We’re only midway through 2014, but already the year is shaping up to be a banner one for commercial real estate in North Texas, with big relocation announcements and huge development projects under way.
What’s driving activity? Where are the greatest opportunities? And what challenges stand in the way? To tackle these topics, we gathered seven top industry experts for a roundtable discussion. Participating were Susan Arledge with Cresa Dallas, Kim Butler with Hall Financial Group, Jack Eimer with Transwestern, Steve Everbach with Cushman & Wakefield, Johnny Johnson of Cassidy Turley, Phil Puckett with CBRE, and Steve Thelen with JLL.
DFW Real Estate Review: Let’s start by getting a midyear update on office leasing activity. How is 2014 shaping up so far?
PHIL PUCKETT: We just finished our first-quarter reports, and they show that the first quarter of 2014 has been the best—maybe the best quarter that we’ve seen in history—in terms of absorption. We had 1.1 million square feet of absorption in the first quarter alone. So, yes, I think we’re off to a great start. Not since 2007 or 2008 has vacancy dipped below 18 percent citywide; that’s another positive. We’re currently at about 16 to 18 percent, which is pretty exciting.
JOHNNY JOHNSON: The reason that’s significant, that 18 percent, is because we came off of a point. Back in 2010, vacancy was more than 23 percent. So in a market our size, with more than 200 million square feet, going from 23 percent to under 18 percent is a huge milestone. If you break it down even further, in some key submarkets we’re seeing single digit vacancy. Just look at Far North Dallas, Richardson, and Plano, where’s there’s a miraculous turnaround with some of the relocations we’re seeing.
JACK EIMER: And over the years our central business district market has driven up our vacancy. What’s really exciting this time around is that we’re starting to see some true absorption downtown. I think we’re going to start getting back to a vacancy of 15 percent or less across all submarkets, and that’s going to be a huge positive.
KIM BUTLER: That’s the big difference. A couple of years ago, we were talking about the submarket haves and the have-nots. You had Uptown and Far North Dallas/Frisco. Now, if you look at the activity, Las Colinas is doing great. And look what’s happening in Richardson and Plano. The wealth is abundant, and it’s great for the region.
STEVE THELEN: Leasing activity is much better than expected. You’ve got the big-name deals like Raytheon, FedEx, and Nationstar. And then you start going down to those submarkets that are hot at the vacancy level. Preston Center and Uptown is 10 percent, Far North Dallas/Legacy is 14 percent. What that has done is drive up net rents—some have gone by 25 percent in the last 12 months.
SUSAN ARLEDGE: Clients are confused about that vacancy rate, though. When they’re from out of town and look at that 18 percent, then they come to Dallas and are surprised there’s no space. And the space they do find is much higher than what they expected to pay.
JOHNSON: Phil, if you’re looking for a block of space or even a full floor in Uptown right now, there are, what, two options? Or, say they need 40,000 square feet.
ARLEDGE: Take a sublease.
PUCKETT: Maybe a sublease …
JOHNSON: For a 14 million-square-foot market, that’s impressive.
PUCKETT: The rates at our building in Uptown just went to more than $46 per square foot, plus electric. When we moved in four years ago, it was about $29 per square foot.
EIMER: That’s the exciting thing. When the occupancy in a submarket gets up into the high 80s, low 90s, rates don’t go up 5 percent or 7 percent—they spike. They go up 25 percent, 30 percent, and that’s what we’re starting to experience. At least on the investor side, that’s pretty exciting.
ARLEDGE: Just look at Advancial Tower off Woodall Rodgers. It was leasing for $19 to $21 per square foot, and now, when renovations are complete, the rates will be in the $30s. Buying that building, at that location, was brilliant.
JOHNSON: And then you’ve got deals like State Farm at CityLine in Richardson, which has turned the market upside down. It has grown to 2.5 million square feet. Then the announcement of Toyota, at 1 million square feet. There are probably five deals in the market today that are between 500,000 square feet and 1 million square feet. When we’d have roundtable discussions like this 10 or 15 years ago, if there was a 200,000- or 300,000-square-foot relocation, it would be a big deal.
Today the question is: Are huge deals the new norm? Is the new norm for Dallas 1 million square feet?
BUTLER: Everything’s bigger in Texas. It used to be front-page news when a project would create 200 new jobs. Now the announcements are in the thousands.
