Big D's development boom keeps up pace

With a strong economy and a growing population base, the real estate market in Dallas remains hot.

Like the sprawling metropolis that is Big D, real estate development in Dallas just keeps on going and going.

Office construction continues unabated. The industrial market remains strong. Multifamily projects are completed and leased in record time. The retail sector, fueled by a growing population and the desire of retailers to be in the Dallas area, continues its incredible ride.

In short, Dallas is unquestionably booming, says Drew Alexander, president of Houston-based Weingarten Realty Investors, a shopping center developer/owner that recently acquired several retail and industrial properties in the Dallas area.

"Economists say median incomes in the Dallas Metroplex continue to be among the highest in the state," says Alexander. "Dallas-Fort Worth ranks in the Top 10 nationally in terms of home affordability. Some 100,000 new jobs are created annually in the Metroplex. This results in construction of new office, retail and multifamily facilities."

The economic vigor of the city's real estate market is tied to job creation, agrees Kim Vincent Butler, executive vice president in charge of Dallas developments for Chicago-based Transwestern Commercial Services.

"In 1999, there were 90,000 jobs created in Dallas," she says. "Experts say there will be another 100,000 jobs created this year. Sixty percent of those jobs are tied to workers who will fill up office buildings. If you look at absorption of office space in Dallas, it continues to be strong because job creation is tied to finance, advertising, financial services and other industries."

She points out that Cisco Systems has moved a number of operations to the area, significantly increasing its Dallas presence.

"Cisco is projected to add 1,000 jobs each year through the 2004, and those are the jobs you hear about," notes Butler. "For every one of those there are 10 smaller companies that move here to access our labor pool."

Absorption is up year-to-date over last year because job growth continues at a much faster clip than predicted, continues Elysia Holt Ragusa, president of Southwest Corporate Services of The Staubach Co., Dallas.

"The real estate market is in fairly good equilibrium because construction has slowed, particularly since the end of 1999," she explains. "Now there is time to absorb new product. Rents should stay flat or slightly upward in the more desirable product, while older product is due to soften somewhat."

She added that venture capital continues to pour into Dallas. "It is 30% greater than last year, which is continuing to not only drive job creation but also high-technology momentum."

Such momentum is being felt in all major sectors of the real estate industry, say brokers, analysts and others.

Big office deals The last three years have been an incredible ride for real estate developers in Big D, and the next 12 to 18 months may bring more of the same, points out Jeff Swope, managing partner at Champion Partners, a Dallas-based real estate development and acquisitions company that is also active in Houston and Austin.

"It used to be a 100,000 sq. ft. lease was a big deal, but no more. In the last 18 months or so, we have had 90 leases or commitments for space of over 100,000 sq. ft.," says Swope. "At our company alone, we've broken ground on a 170,000 sq. ft. building in Irving near the airport and a 600,000 sq. ft. building in Coppell. Both are fully leased. We need to start some more space, but we're being more cautious. Construction lenders have also been cautious, so we don't have any major supply problem as we had in the past," adds Swope.

Greg Biggs, senior vice president/regional manager for the Southwest region at New York-based Julien J. Studley Inc., agrees lenders view Dallas with caution.

"We haven't seen a lot of spec building recently because Dallas had been somewhat red-lined by the investment community," he explains. "They got a little skittish on real estate development here. But we've seen some significant absorption in the area, with big blocks of space taken away. That's going to impact tenants in the next 24 months."

Biggs adds that the Richardson telecom corridor in the city has tightened up significantly, with three or four big deals having recently closed. "Similar tightening has occurred in north Dallas, where there were four buildings that were pretty much vacant but then two were suddenly leased. The other two are about 50% leased," he says.

There is tremendous demand for telecom space in the Dallas area as more and more telecom companies relocate to the Metroplex, agrees Chuck Sellers, vice president of leasing at Dallas-based IFM Services, which manages Infomarts around the world, including two in Big D.

IFM purchased the old Southwestern Life building at 1807 Ross, a 270,000 sq. ft. facility that had been vacant for 20 years. IFM is retrofitting 1807 Ross for telecommunications and e-commerce companies.

Doug Johnson, vice president of the Dallas office of Atlanta-based Industrial Developments International (IDI), says that with the rush to develop in the Dallas area, the supply of available land is shrinking.

"Land prices are on the increase in areas such as Grapevine, Plano and other areas where there is a lot of demand and a lot of construction," he says. "We're also seeing a number of build-to-suits planned in the area. There is tremendous demand for space in these areas."

There is also demand from other areas, says Michael J. O'Hanlon, executive director of New York-based Insignia/ESG, one of the nation's largest commercial real estate service companies.

