A magnet for money

Our panel of experts share their insights on the current climate of Dallas-Fort Worth’s real estate investment market—and the prospects for 2015.



The construction cranes are flying high across North Texas, a clear sign of the capital infusions spurring growth in office, multifamily, industrial, and other sectors. Our diverse region also is experiencing dynamic job growth, attracting numerous corporate relocations, and enjoying record occupancy rates—all of which just adds to the appeal.

What sectors will surprise us in 2015? Will higher rents push development to new submarkets? What product types will offer investors the most value? We asked six industry experts to share their big-picture view about the changing landscape in Dallas-Fort Worth. Here’s what they had to say.


MEET THE EXPERTS:

TIM JORDAN
A managing director of JLL’s capital markets group in Dallas, Tim Jordan’s primary areas of responsibility include the financing of commercial real estate properties and developments, including office, hotel, retail, mixed-use and multifamily product types.

BETH LAMBERT
Executive Managing Director Beth Lambert oversees Cassidy Turley’s capital markets platform in Texas. Her extensive experience in the industry includes co-founding Vision Capital Real Estate and serving as a director at Archon Group LP, a Goldman Sachs company.

BOB AISNER
Bob Aisner brings more than 30 years of commercial real estate leadership to his role as president and CEO of Behringer. Investments sponsored and managed by the Behringer group of companies have invested more than $11 billion in assets.

JACK FRAKER
Jack Fraker is a vice chairman at CBRE and managing director of the firm’s capital markets group. He specializes in the sale of investment properties for institutional clients, as well as tenant representation (office and industrial) for corporate clients.

SCOTTFARBER
As executive director of the capital markets group for Cushman & Wakefield of Texas Inc., Scot Farber is in charge of the disposition of investment sales properties for financial institutions, banks, special servicers, pension funds, REITs, corporate users, and private investors.

ANDREW LEVY
As senior managing director for HFF, Andrew Levy’s primary focus is on office investment sales, as well as overseeing day-to-day operations of the company’s Dallas office. He has worked on some of the largest office and mixed-use sales transactions in the Southwest.


DFW Real Estate Review: Let’s start by getting a recap of real estate investment activity across the region in 2014. Were things better, worse, or about what you expected —and why?

JACK FRAKER: It’s better than we thought it would be this time last year, but each year since the dark days of 2009 have been better and better. In 2009, the volume for capital markets activity was down 90 percent from what it was in 2007. Those were the really bad days that I have tried to repress in my memory. But each year it’s gotten better and better. There’s a significant amount of capital in the U.S. that wants to be in real estate as an asset class. And it’s not just U.S. capital. It’s coming from all over the world. Real estate is one of the better asset classes for the retiring baby boomers coming up in the next few years. Eighty million baby boomers are going to start to retire, and they’re looking for income-producing assets. Volume is better than I had expected, and I think it’s going to be even better next year. 

TIM JORDAN: We benefit from just the dynamic job growth that we have here in North Texas, and plentiful inexpensive debt also helps drive that. It’s been fantastic.

BETH LAMBERT: When I think about investment activity, there’s two pieces: Acquisition and development. Acquisition in the sales volume has been on par with 2013, but development is pretty impressive when you see what’s going on around the city. When you look at the 5.5 million square feet of office, 18.5 million of industrial, and 28,000 units in the multifamily space, which has really been surprising, Dallas is leading the nation in multifamily development. But when you’ve got 5 percent vacancy, the economics still work.

ANDREW LEVY: If we look in on a macro level, we’re having a very, very strong year. It’s obviously a primer of the entire market. I don’t think we’re surprised because we saw our pipeline building up at the beginning of the year — or really at the end of last year, so we felt like it was going to be at least as good as last year and hopefully a little better. But the difference is we’ve been talking for many years about capital leaving the coast and leaving the primary markets and coming into secondary markets, and we finally got to be right. There’s a lot of capital that’s now coming in and looking at apartments, office, industrial, and that’s obviously a very good sign. 

BOB AISNER: The amount of money looking to come into Dallas and the region is just astronomical. 