ARLEDGE: And people forget about Parkland. When the new Parkland opens next year, I believe they’re creating another 2,000 jobs with the biomedical facility and the research facility. Many are coming in from other major medical universities. It’s going to be huge. That medical district is just exploding down there.
What impact will Toyota’s decision to relocate its corporate headquarters to North Texas have on the market?
THELEN: I think the biggest impact is going to be how it affects build-to-suit costs in that area. Land in the area has already escalated 20 percent to 25 percent, and it has continued to rise. Construction costs have gone up by 11 or 12 percent over the last year and a half. All of that has caused build-to-suit expense to go up by $5 a square foot in that market over the last 12 to 18 months. That means developers are going to try to get higher density on that land, because it has gotten so expensive. There will be more mixed-use.
JOHNSON: We were involved with part of that deal, the land transaction. Two years ago, land was under $5 a square foot. Now it’s up the mid-teens, thereabouts. But from where Toyota is coming from (California), and what they’re seeing in other parts of the country where they’ve looked, it’s a tremendous value.
STEVE EVERBACH: Toyota’s decision sends a number of messages about the Dallas-Fort Worth area to the country. First, it’s a very prestigious trophy for DFW, as a headquarters location for Toyota. They’ve been in California for 40 or 50 years. Think about all the ancillary companies that serve Toyota and deal with Toyota. Many are going to end up opening offices here because of those relationships. Then there’s the perspective of companies from across the country, looking at the decision. Other markets—the upper-Midwest, for example, it’s a different economy. It’s not as strong as what we’re seeing here. Everyone sitting around this table is busy every minute of every day.
ARLEDGE: I spoke with an executive at the regional chamber in Charlotte, N.C., a city that competed early on for Toyota, too. He said, “What are you guys doing right? We need to understand what it is that’s so attractive.” I said, “Well, our Dallas Regional Chamber started marketing to California companies two or three years ago. It also helps to have a governor who’s pro-business and who doesn’t mind aggravating other governors with his radio campaigns and his blitz through their states. It has an impact. CEOs listen to that.
EIMER: We did a little research and looked at when Exxon relocated here, and found there was very little ancillary business that came along with that. This time, the vendor chain of suppliers and others related to this company—it’s going to be very significant. I was living in Atlanta in the late 1980s, early ’90s, and Atlanta was competing dramatically for big corporate relocations. Within about a 12-month period, as I recall, they got FedEx and Holiday Inn—huge relocations at that time. That opened the floodgates. Atlanta had another 10 years of growth that were just incredible; I think this move could be a large moment for this city.
THELEN: You remember Exxon? We heard there were 100 executives that had incomes over $1 million dollars a year, and they bought all the big houses in Las Colinas. Imagine 4,000 people coming in from California buying homes in Frisco, Plano, McKinney, Prosper, Celina—think about what that’s going to do to that housing market up there.
The average salary for those 4,000 people, according to Forbes, is $100,000 or more—six figures. That’s a lot of money coming in.
ARLEDGE: If they all choose to relocate. There will be a lot of attrition.
JOHNSON: There will be many who move, though, too. When companies offer relocation packages, if 50 percent or maybe 60 percent take the package, that’s high. Our tenant rep team is working on State Farm, and more than 82 or 83 percent of the people who were offered relocation packages came to Texas. Toyota’s not going to be any different. People want to be here. The chamber no longer has to do the marketing—the word’s out. People who have experienced living here and the quality of life here, the schools and everything else—it has become a known fact that Texas is a place where companies and people want to be.
ARLEDGE: The groundwork has been laid; the word is out because that happened years ago. We’ve been building on that, and it has paid off.
With all of the companies relocating and expanding here, how are we situated there in terms of employees?
THELEN: We have a great, diverse strong work force in this area, and that is part of the attraction. It’s not just the cost of living and the quality of life, but our strong work force. This fact is well known due to labor analytics studies. Dallas always shows up as having a great work force.
BUTLER: We were recently talking with a relocation prospect about our work force. Everybody wants to hire the best and the brightest. In the northern sector, we’ve got young workers. I think the average age is 34. And 65 percent or more have a bachelors degree or greater. That’s huge. Companies are going to go where the talent is. And people are just going to keep migrating here because they know the job market’s great.
EIMER: And relatively speaking, it’s very affordable labor compared to most other cities.
EVERBACH: And real estate … very affordable real estate.
Do you think we’ll continue to see more relocations?
ARLEDGE: Oh, yeah.
JOHNSON: It’s the tip of the iceberg.