"In Dallas, we have major tenants taking up space," says O'Hanlon. "We're tracking 10 million to 12 million sq. ft. of potential need, ranging from 50,000 sq. ft to 100,000 sq. ft. and upward, so there is a pretty strong demand for space. There's not a lot of inventory being built, particularly in light of the capital market constraints."

He adds that the future of Dallas is bright because of the area's employment and population growth. "We used to live in Chicago," O'Hanlon says. "When we moved there, Chicago had 8 million people and when we left six or seven years later, Chicago still had 8 million people," he explains. "Metro Dallas had 4 million people when we first moved here, and now we're back again and it has 7 million people. Continued growth in the area seems to be the future for Dallas."

In one of the biggest real estate transactions in Dallas in the past year, Morgan Stanley Real Estate Fund III and Dallas-based Macfarlan Holdings Inc. purchased an 80% interest in the 50-story, 1.35 million sq. ft. Thanksgiving Tower for $95 million.

Over the past three years, developers added more than 20 million sq. ft. of office space to the Dallas market, most of which has been absorbed, points out Mike Lafitte, who oversees development in the Metroplex for Dallas-based Trammell Crow Co.

Although capital is hard to come by for projects in some sections of metro Dallas, there is continued improvement in overall occupancy rates, and the hot downtown market is spurring new development, says Lafitte.

Because of such upbeat assessments, the wariness of the international investment community towards Dallas has dissipated because the city has turned in a solid economic performance, reports Mark J. Small, president of Dallas-based MJS Realty Inc.

"There is a lot of movement in the marketplace, and for the next year or so we expect to continue to see good, stabilized absorption," says Small. "The predictions for this year were that we'd be absorbing 5 million sq. ft., and we've already absorbed that so far this year and could ultimately absorb 8 million sq. ft."

One of the most talked about projects in the northwest part of downtown Dallas is Victory, a 70-acre, 8 million sq. ft., mixed-use development. The Dallas-based investment firm of Hicks, Muse, Tate & Furst Inc. has announced it will build its new world headquarters in the Victory development. The 30-story building will be the largest and most architecturally significant structure in the downtown core since 1988, when the Chase Tower was built, officials say.

All of Hicks, Muse, Tate & Furst's subsidiaries currently located in the Dallas area as well as the administrative personnel for Thomas Hicks' sports teams, which include employees of the Texas Rangers baseball team and the Dallas Stars hockey club, will relocate their offices to the 700,000 sq. ft. building.

"Victory is such a unique project that market conditions are almost irrelevant to the project's ability to attract office tenants, retailers and residents," says Bill Flaherty, senior vice president at Victory. "However, this is a perfect time for the development because Dallas-Fort Worth is one of the fastest-growing areas in the country in terms of new jobs and residents."

A shopper's paradise Fast-paced mall and shopping center development, and the proliferation of new retail concepts, point to a healthy retail market in Dallas-Fort Worth.

According to an analysis of the retail market by The Weitzman Group, Dallas, the retail market saw one of its most active six-month periods ever during the first half of this year. Demand for new space is being driven by aggressively expanding retailers, as well as a significant number of new retail concepts entering the market.

As a result of all of this activity, Dallas-Fort Worth is on its way to adding more than 3.5 million sq. ft. of new retail space to the market in 2000. That compares with 4 million sq. ft. in 1999, notes Herb Weitzman, president of The Weitzman Group. The largest project under development this year is Stonebriar Centre in Frisco. The 1.6 million sq. ft. mall, a development of Chicago-based General Growth Properties, is located at state highway 121 and Preston Road. Anchors include JCPenney, Macy's, Nordstrom and Sears.

Just a few miles away, The Shops at Willow Bend mall is scheduled to open next year at the Dallas North Tollway and Park Boulevard with Neiman Marcus, Foley's and Lord & Taylor. A Saks Fifth Avenue store is expected to open in 2004.

"Based on the activity during the first half of the year and the outlook for the area's economy, the Dallas-Fort Worth retail market will see continued activity from new retailers and new projects throughout 2000 and into the foreseeable future," says Weitzman.

Real estate analysts expect even more development. Alexander of Houston-based Weingarten Realty notes that the company now owns 540,000 sq. ft. of retail and 1.8 million sq. ft. of industrial space in the Metroplex. Included are the recently acquired Rockwall Shopping Center in Rockwall, a suburb of Dallas. The 209,000 sq. ft. center was acquired in a joint venture with Dana Commercial Credit Corp.

While Weingarten has been active in Dallas, Alexander would like to own and operate more retail centers and industrial projects in Big D.

"I've always wanted the company to have a stronger presence in Dallas. It makes sense to work with national retailers in as many Texas cities as we can," says Alexander, who adds that two-thirds of the company's shopping centers are in Texas. "We've had some opportunities there, but I wish we had more."

