Pocket of Prosperity

When Craig Hall began developing his first office building in Hall Office Park five years ago, there wasn't even a road that led to his 142-acre site in Frisco, a bedroom community about 25 miles north of Dallas. But Hall, chairman and founder of Hall Financial Group, was so convinced the office market would sprawl northward, he went ahead with the 4-story, 101,000 sq. ft. project anyway.

Since then, the sleepy little town has been transformed into one of America's fastest-growing cities. Its population has doubled to 50,500. Just south of Hall's park, at the intersection of State Highway 121 and Preston Road, retail developers, led by Chicago-based General Growth Properties, have built a whopping 4 million sq. ft. of stores — including the 1.8 million sq. ft. Stonebriar Centre mall. Westin Hotels & Resorts also added a 300-room luxury hotel nearby.

Riis Christensen, managing director of tenant services in the Dallas office of Houston-based Transwestern Commercial Real Estate Services, says Far North Dallas may soon be the biggest CBD in the Dallas metropolitan area. The downtown area is undergoing a major redevelopment, but is feeling the effects of a soft market.

Meanwhile, with new construction in the pipeline, the North Dallas area — which currently has 34 million sq. ft. of office space — could surpass the 36 million sq. ft. downtown by 2004. “It will soon eclipse the CBD, and that's very significant,” Christensen says.

To the east of Hall Office Park, Tom Hicks, owner of the NHL's Dallas Stars and Major League Baseball's Texas Rangers, has begun work on a $20 million training facility for his hockey team and a $22 million minor league ballpark. Future phases will include a convention center, two hotels, 700 apartments and more than 1 million sq. ft. of office space.

So far, Hall Financial has maintained a virtual monopoly on Frisco's office market. The developer broke ground in September on its eighth building, bringing the total to 1.1 million sq. ft. The master plan for Hall Office Park calls for 4 million sq. ft. of space, including a pair of 20-story office towers.

Frisco lies at the northern end of what Dallas real estate brokers have dubbed the “Platinum Corridor,” a 15-mile stretch along the Dallas North Tollway that starts at Interstate 635. More than 80 office buildings totaling 11.5 million sq. ft. have been built in the submarket over the past five years, according to Randy Garrett, principal at Dallas-based NAI/Stoneleigh Huff Brous McDowell.

During the second quarter of 2002, the Platinum Corridor was the lone star in Dallas' office leasing scene; its 240,000 sq. ft. of absorbed space helped keep market-wide absorption on the positive side, at 178,000 sq. ft.

Built to Suit

The construction under way in the Dallas area consists primarily of build-to-suit projects in the northern sector. These include a 170,000 sq. ft. operations center for Network Associates in Plano; and a 134,000 sq. ft. headquarters for Accor Corp. and a 140,000 sq. ft. headquarters for Carlson Restaurant Group, both in Carrollton.

Even with 8 million sq. ft. of sublease space in Dallas and a metro area direct vacancy rate of 21.8% for all classes of space — compared with 17.8% this time last year, according to CB Richard Ellis — it still makes sense to build in some cases, says Bill Cawley, chairman and CEO of Dallas-based Cawley International, who represented Carlson in its search. “The cost of construction has gone down considerably, with trades and subcontractors getting more aggressive and interest rates at an all-time low,” he says. “For Carlson, the cost to build was less than what it would have cost to retrofit any of the existing buildings that were considered.”

2nd quarter 2001 2nd quarter 2002
Source: CB Richard Ellis
17.8% 21.8%
Source: CB Richard Ellis
6.9% 9.3%
Source: M/PF Research
5.0% 8.2%
Source: The Weitzman Group
10% 11%
Unless otherwise noted, statistics provided are for the metro area.

Companies looking for existing office space will find plenty of options in a market with a total vacancy of 45 million sq. ft. Demand remains sluggish. Still, the 178,000 sq. ft. absorbed during the second quarter. It was an improvement over the first quarter, which saw negative absorption of 831,400 sq. ft.

Downtown Dallas showed a net gain of 93,000 sq. ft. between April and June, with Oncor Group taking 150,000 sq. ft. in Lincoln Plaza. Oncor, an affiliate of TXU Corp., is new to the CBD, but most leasing activity is coming from current tenants taking advantage of market conditions and jumping from one downtown building to another.

The Richardson/Plano submarket, which less than two years ago had a single-digit vacancy rate, is feeling the pinch from the now-defunct telecom equipment companies. It's now among the softest markets in the Dallas area with a vacancy rate of 25.6%. More than 1.5 million sq. ft. of sublease space is available in the submarket, with equipment companies such as Nortel and Ericsson in Richardson's Telecom Corridor continuing to downsize operations.