SCOT FARBER: For the office side, we’re on pace for $3 billion worth of volume right now, year to date. Some of the sellers are saying, ‘If I sell, where am I going to put my money?’ I don’t know how that’s going to actually translate into sales down the road because people are looking at alternatives once they sell the property, if they can find a replacement property.

 

The same thing is happening on the residential side, too.

FRAKER: Where these yields and cap rates are so low, so many institutional investors are now trying to go on the development side. They can get a slightly higher return that way, through development, and get a higher yield on cost versus buying a stabilized property at a low cap.

 

Where are we in the cycle compared to 2007? 

LAMBERT: People start to think we’re getting near the bubble because of where cap rates are and peak pricing and all that. But, fundamentally, when you compare back to 2007, if you were looking at a 6.5 cap, your interest rates were taking up 500 basis points of that, and so the spreads for lenders and spreads for equity were really small. So they split that 150 basis points. Today, with central banks intervening and keeping the training wheels on, interest rates are making up about half of that, so at 2.5 percent. There’s appropriate risk-adjusted yields for lenders and appropriate risk for equities now. We’re still pretty early in the cycle. We’ve still got a lot more volume left in that regard.

LEVY: We track it in a very similar way. There’s actually a little more room to run. The fundamentals here are just so exponentially better than they were, and the lenders are keeping the construction in check.

FARBER: In some of the major submarkets, leasing rates are pushing past historical highs, and there’s still a lot of room left to go before real construction takes place. I’m talking about real high rise, multitenant office buildings, not the one- and two-story buildings and three stories they’ve been building. So there’s a lot of room left in the submarkets out there for that rental rate growth. 

LAMBERT: When you see buyers paying these crazy 5 caps that Andrew loves to get, they can see where rent is going, because you’ve got job growth, consumer spending is up, and lots of things that are driving a very healthy overall market. They can see how that translates to rent growth. While they may be underrating a 5 going in, we can convince them that there’s a 7.5 or an 8 waiting pretty quickly on the horizon because there’s a vacancy play or rollover in the rent role. 

AISNER: It’s different than ’07 because everybody came out of ’07 saying, ‘I’m never going to leverage high again.’ We’ve been able to cross all sectors and it’s really a much lower-leveraged environment. We’re not down to 40 percent leverage, but we’re on the other side of it. The one thing that’s starting to happen that reminds me of ’07 is people buying vacancy. Let’s buy vacancy because nothing will ever change.

LEVY: I don’t disagree at all. If you’re looking for a red flag, it’s people. I know I speak for all the brokers in the room, you may not want to do that lease. A space that’s worth more vacant than leased is certainly a red flag. But the difference is we have been doing that now for about two years, and they’re being rewarded for it. If you look at a typical Uptown building, the rates have probably moved on the office side $10 in two years.

JORDAN: Yes, the biggest difference is the rent growth. 

LEVY: So any lease you didn’t do, you’re tickled to death that you didn’t do it.

FARBER: I agree with that. 

FRAKER: On the industrial sector, we are exceeding 2007 in terms of volume, of national capital markets activity, and there are also many cases where cap rates now are as low, or lower, than they were back then. The per-square-foot metric is also higher in some cases than it was in 2007, but it is being driven by the rental rate growth that Beth alluded to, because it’s tangible evidence of rental rate growth. 

LAMBERT: We’re not seeing people do crazy underwriting things, like double-digit rent growth for five years in a row like we saw in 2007, to get deals to make. It’s much more moderate growth that you can understand. It’s believable. 

 

Even the brokers have been surprised by the rent increases, how quickly it seems to have happened and how big of a jump there has been, especially in Uptown, with office and multifamily, and all of the unprecedented industrial development that’s going on in Southern Dallas. Are lenders and investors worried about the market becoming overbuilt, or is there enough demand out there?

FARBER: There’s about 5.8 million square feet of new office construction that’s going on right now, and if you back out 1.5 million square feet of the State Farm space, you’re down to about 4.3 million square feet. Let’s assume that across the board it was 30 percent pre-leased, so we’re only talking about 2 million square feet of space. The biggest difference, with the exception of a couple buildings up at Legacy and maybe Uptown, is that the building sizes are actually getting smaller. We’re not building mega buildings anymore. The real high rises aren’t there, and that’s because the rents aren’t there to support it yet. It’s in check right now. 