ARLEDGE: There are at least 20 projects right now that are looking at Dallas. We won’t get them all. We’re competing with other cities. I think there will be some concern for entry-level employers that, between State Farm, Toyota, Nationwide, all of the big jobs that have come in, that it will be harder to hire people at a certain range here. There might be some impact if you’re looking for workers below $20 an hour.
BUTLER: Our chamber folks are out there working with all sorts of companies. In our office park in Frisco, we have 180 tenants. I’m talking to six of them that are planning major relocations of other divisions here. Their headquarters may already be here or they may be somewhere else, but they’re moving their sales offices, they’re moving their manufacturing, and other divisions; it’s accretive.
EIMER: Or like State Farm, which is consolidating on a regional basis.
ARLEDGE: The mayor of Torrance, Calif., Toyota’s current home base, was quoted in a newspaper basically saying, “When you look at the package they got to relocate, it makes it incredibly hard to do business here.” Well, let’s just throw in the towel.
JOHNSON: It’s not all relocations. A lot of activity is being driven by expansions. The economy is doing well, and companies overall are doing well. Whether it’s a 2,000-square-foot tenant or a 100,000-square-foot tenant, the demand for more space is across the board. Raytheon is a good example of a great company that has been here for years. The new campus they’re doing in Richardson was due to expansion of its internal operations. And look at Las Colinas, which has always been driven by corporate America and the Fortune 500 world. It’s experiencing a big comeback.
PUCKETT: What do you think is different from 2006 and 2007, when we had a pretty strong market. What’s different from that and today?
JOHNSON: The economy back then was different from the evolving economy now. Today it’s much more global. And U.S. companies have really gone through a tough time, from the bust in 2008 and in 2009 and 2010, when everyone was just reeling. Companies were shell-shocked and just holding on. As businesses started coming back, there was a lot of pent-up demand. And then when it really turned, they were all well ahead and prepared to grow again. They had a lot of cash reserves, and now we’re seeing the benefit of that.
ARLEDGE: Investors have real money in their projects today, too. The banks were so leveraged back then and projects were highly leveraged, and now investors—whether they are REITs or individuals or corporate investors—have real money in these deals, and they’re more viable.
THELEN: What I’ve seen with my clients today is they’re looking more at the ability to recruit and retain good quality employees. They’re putting that first and foremost. If you look at a company’s expenses, probably 70 percent is labor-payroll cost and the real estate is maybe 10 percent. So they’re looking at it correctly. They’re looking at Dallas and they say, “Listen, we can get a good strong workforce here, and by the way, real estate is low cost as well.” So they’re making decisions to expand here, to move here.
EIMER: At the end of the day, for our business, it always comes back down to job growth. In the last study, from February to February, we recorded 81,000 new jobs for this market. That’s phenomenal. That ranks in the top five by just about anybody’s standards. And that’s what has drawn us out of this previous recession. Our research group is projecting, I think, 77,000 new jobs on average for the next three years. Well that gives you a pretty good sense of where this market’s going to be going.
What kinds of trends are you seeing with regard to suburban markets and urban markets? With regard to activity, what are the parallels, and what are the differences?
BUTLER: I think suburban markets are trying to be urban. Urban is cool. Everybody wants density—it’s beyond mixed use. It’s creating huge areas of critical mass where there’s office, restaurants, hotels, schools, etc. Then there’s the Arts District, which also is going live-work-play, and we’ve needed it there. We’ve had the play; we needed the live and the work. We have residences now, with Museum Tower, once it fills up, and Hall is going to build residences. There’s a school, houses of worship, entertainment, everything literally all within a four- or five-block area.
EVERBACH: Companies are being smarter about their real estate today. Ten, 15, 20 years ago, real estate was a place where you sat rear ends in seats, with a phone and a computer. Now there are two focuses. One is that real estate can be the identity of a company. It’s branding. You also have to have that economic eye, to make sure you’re using the space as efficiently as possible. To Jack’s point on job growth, we need the job growth in order to have the absorption. That’s because tenants are using space more efficiently. A 100,000-square-foot user today may need 60,000 feet in redesigned space that’s more efficient and also brands their company differently and better. A lot of large renewals are taking less space and putting it back on the market. Yet we’re still getting 1 million square feet in net absorption for the first quarter, which is fantastic.
PUCKETT: With the density trends come new challenges—companies want less space but more parking. This is something we need to address sooner rather than later, particularly downtown. The demand is coming, and it’s coming in a big way.