Industrial activity Aided by its location and strong economy, the Dallas industrial market remains strong. Jeffrey D. Turner, senior vice president of the Dallas division of Indianapolis-based Duke-Weeks Realty Corp., noted the company has 2.6 million sq. ft. of industrial space in the metro area and expects to begin developing more industrial product in the future.

Duke-Weeks has two buildings under construction in the Dallas area: the 116,000 sq. ft. Freeport North V and the 228,000 sq. ft. Freeport North VI. The company also has purchased 142 acres of land in Coppell where it plans to develop eight distribution and flex buildings totaling 2.1 million sq. ft.

"We feel there will be continued opportunities for industrial development," adds Turner. "Dallas is a good place to live, a vibrant city with a youthful population base and a diverse economy." He adds that there are few land-use restrictions in Dallas, "so development can keep going and going."

John V. McMillin III, vice president of marketing and operations for St. Louis-based Clayco Construction Co.'s Irving office, notes that the company is on pace to complete approximately $60 million of work this year.

Projects include a $7.2 million, 372,650 sq. ft. building that will serve as the new headquarters for Aero Fabricators Inc. at the Stoneridge Business Park in south Dallas; an $8 million, 262,500 sq. ft. warehouse for Office Depot in Arlington; and a $5.5 million, 78,545 sq. ft. branch-campus building for the University of North Texas at the Stoneridge Business Park.

Growing with the city Thanks to a steady influx of residents, the multifamily market in the Dallas area keeps on growing. Leasing in the Dallas-Fort Worth apartment market accelerated at a torrid pace over the past few months, reports G. Ronald Witten, president of M/PF research of Dallas, which periodically surveys the market.

Residents moved into 8,740 apartments in the second quarter, the strongest quarterly demand since the fall of 1986. Absorption through mid-year already has topped 14,200 units, an increase of 60% from the leasing total posted during the first half of 1999. Annual demand reached 21,430 units in June.

"After worrying about overbuilding for the last year or so, it looks like we've dodged a bullet once again," says Witten. "A number of factors that supported demand for apartments all fell into place during recent months," he says. Most notably, rising interest rates made home purchases less attractive for some renters, and employment growth in Dallas-Fort Worth regained the momentum that had been lost in the last half of 1999." New supply continues to be added to the Dallas-Fort Worth market. Completions over the past 12 months reached 23,334 units, notes Witten.

"Developers exhibited the appropriate restraint during the first half of this year, starting only a limited number of new apartment communities," says Witten. "While further caution is merited when considering new construction, it now appears we'll work through the current wave of new supply somewhat faster than most people previously anticipated."

Steve Lamberti, COO and executive vice president of Walken, a Dallas-based real estate company that owns and manages more than 155 apartment communities in the country, agrees with that assessment. He notes that the area's job growth, with a total employment increase of 91,800 year-to-date and unemployment under 4%, is having a good effect on the market.

"Current Dallas-Fort Worth occupancy is strong at 94%," Lamberti says. "The outlook is positive, with job growth exceeding expectations by 12,000 jobs year-to-date."

Bernard "Bud" Malone, president of Dallas-based Malone Mortgage Co., emphasizes that population growth in the region should continue to spur multifamily development.

"Demand for apartments in the Dallas-Fort Worth area is reaching record levels," says Malone. "The fear of overbuilding has slowed new construction starts in recent months. However, with approximately 80,000 new residents being added each year to the area, we anticipate strong apartment demand through the year 2001 and beyond."

Full-service hotel development Like the other real estate sectors, the Dallas-area hospitality industry remains robust. Alan Brock, president of Alan Brock & Associates Inc., a hotel brokerage firm based in Irving, says the region is experiencing a new wave of hotel building.

"The surprising thing is the number of new full-service properties that are being built," explains Brock. Projects under development include a 300-room Embassy Suites, a 300-room Westin and a 400-room Doubletree. "It's quite a change from the 60- to 100-room limited-service hotels that were being built for a while," he adds.

Like other experts in the sector, Brock says the booming economy is the main reason for the increased hotel development. "Occupancy is going to stay pretty stable here, because the economy is growing very fast and job creation is very fast," says Brock. "The new properties will continue to do well, but some of the older hotels may suffer."

Still, Thomas Corcoran Jr., president of Dallas-based FelCor Lodging Trust Inc., says that the hospitality industry is enjoying the best times it has in a long while.

"As long as demand remains strong, we're going to be fine," says Corcoran. "Supply is slowing somewhat and we've spent the past couple of years fixing up a number of hotels so we'll be in a better market. The hospitality market in Dallas is very strong. It continues to be a booming place."

Few Big D real estate players would argue with Corcoran's assessment when applying it to the entire real estate market. Dallas is enjoying some of the best times it has seen in a decade.

All indications are that those times will continue into the near future.

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