JORDAN: With the dynamic job growth that we’ve had, that’s really what’s backfilling the buildings both in multifamily and office. We’re keeping up with the job-growth-generated demand in both those sectors. The multifamily occupancy’s just under 95 percent. That’s the highest it’s been in 30 years. If you add one new apartment unit for every five jobs created—that’s about what the math is in North Texas—we’re at 25,000 units. We’re keeping up with that job-growth-generated demand, and that’s why occupancies are so strong and we’re getting good rent growth throughout DFW.

LEVY: The lenders are doing their jobs. We’ve raised the equity and the debt on a lot of the new towers that are going up, in Uptown and Legacy. The 5 million square feet is all in two sale markets. I’m exaggerating a little bit, but not much. The lenders are absolutely tapping the brakes and I can’t tell you how difficult it is to raise debt and equity on any spec office building. If you get a 30- or 40-percent lease, you get it at McKinney and Olive, which is a fantastic kind of trend-setting-type building, you can get it done. But even that building was 30 percent pre-leased before we could get it going. 

FRAKER: It’s a lot different today than it was in 2004 or ’94 or ’84. There’s more and more institutional governance on these development deals, speculative or even some build-to-suit deals, and it’s not the wild, Wild West days of the ’80s, when every developer and his brother could go out and get a loan and build something on the same day. Now there’s so much information available about market demand, market statistics, absorption, and the lenders and the equity have their finger on the pulse of that and don’t do anything risky without really understanding the drivers. 

LEVY: There was a great piece that was put together about three years ago that debunked the supply constraint market myth because that was always the knock on Dallas versus Boston or New York or even in Austin. There’s so much land and you can build indefinitely, and the reality is that lenders have bid on various entry because they did get burned so badly in two or three different cycles that it’s just not that easy to get stuff built. That’s our barrier at entry.

FARBER: There’s not a lot of office sites out there that are close in anymore so it’s a choice that an employer is going to have to make about how far out they want to go. If they want to be within the loop, or inner loop, there’s not that many office sites that are ready to build and ready to go. 

AISNER: I agree with Tim that so far we’ve absorbed essentially everything with the job growth. Two factors will help continue to keep this in balance. Land is getting expensive. To build a multifamily property, it’s expensive to buy the land. Then, you’ve got to get big rents. The question everybody asks is, ‘How much more can kids pay on any of these properties?’ That’s the natural ceiling that constrains supply because you just can’t continue to push rents. 

AISNER: Through the bottom of the recession, the unemployment rate for kids with a college education never went above 5 percent. Dallas rents are relatively cheap compared to San Francisco or Boston or some of these other markets, but you have to make a decent living to pay. The natural tension on the multifamily side, unlike the office side, is how high can you raise rents before people start to say, ‘I’m going to go somewhere else.’ We’re starting to see that in the Bishop Arts and Trinity Groves areas. They’re starting to move out a little bit where they can get less expensive rents, but get into downtown a little easier. 

LAMBERT: Even those are escalating pretty quickly. We’ve done a few projects in South Dallas, and they were performing $1.40 rents, and now we’re bringing them online at $1.60, $1.80. So even down there, it’s starting to price people out. 

AISNER: We just bought a property down in Lakewood, near the lake, in an area we think is going to continue to come up on that theory.

FRAKER: The demographics are changing, too, so it’s not just the young people. It could be retiring baby boomers who want to get rid of a house and live in a cool area like Uptown. 

FARBER: Or downtown. 

FRAKER: Or downtown. So they can pay those rents. 

JORDAN: Downtown is a surprisingly good market. It’s been full, seeing good rent growth in the downtown market. You’ve got approximately 6,000 residents downtown now, which is a big change from what it was 15 or 20 years ago. 

 

How would you characterize the makeup of investors who are betting on North Texas today?

