Capital Markets: Feeling the Rush

Capital Markets: Feeling the Rush

Capital Markets: Feeling the Rush

Capital Markets: Feeling the Rush

Investors are flocking to Dallas-Fort Worth, where job growth, economic diversity, and other strong fundamentals are fueling a thirst for commercial properties in all sectors. Here's what to expect in 2016.

In its highly respected annual Emerging Trends report, the Urban Land Institute and PWC identified Dallas-Fort Worth as the No. 1 real estate market for 2016. The report cited DFW’s impressive employment growth, supported by a business-friendly environment, an attractive cost of doing business, and low cost of living. 

The findings supported what investors all over the world are discovering: Dallas is the place to be. The outlook is strong across all property types, in both acquisition and development potential. To get more details on capital markets activity in the region, we recently gathered a panel of some of the top minds in the business. The discussion was moderated by Christine Perez, editor-in-chief of the Dallas-Fort Worth Real Estate Review.

CHRISTINE PEREZ: Let’s begin by getting your take on commercial real estate investment activity across North Texas in 2015. Were things better, worse, or about what you expected? 

GARY CARR: I think it was about what we expected. We knew going into 2015 there was a lot of momentum. Leasing activity was so strong in 2014, and we had a lot of liquidity in the market, both debt and equity. In transactional volume, we’ll probably be up in the office sector by 8 to 10 percent in 2015, and probably hit about $4 billion in transactions. 

BILL VANDERSTRAATEN: For us, it was a slightly better year than we were expecting. The interest rate environment and cap rate environment I kept a pretty open window on the sales side, and I think there were still some opportunities on the buy side as well. So it was a year where there was quite a bit going on both coming and going. 

RANDY FLEISHER: It has been good across all the property types. Apartments showed a 22 percent increase, year over year; office was up 19 percent; industrial was at 28 percent. Retail lagged at 3 percent. But overall, good growth over 2014.

TREY MORSBACH: I guess we’d have to say it was as expected, because we’re optimists. We go into every year suggesting that next year is going to be great. But in all honesty, I would say we’re probably a little bit surprised. Through the third quarter, the trailing 12 months, Dallas eclipsed its largest transactional volume in commercial real estate ever, at just over $18.5 billion. There’s no doubt there was liquidity in the market—enough capital to certainly support that kind of activity, and the fundamentals in the market are as good as maybe they’ve ever been. You combine those two and you end up with the most transaction activity ever. 

BRIAN O’BOYLE: On the multifamily side, it has been another year. In the last 12 months, there’s probably been about $5.5 billion in multifamily transactions. And we still have a very active market ahead of us.

Globally, cross-regional investment is on the rise. Are we seeing more foreign money targeting Dallas, and why or why not? 

O’BOYLE: In the last 90 days, I’ve closed more than $500 million worth of deals. And of that amount, more than 40 percent involved foreign capital. For the most, it was China and the Middle East. 

CARR: Dallas has always been attractive to cross-border capital, but a large percentage of that has traditionally come from Mexico or Canada, or Europe, Germany, and Great Britain. As Brian said, we’re seeing a lot of interest today from all over the globe. There’s a lot of capital trying to get into the United States right now because the economy is strong. In the last six months in Dallas, we’ve had big contingencies of people coming in from Japan, China, and Korea. The airports allow people from all over to get into this part of the country on direct flights, which is a great asset.

FLEISHER: We’ve also seen tremendous job growth—100,000 per year for the past five years. We’re expected to grow by 2.1 million people from 2015 to 2030. So that’s a huge driver, too. Dallas-Fort Worth is the fourth most economically diverse market, when you look at all the major cities across the U.S. Foreign capital is realizing that Dallas is a gateway market—a market that they want to be invested in.

O’BOYLE: I think especially some of the countries where there’s a political situation and some of the instabilities that exist, a lot of these foreign investors look at the U.S. as a safe haven. We may have some issues, but long-term, we’re probably the most stable and low-risk investment.

VANDERSTRAATEN: Yeah. I think they look at stability first and then within the U.S., they see high growth in a place like Dallas, so it’s making them consider the middle of the country more than they did in the past, when the focus was either California or the East Coast. Texas is now getting more attention. 