Despite lackluster office leasing activity in Dallas, investment brokers expect office transaction volume to top $1.5 billion this year, triple the deal volume in 2001. In August, Atlanta-based Wells Real Estate Investment Trust picked up a 604,000 sq. ft. campus in Irving for $118 million. The three-building complex serves as the headquarters for Nokia Inc., the U.S. division of Finnish mobile phone maker Nokia Corp.

Retail Revitalizes Downtown

Two major retail initiatives are aimed at bringing new life to the urban core. In May, the Dallas City Council committed $109 million for a revitalization effort led by the Downtown Partnership, which aims to restore a 10-block strip of Main Street. The city also agreed to rebate $43 million in future property taxes to Related Urban Development, the master planner of Victory, a 20-acre, $600 million retail project surrounding American Airlines Center, home of the Dallas Stars and the NBA's Dallas Mavericks.

New York-based Related Urban (formerly Palladium Co.), the developer of the AOL Time Warner Center in New York, says it won't begin work on the 500,000 sq. ft. first phase of Victory until half of the space is leased. FAO Schwarz, Abercrombie & Fitch and J. Crew are among those making initial commitments to the project, scheduled for completion in 2005.

Jim Thomas, a senior managing director in the Dallas office of New York-based Insignia/ESG Capital Advisors Group, says the successful transformation of downtown Dallas isn't a slam dunk. “Everyone would like to see Dallas become a 24/7 city,” he says. “But this is Texas, and people like to drive their cars.”

While Dallas has above average office vacancies, the retail sector has experienced only a slight decline. Occupancy was 89% for the second quarter of 2002, down from 90% for the second quarter of 2001, reports The Weitzman Group, based in Dallas. About 3 million sq. ft. of new space is under development.

On the investment side, one of the poshest malls in Dallas is about to get a new owner. Sources at Hartford, Conn.-based UBS Realty Investors say the company has agreed to purchase the 1.8 million sq. ft. Galleria Mall from its original developer, Houston-based Hines Interests LP. The $270 million package includes Galleria North, a nearby 112,000 sq. ft. retail center.

Industrial Strength

Despite the slack economy, Dallas's industrial sector is surprisingly active. A flurry of last-minute deals helped boost second-quarter absorption to 3.8 million sq. ft., according to CB Richard Ellis. That was more than triple the 1 million sq. ft. absorbed during the first three months of the year.

Indianapolis-based Duke Realty Corp. brought on board six new tenants in the third quarter for a total of 500,000 sq. ft., and inked a 1.2 million sq. ft. build-to-suit for The Container Store. Fort Worth-based developer Hillwood also leased 670,000 sq. ft. to General Mills.

According to Jeff Turner, who heads up the Dallas/Fort Worth office of Duke Realty, the real upside has been the big-bulk distribution market. “For those types of projects, even in this downturn, there is reasonable activity,” he says.

Multifamily: Developers Keep on Building

The apartment market, meanwhile, is softening. Staggering net move-outs in late 2001 and early 2002 pushed occupancy rates in Dallas to 92.2% in the second quarter, according to Dallas-based M/PF Research Inc., compared with 95% in the second quarter of 2001. Rents remained flat at about $700 per unit.

The rising vacancies have not halted construction, however. Nearly 13,300 apartments are under construction, says Greg Willett, director of research for M/PF. “There is quite a bit of construction going on when the economy is this tenuous,” he says. “It may not be a large block of product by Dallas standards, but for any other market in the country, it's pretty aggressive.”

And there is more to come. Building permits for 8,934 units were approved during the 12 months ending June 30, up 34% from 6,663 in 2001. “That jump is one of the most pronounced increases seen anywhere in the country,” Willett says.

Depressed Hotel Market

The darkest picture in Dallas is the hotel sector, which saw occupancy drop to 52.6% in the second quarter from 58.1% in 2001, according to San Antonio-based Source Strategy Inc.

RevPAR, which measures revenue per available room each night, dropped from $45.60 a year ago to $41.30 in the second quarter of 2002. “Dallas is its own sad story,” says Todd Walker, vice president of the research firm. “But we're seeing demand starting to pick back up.”

On the acquisition front, hotel properties are attracting investors looking for opportunistic buys. Both Hall Financial and Cawley International have created funds to acquire hotels. Steve Moffett, regional partner in the Irving office of Atlanta-based Stormont Hospitality Group, says the two companies are far from alone.

“There are a lot of people out there looking to buy hotels right now,” he says. “But sellers aren't coming down in their pricing yet to make that happen.”

Investors remain cautious about the city's high office vacancy rate and penchant for overbuilding, but some are willing to bet that Dallas will make a strong comeback, says John Zogg, senior vice president of asset management and leasing at Fort Worth-based Crescent Real Estate Equities Inc.

“When we get back to historical absorption levels,” Zogg says, “We can get healthy real quick.”

Christine Perez is a Dallas-based writer.

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