JORDAN: It’s very mixed. You’ve got the institutional investors, which are strong and real active in this market. With the available inexpensive debt, you’ve got a lot of the local, regional, private investors that can play in the market. When Bob is out looking to buy something on the multifamily side, he’s got good competition, real broadly across the spectrum.

FARBER: On the office side, I would call it North American capital. We do get some foreign money here, but what we’ve seen is a bigger influx of Canadian and Mexican money that’s actually coming in and investing here, as well as other cities from around the country that haven’t been here before. So it’s a pretty diverse group that’s looking at North Texas right now.

LEVY: We’ve always talked about foreign capital as if it was the last page of the pitch, just throw it in there that we knew something about foreign capital. But to Scot’s point, it’s Canadian, it’s Mexican, it’s Israeli, and German. We’ve never seen those types of buyers coming in. The statistics would tell you that 12 percent of the core trades in the United States on the office side are now foreign capital, and 90 percent of that is in the gateway market so that’s pushing a lot of capital out because we’re not getting deals done in those markets because foreign capital is beating them. We don’t like to think Dallas is a secondary market. Probably the better term is non-gateway. It’s not New York, D.C., L.A., or San Francisco, or Boston.

LEVY: From a transactional volume standpoint, across all property types, in 2013 Dallas was No. 6 in the country, behind cities like New York, L.A., Washington, and Chicago. That’s got to be filled by a lot of different buckets.

LAMBERT: We think there’s a ton of foreign capital here, but in reality it’s less than 10 percent that actually invests in Dallas. It’s the same thing in Houston. 

FRAKER: A lot of the foreign capital is sort of hidden from the public view because it ends up in commingled funds. All of these famous funds we hear about, whatever asset class it is, they may have a wide variety of foreign investors that are limited investors in a fund. Clarion is a giant company, and they have foreign investors. All of these industrial funds, Prologis, and some of the major developers and public REITs, they have co-investments with major sovereign wealth funds. So it doesn’t always show up on a direct basis.

LEVY: Or even operating partners. You’ll see a New-York-based private investor come in and buy a 1 million-square-foot building —we did one on the tollway last year where 90 percent of the equity was Israeli, but you would never see it. I can’t imagine any of the national statistics would reflect that because you wouldn’t know it. It was completely hidden by the operating partner, who had 2 percent of the equity.

AISNER: We raised $500 million from an overseas pension fund to do domestically controlled REIT joint ventures with us in our multifamily, and so nobody would know that they own 45 percent of a lot of stuff here in Dallas just because they’re not on the masthead or the letterhead. But that’s foreign capital that’s willing to invest here in Dallas.

FRAKER: I was on a property tour a couple weeks ago with people from the Middle East buying an industrial portfolio. We also had people from Canada, Quebec province, looking around, too. So they’re starting to do direct deals as well, but mostly, it’s hidden funds.

JORDAN: You think about Invesco. They’ve invested almost $1 billion in the Legacy market, and then this is a trade of 1,600 units total up there. But you look at that and that’s a huge buy for somebody and it’s a huge stake, but it’s a testament to their commitment to that market and how they view the growth up in Legacy long-term. 

LEVY: It’s in the public record, that CalPERS is increasing their allocation in real estate by 11 percent, which is probably $7 billion if they spent it all. They may or may not, but it’s enormous. They also announced they were exiting the hedge fund business and, to your point relative to Invesco, that they’re giving four different advisors anywhere from $500 million to $700 million. Invesco was one. There’s just a ton of capital, closed-end funds, open-ended funds, or it being anywhere from 20 to 50 percent above 2007. There is a lot of capital in this market. 

FRAKER: It goes back to my earlier comments from an actuarial perspective. I think 2017 is the peak year for retiring baby boomers. So if you’re the CEO of CalPERS or a corporate pension plan, you really don’t want to have your money in derivatives or hedge funds or something exotic like that, or even the stock market, because you’d rather have money that you can count on, reliable income, even if it’s lower yields. Real estate is going to be a big beneficiary for these CEOs.

FARBER: The S&P just created an 11th grouping for REITs, which is a big change. The investors asked S&P to do that.

LAMBERT: I thought this was Jack’s way of telling us he was done in 2017.

