Foundations: Winter 2015

A baseline for the region's future



Hotel Boom Underway in Downtown Dallas

Travelers to downtown Dallas will soon have a multitude of options when looking for a place to stay for the night. More than a dozen projects planned or underway in the urban core will add about 2,500 rooms to the inventory. Because many are redevelopments, there’s an added bonus of repurposing long-vacant space and making it productive again. 

Among the largest is a 323-room property from Starwood Hotels and Resorts and KFK Group. It’s going into One Main Place, a 1 million-square-foot building that occupies a full city block at Main, Elm, Field, and Griffin streets. At 1700 and 1712 Commerce, NewcrestImage is bringing in three hotels—two Marriott brands and a Hampton Inn. Combined, they’ll add about 400 rooms.

The highest-profile endeavor may be the redevelopment of the Statler Hilton at 1914 Commerce Street. Mehrdad Moayedi’s $175 million effort will create 161 hotel rooms on five floors and 219 residences on top. Moayedi’s company, Centurion American, bought the historic hotel in 2014 and was awarded $46.5 million in TIF money from the city of Dallas to help fund renovations. 

New projects include a 25-story hotel-condo tower from developer Craig Hall in his Hall Arts District project at Ross Avenue and Flora Street.

DFW: A Data Center Force

Workforce growth, corporate relocations, and regional office expansions are fueling diverse demand for data center space in Dallas-Fort Worth, according to a new report from JLL. What’s more, utility rates are at an all-time low, creating favorable pricing in Texas and other states in the Southwestern and Central regions.

Breaking down demand by industries, insurance companies like State Farm are leading the way, followed by financial services and technology concerns like Facebook, which has kicked off a $1 billion build-to-suit in North Fort Worth. New speculative data center developments are offering a full spectrum of services—cloud, managed services, co-location, etc.—to meet this fast-growing demand, JLL reports.

 

Multifamily Mania Goes High-Rise

Apartment developers are keeping the construction trades busy in North Texas. More than 24,000 units are scheduled to open by the end of the third quarter of 2016, according to MPF Research. Even with the flurry of new deliveries, though, demand is keeping pace. Occupancy is projected at 95.5 percent—the highest level the market has seen in 14 years. 

Millennial renters are a big reason why, but downsizing baby boomers are driving demand, too. That’s good news for property owners, as land and construction costs are on the rise, and older tenants are more likely and better able to pay escalating rates. 

The trend also is causing an evolution in the types of apartment projects that are getting built. For the first time in history, Dallas has an active new segment: the high-rise market. According to multifamily guru Brian O’Boyle Sr., vice chairman of ARA Newmark, 30 to 35 apartment towers are under development or planned for the region.

Among them is The Case Building, a 17-story complex from StreetLights Residential and investment partner Westdale Properties. Formed just five years ago, StreetLights has quickly become a leader in the high-rise segment, with projects like The Taylor (17 stories) and The Jordan (23 stories) in Uptown and The McKenzie (23 stories) in the Knox-Henderson district. The company also is working with RED Development on The Union in Uptown. 

Trammell Crow Co. affiliate High Street Residential has been active, too. Along with a 32-story apartment tower at Park District in Uptown, the company is doing a 20-story complex on McKinney Avenue called M-Line Tower. Southern Land Co. also is joining the fray, with an 18-story tower in the Knox-Henderson neighborhood that will kick off in the first quarter of 2016.

 

How North Texas Stacks Up

If you’re part of the real estate economy, Dallas-Fort Worth is a great place to be, says Chuck Dannis, senior managing director of National Valuation Consultants Inc. The veteran industry player and real estate professor at Southern Methodist University recently pulled together stats on how DFW ranks in absorption (by units for apartments, and square feet for the other classes), as of the third quarter of 2015, for the office, industrial, retail, and multifamily sectors. 

As he notes: “It is good to rank high in absorption—it simply means users are using the space. However, one’s ranking at the top of the ‘under construction’ scale can be good, but it can also be bad. Being ranked No. 3 to No. 5 is a reasonable place for DFW to sit, as long as we keep eating up space at this rate.” 

An Exception to the Rule

In December, the Federal Open Market Committee raised interest rates for the first time since 2006. The 25 basis point increase to the target federal funds was widely expected. “The strong November jobs report, in particular the first evidence of wage inflation in some time, sealed it,” wrote CBRE researchers in a U.S. Market Flash report.

CBRE believes the Fed has significantly more room to move before there is any real pressure on cap rates. That being said, certain markets may be more susceptible than others to interest rate increases. Texas markets, which have lacked strong cap rate compression since 2010, are expected to experience little cap rate adjustment, if any, CBRE reports:

“Dallas office assets should also benefit from expected rent growth—with cap rates possibly compressing by another 25 bps by 2018. In fact, under our baseline scenario, forecasted rent growth is the primary cause of continued cap rate compression in Dallas, and will bring Dallas cap rates below their long-run trend within the next five years.”

 

Companies Disinvesting in California, 2008-2014

A new report highlights how California’s poor business climate has led many companies to disinvest in the state. Joseph Vranich of Irvine, California-based Spectrum Location Services compiled a list of 1,500 “disinvestment events” between 2008 and 2014—relocations out of California, foregone expansions in California for other states, and facility closures, among others. He also looked at cities, regions, and states that gained the most from California’s losses. 

With a No. 1 ranking from Chief Executive magazine as the Best State for Business in 2015, it’s no surprise that Texas topped the list among all destination states with 219 events—nearly as many as the next four states combined.

Similarly, with a competitive cost of living, central location, talented workforce, and an exploding population and employment base, DFW received 68 California-based company investments. Examples include Coparts’ headquarters relocation to Irving, CBRE’s consolidation of IT operations in Dallas, and Cisco Systems’ new data center in Allen. Among all metro areas, Dallas-Fort Worth came in second only to Austin. 

The study provides an important caveat that the benefits of California disinvestment to cities like Dallas and Fort Worth are, to a large degree, understated. Vranich says the events in his report are public knowledge, but that “experts in site selection generally agree that at least five events fail to become public knowledge for every one that does.” He concludes that it would be reasonable to project that approximately 9,000 disinvestment events occurred during the 2008-2014 period, indicating that the rush to leave California has likely benefited the DFW region more than we can ascertain.

— Eric Griffin