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.”
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.”
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.
Things are much tighter in Uptown. Cushman & Wakefield of Texas reports that the office vacancy rate for Uptown registered 12.1% at the end of the first quarter, compared with 15.8% for the same period in 2004. Downtown vacancy was 30.7% as of March 31 compared to 30.4% last year.
Hillwood, the real estate development firm owned by Ross Perot Jr., will break ground in July on Victory Plaza, a pair of seven-story buildings in its Victory development, anchored by American Airlines Center and the 33-story W Hotel and Residences. The 180,000 sq. ft. addition will include 60,000 sq. ft. of retail space.
Hillwood will occupy 50,000 sq. ft. in the east tower, which will be capped by a nightclub on the top floor and anchored by restaurants and stores on the ground level. Two Dallas broadcast studios are competing to lease space in the west tower, where 70,000 sq. ft. is available.
Eleven high-definition panels totaling 4,000 sq. ft. will be mounted on tracks on the outside of the buildings, says David Hicks, senior vice president at Hillwood. “They will broadcast around the clock — sports, news, movies, digital art — all kinds of possibilities,” he says. “We're creating the Times Square of Dallas.”
Hicks also is marketing One Victory Park, the first phase of a two-building, 800,000 sq. ft. complex Hillwood is developing in partnership with Houston-based Hines. The first 18-story tower will include 350,000 sq. ft. of office space, plus ground-level retail. Construction will kick off when the building is 50% pre-leased. “The interest level is fairly strong,” Hicks says. “The larger tenants I'm in discussions with need a total of about 1 million sq. ft. in 2007 or 2008.”
Hillwood will face competition from other Uptown projects: CarrAmerica Realty Corp.'s 16-story, 350,000 sq. ft. Rosewood Court; Lincoln Property Co.'s 20-story, 400,000 sq. ft. 2000 McKinney; and Harwood International's 24-story, 280,800 sq. ft. St. Ann Court.
Unlike the speculative developers in Far North Dallas, all of the Downtown/Uptown builders are seeking big initial leases before breaking ground. Those tenants most likely will come from the CBD.
As for pricing, Real Capital Analytics reports that office space in Dallas sold for an average of $110 per sq. ft. in May, compared with $384 per sq. ft. in Washington, D.C., and $357 per sq. ft. in Manhattan.
Russ Ingrum, senior vice president at CB Richard Ellis, warns that too much new construction could push buyers to other cities. “It will reinforce to the investment community that Dallas is a high-beta market that will build itself out of any favorable economic condition,” Ingrum says. “There's already a bias against the way Dallas developers like to build. If all of these projects come on at once, a whole lot of people are going to say, ‘I told you so.’”
Christine Perez is a Dallas-based writer
Dallas - BY THE NUMBERS
POPULATION OF METRO AREA:
Source: Dallas Business Journal; U.S. Dept. of Labor
Dallas Independent School District
Wal-Mart Stores Inc.
Source: Dallas Business Journal
METRO AREA STATS
24.1% vacancy, 1Q 2004
24.9% vacancy, 1Q 2005
Rent per sq. ft.: $17.32, 1Q 2005
Source: Cushman & Wakefield of Texas Inc.
10.3% vacancy, 1Q 2004
9.8% vacancy, 1Q 2005
Rent per sq. ft.: $4.71, 1Q 2005
Source: Grubb & Ellis Inc.
11.2% vacancy, 1Q 2004
10.4% vacancy, 1Q 2005
Rent per sq. ft.: $15.21, 1Q 2005
Source: Roddy Information Services Inc.
10.3% vacancy, 1Q 2004
10.1% vacancy, 1Q 2005
Rent per sq. ft.: $0.84, 1Q 2005
Source: M/PF Research Inc.
54.4% occupancy, 1Q 2004
54.6% occupancy, 1Q 2003
Average daily rate: $79
Source: Smith Travel Research
DALLAS-FORT WORTH REAL ESTATE HIGHLIGHTS
California-based Fluor Corp. will relocate its headquarters to Dallas by early 2006, creating 700 new jobs in North Texas. The company is scouring the market for 100,000 sq. ft. of office space.
Aurora, Co.-based ProLogis is building a 520,000 sq. ft. speculative distribution center in Mesquite. Atlanta-based IDI has begun work nearby on the 250,000 sq. ft. first phase of its planned 1.5 million sq. ft. Skyline Trade Center. In North Fort Worth, Indianapolis-based Duke Realty has completed construction of a 687,500 sq. ft. build-to-suit for Del Monte Foods.
Bass Pro Shops-Outdoor World will anchor a $50 million retail development in Garland called Harbor Point, which will open in mid-2006. It will compete against another Bass Pro store in Grapevine, in addition to a 230,000 sq. ft. Cabela's that recently opened in Fort Worth. Swedish home-furnishings retail giant Ikea will open a 310,000 sq. ft. store in Frisco in August. Ikea also is in discussions to develop a 265,000 sq. ft. store in Arlington.
San Francisco-based Virtu Investments entered the Dallas market with its $110 million acquisition of The Mansions at Ridgeview Country Club, a 548-unit complex in Plano, and The Mansions at Coyote Ridge, a 528-unit property in Carrollton.
Springfield, Mo.-based John Q. Hammons Hotels Inc. has announced plans to develop a 10-story Courtyard by Marriott in McKinney. The 250-room hotel will adjoin a planned 75,000 sq. ft. conference center. Hammons recently opened a 330-room Embassy Suites in Frisco, which boasts 100,000 sq. ft. of meeting space, including the Frisco Conference Center.