LEVY: There’s your headline. 

 

What’s the sweet spot in terms of the different product and property types and submarkets? What are investors currently targeting?

LAMBERT: I’ll pick on value-add a little bit, and I do all product types. When I think of buyers, there are value-add guys, which sometimes look a little opportunistic today, and there’s core buyers, who have a core or core plus or build-a-core kind of program. I see the value-add guys looking at Las Colinas a good bit, because that market has been an island, but has started to have some great connectivity with Dallas and Fort Worth. The amenities are coming in and there’s an infrastructure that’s happening there. People see an opportunity there. A few groups are getting a little bit ahead on the value-add side, along the LBJ corridor, thinking that when it’s finished there’s going to be surreal opportunity there. On the core side is Uptown, Preston Center, and Legacy.

LEVY: The only thing I’d add is 90 percent of the capital that’s been raised in the last three years in the U.S. is targeted at whole periods of less than seven years, and a huge part of that is three to five years. So it’s all value-add money or core-plus money, and the yields are being chased down because they’re not finding a whole lot of value-add in the market that’s creating so many jobs and filling up so many apartment units, and retail centers, and office buildings, and industrial buildings. 

Their yield requirements are dropping and in order to replace this capital they show up and they want to talk about Uptown and Legacy or Preston Center. They find very quickly they’re nowhere near where the yields need to be so they’re going to Richardson, Las Colinas, LBJ. I think the next market that’s got to pop, from an investment and leasing standpoint, is going to be North Central Expressway, because with Uptown and Preston Center as tight as it is there are a lot of tenants who just flat out will not be able to pay $25 net, when they were paying $25 gross when they signed their lease five or seven years ago. You would imagine they would have to go to Central Expressway, and that’s where the vacancy is as well.

FARBER: LBJ is a sleeper market. For my entire career, we’ve heard nothing but negative things about LBJ, but for the first time, with the completion in 2015, people are picking up on it. I think we’ve sold over 20 buildings over there. People are trying to get ahead of the curve about what’s coming. I don’t know if you’ve driven the stretch from LBJ, but you can get there pretty quick right now, and you can get to DFW Airport really quick.

LAMBERT: The on and off ramps to 35 are fabulous. 

LEVY: Value-add capital’s got to chase vacancy, and North Central and LBJ is where the vacancy is.

JORDAN: You’ve already seen rents pop pretty well in the nicer buildings along Central Expressway. You’re getting rewarded for making that bed early, when Piedmont bought Lincoln Park. 

FRAKER: The sweet spot for industrial is the light industrial sector in buildings that are 200,000 square feet or smaller, which are primarily infill locations. Out of all the speculative development that’s taking place in Dallas, very little of it is in that sector.

It’s exciting to talk about the million-square-foot lease deals, but the vast majority, something like 65 percent or 70 percent of all industrials, is light industrial. So if it’s not being built speculatively, and tenant demand has come back, a lot of those tenants are tied to the single-family housing industry or tied to the automotive industries and those industries were wiped out in 2009. But now they’re coming back and they’re leasing up light industrials.

 

What trends are we seeing with regard to pricing, and what factors are driving the trends? Also, do you expect the end of quantitative easing to have an impact? 

AISNER: On the multifamily side, there’s been no increase in cap rates. We’ve seen no continued pressure on pricing. We moved our strategy from a buyer to a developer a couple of years ago because we waited and waited and thought, well, this is not just in Dallas. So we’ve given up guessing on that. But it’s been really a very tough market to buy in. People feel really good about buying into long income streams of apartments. You know, at some price, they always rent. I don’t think they’re going to move for a while. In the multifamily business, people are trying to decide how far out of the core do they have to go to get a decent yield. And then, do people really want to go out there? It’s going to be easy at the State Farm property, or up at Toyota, where you’ve got a real suburban-urban kind of place, where they’re not going to have to get in their car and drive everywhere. I don’t see a movement up in cap rates, at least for a while, on the multifamily side. I think it’s going to stay very tight. 