MORSBACH: I looked at some data this past weekend. There has been more foreign capital in the United States in the last 12 months than ever: $17.1 billion. That eclipsed all of 2007. By mid-year this year, there was more than all of last year. The flow of foreign capital into the U.S. is extraordinary, and increasing. In terms of specific markets, Dallas came in at No. 2, in terms of total dollars, behind Manhattan. This is surprising, when you think about Los Angeles and San Francisco and Washington, DC, and all of the gateway markets. Gary’s comment about the airport is so true. We just hosted 20 Chinese investors—for the fourth time this year, a contingent of Chinese investors have come in—and their real simple mantra is, “We’re going to invest where we have a direct flight from Beijing.” So the fact that DFW International opened up direct flights to Beijing literally is a direct connection to how and where they’re going to invest.

CARR: A lot of times it’s not very transparent that it’s coming offshore, because a lot of the offshore capital will come in through institutional advisors like Invesco or MetLife, so you don’t actually realize where the money is coming from. 

Good point. So along with the airport and job growth, what are DFW’s biggest selling points as an investment market, and what are its biggest challenges? 
VANDERSTRAATEN: Randy touched on this, but I think the economic diversity is a very big part of what’s attracting investors. There are so many different kinds of businesses here. We’re not dominated by a single industry the way a lot of other markets are. From an investor’s standpoint, the biggest drawback remains in the ease of getting competitive product started in this market; investors are sometimes a little cautious about jumping in where they know they can get surprised by competition. 
MORSBACH: I think some of the more supply-constrained markets of the country have gotten out and ahead of their skis more than we have, in this cycle, and even in last cycle. Now, we’ve been saved by demand, so it’s not that we don’t develop. We have probably the best development community in the country, and we have the ability to develop because we have land. But if you think about where we are on supply-and-demand metrics on almost every asset class, through last cycle and even into this one, we outperformed almost all the major gateway markets, maybe with the exception of Manhattan.
VANDERSTRAATEN: What do you mean by perform? 
MORSBACH: Occupancy. We had better supply-and-demand performance on every asset class. So I’m really talking about how did they stay occupied, and do we have assets that were not languishing. We had rent pressures, like everywhere else. 
VANDERSTRAATEN: Most of you guys know much about the reality of new product, but the perception from the investment community that we have the ability to pop up buildings on fairly short notice, both multifamily, office, industrial. That perception I think is a headwind for a lot of investors. 
MORSBACH: Indisputably. I think that’s the key, is its perception. And I think statistically, you can go back to 1988, that was the last time this city was materially out of equilibrium. So we’re still sort of living with the sins of two and three decades ago in this city.
VANDERSTRAATEN: That was a rough one. 
MORSBACH: A lot of people in the 212 area code still forget that this market has actually performed better than all the supply-constrained markets. 
O’BOYLE: When you talk about the 1980s, the amount of equity that was put in deals was very small. Today, we’ve built in more controls. Your typical deal is somewhere between 25 and 35 percent now. So we have more checks and balances in the system. To your point, Trey, the Urban Land Institute just ranked Dallas as the No. 1 investment market in the United States for 2016. Over the past 18 months, I’ve seen so many new buyers come to the marketplace. We’re on more radar screens today.
CARR: The stars are aligned in Dallas right now. It’s a job-growth engine, you’ve got all this relocation activity because of the no-tax environment, you’ve got a balanced state government, you’ve got these great airports, you’ve got the central time zone, you’ve got great housing stock. North Texas is seen as a safe haven, which is why we’re seeing so much relocation activity.
FLEISHER: Yeah, I agree with Gary on the leasing attractiveness in this market. JLL is tracking 21.4 million square feet of tenants that are looking in our market, and they’re looking at all those factors that everyone has pointed out. You’ve got market diversity, the business-friendly environment, you’ve got a local time zone, you’ve got great transportation with DFW and Love Field. Investors are seeing the same thing that corporations see when they look at this market.
VANDERSTRAATEN: The quality of the workforce is another huge draw, particularly in corporate relocations. 
MORSBACH: And the low cost of living. 
FLEISHER: Although that’s becoming somewhat of a challenge now, that the employment base is starting to get thinner here. 
VANDERSTRAATEN: Being stretched? 
FLEISHER: Yeah. We’re reaching near peak employment. If you graduate now with a college degree, the unemployment rate is 2.4 percent, which is really low. But we just continue to see net migration, so we’re offsetting the demand for new employees with people who are moving here. They’re following corporations, which also is helping fuel investment.
VANDERSTRAATEN: It will be interesting to see if down-shifting by some of the energy companies contributes to more looseness in the job market. 
MORSBACH: The economic diversity comment is one that can’t go under-discussed. All of us, particularly in the transactional space, went into this year with what was going on in Houston and we were waiting with bated breath to see whether this energy was going to affect Dallas. We looked at it statistically, and you could look at the percentage of mining and refining, and Dallas is de minimis and all, but there’s all those extra layers of jobs. Has anybody felt any impact from energy in Dallas?
O’BOYLE: Zero. Zero. 
MORSBACH: I mean, to the contrary, right? In some ways, I think capital has almost reversed. We actually saw capital that wants to be in Texas becoming somewhat resistant to Houston (which is so dependent on the energy industry), so they’re coming to Dallas. I don’t know if that’s sustainable, but I don’t think the energy has played out as significantly. Maybe it will, maybe it won’t. 
VANDERSTRAATEN: I think it’s a little early, which I know sounds funny because we’ve had depressed oil prices for some time now. These organizations take a long time to adjust to that, and oil and gas is only a small percentage of Dallas, relative to most other Texas markets. It may only be 10 or 12 percent, but it’s the best 10 or 12 percent. So it does have a little bit of a headwind effect. 
O’BOYLE: To your point, Trey, I’ve seen a lot of the funds come into town saying, “Look, I don’t want to have to get up in front of my investment committee and have to go through a big hard sale.” So it’s like a balloon that’s filled with water—you squeeze Houston out and that money shifts to Dallas and it shifts to Austin.