JOHNSON: Phil and I are working right now on a deal where parking is an issue.
PUCKETT: Following up on Steve’s point about branding, it’s not just the building, it’s the location, whether it’s Uptown or the Arts District or wherever. They’re repositioning their companies and deciding where they need to be to recruit and retain talent. We’re seeing that particularly with law firms. But yes, parking is an issue. Kim is smiling because she has the best parking in town.
BUTLER: We Texans like our cars.
ARLEDGE: You’re not going to get lawyers to ride DART.
JOHNSON: People want to be efficient, and occupancy costs matter, but it’s really all about retention and attracting employees in a very competitive environment. So building features in facilities that go
beyond the conventional … food service, and fitness and wellness—that’s the new norm.
EIMER: And all of a sudden we’ve got a huge generational gap. Decision-makers are trying to decide, how do I attract the highest class of millennials? And what should the space be like to help them be the most efficient? Because it’s probably different than what made me the most efficient. At the same time, they don’t want to get too trendy.
THELEN: Tenants are also starting to realize that they may need to compete for space. Many of my clients are becoming more decisive, because they know they’ve got to make a decision or the space can go away. That’s one of the trends I think we’ll see for the next 12 months, as there’s going to be more demand than there is supply.
So what does that mean for development?
JOHNSON: It’s here. We’ve got a lot of land. The growth is going to continue to the north and now the northeast to some degree, and the northwest corridor is going to continue to evolve.
PUCKETT: But will it be excessive? Will we overbuild?
JOHNSON: It feels like it’s manageable. As we’re talking to prospects, it doesn’t feel like people are way out over their skis. They’re still careful about their decisions. And financing will evaluate whether it makes good sense or not. But the reality is, for these big, big deals, the only alternative is a build-to-suit.
EVERBACH: You hit on a good point: The lenders are helping us help ourselves.
ARLEDGE: Yes, forcing us. Forcing us.
EVERBACH: The money is available, but it is only available for developments that actually make sense and are not fee-driven. The worst headline I’ve seen in the last month was, “Lenders easing restrictions.” That’s a drug we don’t need here, because look at what happened the last three or four cycles. This time, development is restricted by capital, which is good. I think that’s the best medicine we can have. Keep it under control. I don’t think any of us want to see another bubble on the supply side.
JOHNSON: We won’t go too far.
BUTLER: You’ve got the balance of construction costs.
EIMER: That, too. And you hate to have to rely on it, but I hope that the lending community doesn’t ease up, or ease up dramatically. Pre-leasing in Dallas has always been the amount of leasing you do after you break ground and before you get finished. Well, this cycle we have real pre-leasing requirements. If the capital is there and the restraints aren’t, well, we have the best development talent in the world sitting right here in Dallas, and they’re ready to develop.
Do you think that we will get into a situation in the near term where a lack of supply could constrain growth?
EIMER: I think that’s a legitimate question.
JOHNSON: For deals that are moving fast, for really large deals that just don’t have options, they might consider another city if they can’t find the options they want here in a timely manner. But those are few and far in between. You still got a market that has 18 percent vacancy. In key markets, there is a shortage of large quality blocks of space, but there are still ample options.
Looking ahead, what are the biggest challenges the DFW office leasing market office will face this year?
EIMER: I was asking some of the brokers in our shop about that, and their response was: managing client expectations—on both sides.
PUCKETT: That’s a good point.
EIMER: We’re in a market—it’s a sliver of time in Dallas called a landlord’s market. And it doesn’t last very long, usually. You’ve got landlords now getting pretty aggressive. On the other hand you’ve got tenants trying to get deals that maybe their friends got just a year ago. They don’t understand why they can’t get the same deal. It’s an interesting point, and it’s on both sides of the spectrum.
THELEN: Long-term, I think our biggest challenge could be our water solution, as we start approaching 10 million people in this area. Short-term, I think it’s the demand on construction services. We’ve got Midland competing for it, we’ve got Houston competing for it—people are being drawn all over the state. And then I think we’ve got to make sure our transportation network stays ahead of the growth. We don’t want to be a bottleneck community. We want to make sure DART works and that our highway systems work. I think we’re heading in the right direction with that, but I think those are the concerns I have, short- and long-term.