LAMBERT: In mid-2013 we had a market check, what they called a taper tantrum, when the interest rates spiked. For that period that they were spiked, nothing happened in cap rates. That goes back to those appropriate risk adjusted yields that lenders are getting and equity’s getting back compared to 2007. So there’s some running room there. Interest rates have got to move significantly, but moderate inflation is going to be a good thing for real estate pricing. If we’re having normal inflation, we’ve got job growth and wage growth, and consumer spending, and all the fundamentals that are going to drive demand for real estate. You’re going to see the rent growth and the occupancy growth and that demand happen. I like taking the training wheels off and trying to stand on our own and really one with the market forces, as opposed to this intervention by the central bank. We can do that and not see cap rates being adjusted for a while. 

JORDAN: We are seeing real rent growth today with the low interest rates, and it’s real, sustainable, and it’s expanding. That piece of it feels better than any time in my career where the fundamentals are really in check with good job growth and very inexpensive capital.

LEVY: The party line at our firm is that the transactional volume is driven by the availability of capital, not by the pricing of capital. If you look back in 2007, the national U.S. investment activity was $575 billion, and the average interest rates were 4.6 percent. So the interest rates were 200 basis points above where they are right now, and it was the highest volume in the history of the business. Even going from 13 to 14, interest rates have run up 100 basis points, and yet transactional volume is still spiking.

FRAKER: So there’s no direct correlation. It’s not a basis point for basis point correlation.

LAMBERT: Not at all. It’s a lot more complex than that. 

FARBER: The transaction volume is still way down. The only statistic I follow is CMBS (commercial mortgage-backed securities) lending, but CMBS lending in ’07, I think, was $250 billion. This year it’s $100 billion or something. It was $80 billion last year. So you talk about this huge spike of transactions, but there is not as much as there was leading up to the recession, which I think is a good thing. 

LEVY: The difference is there’s much more equity going into these deals.

JORDAN: In ’07, you had a lot of the public-to-private trades, which were in that number. The volume was driven a lot by those massive public-to-private trades that occurred. If you take just what I’ll call “flow CMBS,” we’re not at the peak, but it’s pretty healthy. 

LAMBERT: Closer. 

JORDAN: Yeah, you have to take out the big events. 

FRAKER: There’s a lot of debt that’s LIBOR-based. There’s big, smart, sophisticated institutional investors that are doing LIBOR-based financing with interest rates of 1.25 percent. We’ve seen some sovereigns or really large groups that are capable of 100 basis point spread over LIBOR (which stands for London InterBank Offered Rate). You can really do some good gearing, as they call it overseas, with those kind of low interest rates.

FARBER: If you’re a value-add or opportunistic investor, you’re not talking to the CMBS market anyway because it’s a shorter-term value-add, three- to five-year hold. So that’s a little bit different. 

AISNER: If you look at the public markets, their ability to access capital at very low rates is incredible right now. It’s really cheap money right now for the publics, and in all office and multifamily, whatever, enormous availability of capital.

JORDAN: But there’s good liquidity. You look at the bank market, life insurance company market, and the CMBS market, everybody’s healthy on the capital provider side.

AISNER: All this good news is scaring me.

JORDAN: No, they’re healthy. It’s good. 

LAMBERT: Look at the additional debt funds that you throw into that mix. What I think has been crazy is it tells you how much debt capital is out there. When you look at some of the big firms, like Mesa West, LoanCore, or Latitude, they’ve been used to lending at 5 and 6 percent. You talk to the guys that run those companies, they’re telling you high 3s, low 4s now, and I say, ‘Is that just because you’re making a run for end of the year?’ They really think that those prices for debt funds are going to be in the high 3s, low 4s. So there’s just a tremendous amount of debt capital out there. It’s more disciplined, but it’s out there. 

 

Banks are feeling pressure right now with the margins being squeezed and the ongoing challenges of regulation and compliance. How will this affect their real estate investment activity? And if they spend more money on compliance, will they have less money to invest?

JORDAN: They get better yields in real estate than they do a lot of their other businesses, so the real estate industry is a good relative yield for life insurance companies and banks. They’ll continue to be active in our space because while it looks very inexpensive for those consumers of capital on our side, when you’re sitting in the bank’s view that’s a good relative yield. They’re getting better pricing there than anyplace else. 

