Dallas-Fort Worth office market may fill up as economy improves
12:00 AM CDT on Friday, May 14, 2010
By STEVE BROWN / The Dallas Morning News
stevebrown@dallasnews.com
Early this year, SoftLayer Technologies rented office space in Farmers Branch for its headquarters.
MICHAEL AINSWORTH/DMN
The biggest beneficiary of better economic times will be the Dallas-Fort Worth office market, which suffered an almost 2 million-square-foot decline in net leasing last year but is on track for positive growth in 2010.
Less than six months after signing the more than 50,000-square-foot lease, the high-tech firm took all of the 125,000-square-foot building on Midway Road.
“They came back and asked for the rest of it because they were concerned someone else would lease the space,” said Clay Vaughn, senior managing director of the Dallas office of Newmark Knight Frank, which brokered the deal. “The first deal we did with them five years ago was just a 3,000-square-foot, one-year lease.”
With the nation’s economy on the mend, real estate brokers and building owners say they hope to see more business expansions in North Texas this year.
The biggest beneficiary of better economic times will be the Dallas-Fort Worth office market, which suffered an almost 2 million-square-foot decline in net leasing last year but is on track for growth in 2010.
A string of big deals signed early this year by companies including Denbury Resources, International Electric Supply, Hilton Worldwide, CB Richard Ellis and Pizza Hut suggests that local office demand is picking up.
“Our leasing velocity is up 25 percent from first quarter last year,” said Jack Eimer, president of real estate service firm Transwestern’s central region. “We expect this to be improved upon, with 2010 leasing revenues exceeding 2009 by at least 30 to 35 percent.
“Corporate America is becoming more comfortable making decisions on significant space requirements.”
With office rents in North Texas now at their lowest levels in more than five years, some companies have decided the time is right to expand.
At downtown Dallas’ Fountain Place, two major tenants – Tenet Healthcare and Wells Fargo Bank – just enlarged their leases.
“Our tenants are feeling a little bit better about where they are,” said John Zogg, managing director of Crescent Real Estate Holdings, which operates Fountain Place and three other big office projects. “People are making decisions who didn’t last year.”
Crescent real estate plans to spend about $8 million this year on upgrades at Fountain Place, Trammell Crow Center and the Crescent office projects. “We think ultimately we will be rewarded for taking care of our assets,” Zogg said.
Open spaces
Tenants have plenty of space to choose from.
At the end of the first quarter, more than 45 million square feet of empty office space were on the market in the D-FW area.
But the current 22.5 percent office vacancy rate is still lower than in the late 1980s, when almost a third of the local office market was empty.
“Obviously, unlike the ’80s, we don’t have the huge overhang of space,” Eimer said. “We developers somewhat behaved ourselves this time.”
Much of the vacancy is concentrated in a few key areas, including downtown Dallas, Las Colinas, and along LBJ Freeway and Stemmons Freeway.
The business districts that have seen some of the highest recent leasing volumes – West Plano, Frisco, the North Central Expressway corridor and Uptown – have less space to fill.
“The upper Dallas North Tollway has had pretty tremendous office absorption this year,” said Kim Butler, director of leasing at Hall Financial Group. “There are fewer and fewer large blocks of space.”
Butler said her firm is tracking tenant growth in its Hall Office Park near State Highway 121 and the tollway.
“We are seeing a lot of our existing office park tenants start expanding – particularly the small- to medium-size entrepreneurial and regional companies.”
Major companies are starting to scout the market for corporate campus deals and large leases, said Toby Grove, president of KDC, a Dallas investor and developer.
“We couldn’t have said that 12 months ago because there wasn’t really a compelling reason for many companies to get office deals done,” Grove said. “Now we are seeing more viable deals in the market.
“People are trying to understand where the markets are going to be from a capital cost and construction cost perspective.”
KDC scored a win with its lease of more than 300,000 square feet in Legacy business park to energy firm Denbury Resources.
Now the developer is hunting tenants to fill the former Blue Cross Blue Shield of Texas building on Spring Valley Road in Richardson.
“We have several groups that have gone through it,” Grove said.
Light construction
But don’t look for any speculative office construction in the D-FW area anytime soon.
There’s less than 1 million square feet of office space under construction in North Texas – the lowest volume since 2004.
Unlike previous building booms in the 1980s and 1990s, when developers built between 9 million and 17 million square feet, the construction peak this time was only about 6 million square feet.
“We did not have nearly as many spec buildings as in the ’80s, so the market is not perceived to be in as bad a shape,” said Paul Whitman, president of Jones Lang LaSalle’s Dallas office. “We are very lucky to be in D-FW.
“But I still don’t think we have hit bottom from the commercial PROPERTY perspective.”
Developers who just opened the doors on Dallas’ newest office towers – both in Uptown – are happy to see signs of better economic times.
“We have done more leasing to date this year than we did in all of last year,” said Greg Fuller, chief operating officer of Granite Properties.
Granite, which has several office buildings in Dallas’ north suburbs, is just finishing its first tower in Uptown.
The 17 Seventeen McKinney high-rise has more than 350,000 square feet of space – most of it still available for lease.
“We know it’s going to be a long haul to fill it up,” Fuller said.
“We projected a three-year lease-up.”
A few blocks away on Harry Hines, developer Harwood International has leased all but a couple of floors in its new Saint Ann Court tower.
“We see a lot of demand out there, especially more demand within the next 24 months,” said Harwood CEO Gabriel Barbier-Mueller.
Average office rents in the D-FW area have fallen by more than 20 percent in the last two years.
And many buildings are offering incentives to woo tenants.
While landlords are optimistic that the rent slide will end in 2010, some brokers aren’t so sure.
“We are not at the bottom of rental rates,” said Dallas office broker Tracy Fults. “There is not enough job growth to absorb enough space for rental rates to go back up.”
Still, Fults said, if businesses need more office space, “from a tenant’s perspective, you wouldn’t lose doing a deal now.”
Hanging on
Many businesses are trying to hang on with their existing office space as long as possible, brokers say.
“A lot of companies are trying to eke out as long as possible before they start hiring,” said Jeff Ellerman, vice chairman in the Dallas office of CB Richard Ellis.
“The overwhelming consensus is the market has most certainly bottomed out.
“Now we are seeing big tenants that don’t want to miss out,” Ellerman said. “They realize this is a generational opportunity to lock in office space at low terms.”
The prospect of increased office building foreclosures this year has some tenants leery of negotiating with building owners or representatives who may not be able to deliver on promises.
“One of the biggest challenges to deal with today is asking who is going to be there to get a deal done,” said Mary Stoner of Colliers International.
If forecasts are right, and there’s a turnaround this year in North Texas employment growth and more job gains in 2011, office landlords and their lenders will find a way to get leases done.
“We are tracking over 4.5 million square feet of deals,” said Greg Langston of Cresa Partners. “So you do have some chess matches that are ongoing as we speak.”
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