O’BOYLE: One of the things that Dallas has going for it is the fact that it’s one of the cheapest costs of living of any major metro area. If you look at the percentage of rents to income, Dallas may be 18 percent on a national scale and New York is 38 percent. That’s a big deal. Randy mentioned our ability to have a pipeline of qualified employees—what’s the bench strength of that, with Toyota and Liberty Mutual and the others. One thing to look at is the annual graduating classes of college seniors. We we get a high percentage of the SMUs and the TCUs and other Texas schools, but there’s a lot of other annual in-migration of people coming from all over. I have a son who graduated from TCU a year ago. He had 31 kids in his pledge class, representing geographical diversity from all over the country. Fifteen of the 31 came to Dallas, to the Uptown area. And if you look at the quality of life that these kids have—I kid my son and tell him, “I want to come back as you.”

VANDERSTRAATEN: This city has never been better for a young person. 

O’BOYLE: Then they’ll have friends come visit from New York, where they’re paying rents of $5 to $8 (per square foot) a month. You’re hard-pressed to almost find a place for $2 here—the nicest place in town. If you look at our cost of living index, we’ve got one of the lowest costs in the United States. 

MORSBACH: You’re saying multifamily rents can keep on going up? 

O’BOYLE: There’s a lot of juice left. 

VANDERSTRAATEN: So we’re a millennial magnet. 

MORSBACH: There are worse monitors. People are looking at millennial markets because it goes back to quality job growth and where the best talent wants to be. … What our city has done in Uptown and with the bridge and downtown—everything that is going on in our urban core is starting to attract a lot of millennials. We’re hiring a lot of people and we interview a lot of people, and they all want to live right here. 

VANDERSTRAATEN: For that age group, the diversity of entertainment options for them is bigger than it has ever been, between Bishop Arts and Deep Ellum and Trinity Groves and Uptown, the list goes on and on. 

MORSBACH: You go out? 

VANDERSTRAATEN: No, of course not. But they do and they love it. 

O’BOYLE: That generation is parking the car on a Friday afternoon and not going back to it until Monday morning.

VANDERSTRAATEN: It’s an Uber weekend. 

O’BOYLE: That’s right. It’s a totally different lifestyle.

We talked a little bit about supply and demand. Let’s break it down by property type. Brian, you’re the multifamily guru; I cannot believe the amount of development going on in that sector.

O’BOYLE: It’s a beautiful thing. We’ve got about 38,000 units in the pipeline, of which we’ll deliver, by the end of the third quarter next year, probably 24,000 units. But since 2010, we’ve absorbed almost 100,000 units in this market. It’s amazing the absorption we’ve had. The pipeline is probably as big as it’s ever been, but we’re also creating a lot of jobs. We may be a little short of absorbing all the units, but it’s nothing I would consider being out of balance. 

FLEISHER: On the other side of multifamily is single-family residential and a tremendous under-supply there. Developers are having a real difficult time doing horizontal lot development, so that will help keep multifamily going. 

MORSBACH: The fact that we have not been able to deliver the supply and the fact you still have a lot of disruption in the mortgage market and the difficulty getting lending has led to more success in multifamily side. If there’s any product type that is questioned about whether it is potentially being overbuilt, it’s multifamily. What about Uptown, and all of the towers getting built?

O’BOYLE: There are 11 high-rises under construction right now, and a bunch more planned. 

MORSBACH: In the Uptown submarket? 

O’BOYLE: Yes. It will be interesting to see how it pans out, but the ones that have come online have done incredibly well. We’re also seeing some of these new towers getting $3 a square foot.  