BUTLER: I agree that we’re making a lot of progress, but the water issue is something we need to look at. Just recently out in Frisco, we were installing a new type of grass. It’s actually combination of five different grasses. It was developed at the University of Texas, and it’s used at the Bush Library. It requires very little water. The education of developers and corporate users that are building their own facilities, on how we can conserve our natural resources better—I think that’s going to be key.
EVERBACH: I think the greatest threat or challenge is something that we don’t know. It could be a result of the geopolitical situation. On the positive side, it could be another major relocation. We have it so good right now where we are, but it won’t go on forever.
EIMER: We know that we’re going to be facing rising interest rates. We’re in an abnormal period of time. And we’re all learning to live within the low interest-rate environment. It’s affecting everything. It is going to change. It has to, and it will be interesting to see what impact that has.
EVERBACH: And as rates go up, one side, seller or buyer, is going to have to accept a lower return. Last time this occurred, the buy side accepted a lower return. That will probably happen again, because there’s so much cash available. Currently, there’s a tremendous amount of capital looking at Dallas. From a stability standpoint and an attractiveness standpoint for that capital, Dallas, unlike five or seven years ago, is a bull’s-eye on the map. It was the coasts, and then Houston worked its way in there because of the energy concentration and the attractiveness of that market as the third coast. But now, the DFW area is very well positioned, and I think that will continue for the foreseeable future.
JOHNSON: Here’s a great example: 3500 Maple is a building we lease in Uptown. Yesterday, it went to the courthouse steps, due to a financial situation with the building. This is a quality building of more than 350,000 square feet. More than eight bidders showed up. And this is when you have to show up with a cashier’s check; this isn’t where you run back to your lender and figure it out. It ended up trading for more than $170 a square foot, where they thought the number would maybe be $150—and that was a stretch. These were very credible buyers, standing there bidding it up, just like you’d see in a movie.
EIMER: It was like a Picasso painting going on the market for $500. Everybody had their paddles going.
JOHNSON: We’re at a unique moment in time right now.
ARLEDGE: All that capital that had been on the sidelines is now in the field.
THELEN: An expression I heard is, “You’re never as good as you think you are, and you’re never as bad as you think you are.” We’re somewhere in between.
PUCKETT: In terms of challenges, I go back to downtown. Our city will always need a healthy CBD. The great news is that good things are happening downtown again. But if we don’t get focused on this parking issue, we’re going to have some serious problems. The city, or whoever needs to get this going, needs to get it going now. The good news with our CBD is we’re getting great new ownership of many properties; good things are happening.
JOHNSON: For a long time, people talked about revitalizing downtown; and, with such strong sponsorship, it’s finally happening. Fountain Place is a good example. A new owner is coming in who will transform the asset, address the parking issue in a huge way, play into what the neighbors are doing all around the building. It’s going to help transform part of downtown that for too many years languished.
ARLEDGE: People can do what Craig Hall did: build a parking garage and share the facility, utilizing it for different amenities. There have to be more opportunities to do public-private opportunities like that for parking.
Let’s close by getting everyone’s general outlook with regard to office leasing activity for the next 12 months.
PUCKETT: Extremely optimistic, based on current workload.
EIMER: Yeah, very optimistic. This is a time when the sun’s shining, and you’ve got to take advantage of it. If there was ever a time to work real hard, it’s now.
BUTLER: Fortunately, we have great city leaders and heads of companies looking at the city and the vision and how do we protect its health going forward. That’s something other cities also enjoy, but I think in the Dallas region as a whole, we have more leadership in place solving the problems of the future. So I feel great about it.
EVERBACH: If you’re on the investor/owner side, your returns are going to increase for the foreseeable future. If you’re on the tenant’s side, your rent’s going up. So, I’m optimistic for the DFW area, cautiously optimistic nationally.
JOHNSON: Now’s the time to not just work hard, but work smart. Clients need us now more than ever. Work smart for them. It’s easy to be sloppy in a good market, but now’s the time to be thoughtful and value your clients.
ARLEDGE: I wouldn’t have said this two years ago, but now’s a great time for young college graduates, 20-somethings, to get into the real estate business. We’re starting to see more graduates look at commercial real estate as an option again.
THELEN: I’m optimistic. Everything looks good. Companies are going to continue coming to Dallas. We’re going to see more development in Uptown and Preston Center, and we’ll see a lot of build-to-suits in the northern suburbs, as there’s a lack of that type of space up there right now.
Well, it sounds like the future looks bright. Thanks to everyone for sharing your insights and perspectives today.