LAMBERT: You hear the banks really talk about the incremental cost that it’s taking to comply with all these regulatory aspects and issues. The smaller banks feel it a lot more than the larger banks. So where you might see it more so is in your regional banks. If you’re a mom-and-pop kind of middle-markets investor and you’re investing, you might see an uptick in rate for them to accommodate that. The bigger banks will probably just take less profitability because real estate is already high yielding, as Tim was saying, but they’re going to absorb that because there’s just too much competition at the big bank level. 

FRAKER: There’s much more underwriting due diligence that goes into a loan or an acquisition. We’re doing some deals now, and there’s auditors and appraisers that are all over these deals. There’s a lot more double-checking before they make a loan. 

 

Some have projected that the current cycle is going to turn in 2018. Are there any indications of that happening?

FRAKER: Nobody can really predict it. Janet Yellen was asked to predict interest rates a year ago, and she couldn’t. You can look at industrial real estate. The average amount of new construction for a 20-year period, from 1987 to 2007, was about 225 million square feet per year, and so now we’re way below that average nationally—we’re close to 100 million square feet. But, gradually, it will get back to the same number or more and some people have predicted that it will be 2018. So that could be some sort of governor on rental rate growth or activity. If you look at cycles and recessions and how the recovery lasts after a recession, we’re just now getting started in that cycle. Some people say that will be five or seven years, so that would take you past 2018. 

LAMBERT: This is a different recovery. It’s already been elongated, when you look back. So history is not helping us predict much. With the strong fundamentals we’re seeing in Texas, we might have a longer tail than the rest of the country. 

FARBER: For the office developers doing larger projects, they’re going to need more than $40 a square foot to even kick those deals off. We’re a far way away in most submarkets, so there’s a lot of room to grow. I don’t know how that coincides to 2018, but the rental rates are going to move quite a bit before we can really get to those rental rates and have a lot of meaningful construction out there. 

JORDAN: Look at Toyota’s decision to come to North Texas, and that’s a generational decision. They’re moving their corporation here and making a long-term bet on North Texas. You look at what’s going on with DFW, and it’s hard to be more bullish than we feel today because we’ve got everything going for us in North Texas, and in Texas in general. 

AISNER: For multifamily, by 2018 we will see there’s no slowing, and we just can’t keep raising rents the way we’re raising them. We’re going to come back down a bit. This is just too good right now. Office obviously comes out of the cycle later than multifamily. There’s no doubt the office sector will have a longer tail on it and really strengthen. We came out much, much sooner and much quicker than the other sectors, and I think that will affect what it looks like in ‘18; whereas, the office could look much better. 

JORDAN: For multifamily, it seems that the rent growth may slow down, but it doesn’t seem like we’re going to have issues relative to occupancy.

AISNER: No, no. Dallas came through the recovery OK in the multifamily sector because we didn’t have the overheated housing market here that blew up the rest of the country. 

 

What is it going to take for capital to be driven to Southern Dallas? 

 

LAMBERT: There’s a good bit of multifamily stuff happening down there. Rents are really proving up. There’s exit strategies down there and that’s where it starts, right? You don’t start with the office. You start with the multifamily.

JORDAN: That’s because you can go down there and lease it for $1.40 per foot, not $2.00, or $2.40. You’ll have the urban pioneers go down and say, ‘For that price, I’ll make the change.’

AISNER: Transportation into the city is incredibly important, wherever you are. If they can get in here easily; it’s just amazing what the bridge to Trinity Groves has done.

LAMBERT: Bishop Arts and Trinity Groves. 

 

South Dallas seems to be very active on the industrial front.

FRAKER: That’s right. Corporate real estate managers will talk about the Inland Empire in Los Angeles or Eastern Pennsylvania/New Jersey, and in the same breath they’ll talk about South Dallas. You have the intermodal. If you haven’t done this, pull off to the side of the road one day at that intermodal entrance and just watch the activity. Capital is already investing in the industrial sector in South Dallas. Look at what other ancillary uses could go around all of that activity. I don’t know how many workers are down there, but they’re having to drive a long distance to get nice apartments or housing. 

