 million sq. ft. of retail space within a 1.5-mile radius, including the 1.7 million sq. ft. Stonebriar Centre mall, which opened in 2000, and a 310,000 sq. ft. Ikea store, slated to open in August.
Frisco's aggressive economic development group has put the retail tax receipts to good use, luring office users with cash incentives - sometimes as much as $1 million or more. So far, most of the cash has gone to tenants in Hall Office Park, a 165-acre, multi-tenant campus developed by Craig Hall, who was building in Frisco before Frisco was cool.
Hall's monopoly, a hold he's had since 1997, will soon end as other developers have begun to invade the market. Still, he has a big head start. The nine buildings in Hall Office Park are more than 90% leased. The two under construction will bring the total to 1.4 million sq. ft.
Hall is one of the few Dallas developers working both ends of the Dallas North Tollway. Brokers describe the 47-story high-rise he's planning to build at the southern end in downtown Dallas as "stunning." The 1 million sq. ft. project will include office, retail and luxury condo space.
Hall calls urban Dallas a tricky market. "Downtown is full of Class B+ buildings with a lot of vacancy, having trouble getting rents of $15 to $17 per sq. ft.," he says. "At the same time, there are buildings like The Crescent in Uptown getting $30-plus rents. From a developer's standpoint, Dallas is treacherous. It's very competitive, with a lot of smart people fighting each other. It has always been very overbuilt, and it will continue to be that way."
Downtown renaissance
Hall's planned tower is in the Arts District, an area at the northeastern end of the central business district (CBD) that includes the Dallas Museum of Art, the Nasher Sculpture Center, the Meyerson Symphony Center and the Dallas Center for the Performing Arts, a $275 million complex under construction.
It's here that Billingsley Co. is moving forward with One Arts Plaza, the first office project to be built in downtown Dallas in nearly two decades. The 23-story, $100 million first phase will include 110,000 sq. ft. of condo space, 30,000 sq. ft. of retail space and 425,000 sq. ft. of office space. 7-Eleven Inc. is expected to lease about 250,000 sq. ft. in the building for its headquarters. The convenience store giant now occupies about 505,000 sq. ft. a mile away in Cityplace. The city of Dallas coughed up nearly $10 million in economic incentives to keep 7-Eleven within its borders.
Why so much new product?
Lucy Billingsley, a partner in Billingsley Co., says there is pent-up demand for options downtown. "The reality is the vacant space is at least 20 years old. With One Arts Plaza, we're offering product that better fits today's workplace with services, efficiencies and style. It reflects a sophisticated but casual culture, not the grandeur of the flamboyant '80s."
Construction will begin this summer, with delivery scheduled for the first quarter of 2007. Billingsley's site can accommodate three additional towers, all of which would be about 20 to 23 stories tall.
A few blocks away, Hunt Consolidated, a holding company for the oil and real estate operations of billionaire Ray Hunt, is quietly readying plans for a new 13-story, 350,000 sq. ft. corporate headquarters. The company currently occupies 300,000 sq. ft. in nearby Fountain Place. JPMorgan Chase & Co.'s $58 billion merger with Bank One will create more vacancy downtown, as the companies' two large Dallas offices are combined into one.
"The move-outs are going to leave big holes in quality buildings downtown, which is great from a tenant's perspective but bad for the overall market," says Bill Cawley, chairman of GVA Cawley. "There is not a lot of velocity downtown, and it's going to be awhile before the space is absorbed. Still, Dallas is a market that sees big relocations, and it always tends to exceed expectations."
'Times Square of Dallas'
On the other side of the tracks in Uptown, separated from the Dallas CBD by Woodall Rodgers Freeway, developers are planning projects that would add nearly 1.4 million sq. ft. of office space.
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