LAMBERT: I keep hearing South Dallas referred to as the Inland Port. That’s a real compliment to the activity and the recognition around the country that’s being placed on South Dallas and the industrial sector.

AISNER: Will the expansion of the Panama Canal help?

FRAKER: Yes. That will help. The Port of Houston actually has an office that they’ve opened in Dallas to keep track of port activity from Houston. Stuff will get loaded on a train or a truck and come up to Dallas for national distribution. For somebody that’s really involved in supply chain dynamics, they’ll go to the best location, and that’s why South Dallas really is the best location: Interstate 35, Interstate 45, Interstate 20, flat land. And now you have this intermodal facility that the Union Pacific Railroad has and BNSF Railroad also ties into that whole area. ... Alliance has the same benefits.

 

So is the next step housing, and making sure that growing labor base has access to retail and other things?

FRAKER: Let’s go build a warehouse, I mean, an apartment complex. 

AISNER: You’ve got to have a grocery store down there. That’s absolutely so critically important, it’s unbelievable. It’s the Whole Foods theory. 

 

Okay. So South Dallas is an opportunity for 2015. Let’s talk about other opportunities, challenges, and your overall predictions for the coming year. 

LEVY: The biggest challenges and greatest opportunities are on the office side. 

FRAKER: We all had pipelines of deals in business, and we already know that we’re going to have a good first quarter. It’s going to be at least a continuation of the type of volume we’ve had this year. Large portfolios are happening in our sector, so we expect a few more of those to happen next year. Unfortunately, I’m in the industrial real estate business, and our per-square-foot prices are half of what the office is, so we have to work twice as hard. But, anyway, we think the volume in our sector is going to be big next year.

LAMBERT: We have such great momentum with corporate relocations coming to this area. That’s still a great opportunity. Our groups together have done a great job in recruiting and bringing folks in, and that continues to bolster our economy and keeps us all in business because of the job growth and all that comes with those companies coming in, the need for space. I see that as a continued opportunity to really sell what’s great about Texas and what’s great about Dallas. Having a diverse economy is huge, and that’s why Toyota’s here and State Farm is here. When you talk to those groups, you think real estate might be driving those decisions, but the stories I hear is that there’s no real estate people coming to those meetings. It’s the HR groups that are looking for places where people want to be in these urban lifestyles. That’s a real opportunity when those corporate relocations come to build communities around them, like State Farm and CityLine, and do something really great within our city. 

LEVY: For the next 12 to 24 months, I’m probably most excited about downtown for all the reasons everyone’s discussing. The renters are getting priced out of Uptown. Bob, you told me it’s 50 cents to $1 cheaper for a phenomenal Class A unit in downtown. The denominator is shrinking. The amount of activity on the street is rising with retail coming in every month. If you look out of this window at the top 10 buildings, it’s hard to find a building that something significantly positive hasn’t happened to it in the last 12 months, whether it be One Main Place or 1401 Elm. Virtually, every building in downtown has had something significantly positive happen to it in the last 12 to 18 months.

FARBER: We’re going to continue to see investors that haven’t been here before and add-ons. So we’re going to continue to see new capital because they see the headlines that are out there and we get new calls everyday for a first-time investor that hasn’t invested in Dallas, that’s looking. That’s a pretty bold sign out there in the marketplace. 

JORDAN: The lifting of the Wright Amendment is going to have a huge impact on the in-town market, and I think downtown also benefits there. If I’m a company and I’m looking at transportation, I’ve got my people traveling all over the country. All of a sudden, now I can go from Love Field and my access from downtown is fantastic. That’s a dynamic we haven’t really seen the effects of and the spillover of that could be tremendous. 

 

AISNER: From the multifamily side, that can obviously be good. The challenge will be finding developable land where the numbers will work. You’re going to see development pull back, and I think the opportunities will be starting to look in these fringe areas that people still feel are kind of cool, but are a little on the edge. For owner/operators, I think 2015 will be another very good year.