It’s the boomers. 

O’BOYLE: Exactly. A lot of friends I know are selling their homes, whether it’s Park Cities or Preston Hollow, and they’re moving to the Uptown area or downtown and living in high-rises, where you’ve got walkability, you don’t have any yards, and if you want to leave town, you just walk out the door. 

VANDERSTRAATEN: We’ve got four different multifamily investments, and we’ve been surprised with how resilient that market has been through the course of the year, even as it continues to deliver a record level of units. We think the high-rise market is going to have some softness in it. I don’t think it will be long-term, but there will be some softness, just because so many are happening at the same time.

MORSBACH: Softness defined as just rent? 

VANDERSTRAATEN: Rent concessions, for some period of time. I do think the long-term Dallas job growth is such that demand will eventually catch up, but I think over the next 18 months we are going to start to see some softness in that part of the market. But we’re long-term bullish on high-rise and urban. I wouldn’t just focus on Uptown; there’s quite a bit of other urban housing options happening, in every direction from downtown. 

O’BOYLE: If you look at what’s happening to the east and now there’s activity going down in the Cedars, and then you look at what’s west of downtown, we’re basically seeing entire new submarkets pop up. 

VANDERSTRAATEN: Yeah. There are five or six projects between Bishop Arts, Trinity Groves, and Deep Ellum. 
What about the other sectors, office, industrial, and retail?
CARR: Generally, office investors are comfortable with the new supply that’s coming on, for a couple of reasons. One, demand has been so strong. Through the first three-quarters, we saw 4.6 million square feet of net absorption, and there’s roughly 6 million square feet of construction under way right now. Additionally, construction costs are going up pretty rapidly, and you can’t go out and get nonrecourse financing, so you’ve got to have real equity in a deal. The rents have to be there in order to justify it and investors come in and they see new construction and they feel good about where things are going. In previous cycles we’ve gotten ahead of ourselves with new development, but that was driven by different sets of circumstances, and we don’t see that this time around. 
FLEISHER: On the retail side, there’s a strong belief that there’s undersupply. In pockets like in far North Dallas and in Plano and Frisco, where a lot of the job growth is going on, there’s certainly an undersupply. 
VANDERSTRAATEN: We have a retail investment in Frisco that has done phenomenally well. We’ve seen a180 degree change in just the last two years.
CARR: Which property is that, Bill? 
VANDERSTRAATEN: Frisco Market Center. It was very quiet two years ago and there’s not enough time in the day to get everybody in there right now. Retail trails job growth, and that’s what we’re seeing.
MORSBACH: You could make an argument that we don’t need more retail, if you just look the global statistics. But retail has a place-making element to it. You look at the success of Legacy and Legacy West. You see anywhere that has retail now becomes a destination. You can’t build it fast enough; the demand is quite extraordinary. In the right market, retail demand is strong. And it’s very difficult to capitalize. It’s as hard as anything to get a project off the ground in that particular product type because you need pre-leasing, you need all the alignment of all these things to happen. 
VANDERSTRAATEN: It’s very complicated. So that makes it, once you’re in it, it’s hard for others to get in. 
MORSBACH: Barriers to entry. 
MORSBACH: I didn’t think we had that in Dallas. 
What about the industrial sector? 
VANDERSTRAATEN: Big box feels pretty well served. What’s in the market is probably what the market is asking for and not a lot more than that. I think with shallow, there’s still some runway. 
MORSBACH: On the big box side, again, that’s such a tough market to comp because the numbers can grow and shrink so fast. There’s speed of development, but they can also be absorbed extraordinarily quickly. We’re the No. 2 or No. 3 industrial market in the country, for a lot of reasons that aren’t going to change. We’ve got some of the best developers in the world here. If everyone is one box ahead of the market, and they’re 800,000 to 1 million square feet each, you can look at the numbers, but a quarter later, it could be full. Statistically, it’s the only market that looks a little out of line in terms of new deliveries relative to current absorption, but that absorption number is so variable, it’s just so hard to predict. It’s healthy; no one is concerned. If there’s anything that can get done quickly from a capital perspective it’s spec industrial.
FLEISHER: There’s speculative development in industrial, but we’re seeing the space getting leased quickly. So our belief is that industrial is at equilibrium. 
Good to hear. Let’s talk a little bit about pricing. What are you seeing out there, and what’s driving pricing trends? 
FLEISHER: Cap rates are low and we’re seeing it across all property types. The investors are seeking yield, so that’s driving low cap rates. We have low interest rates right now, so those are the big drivers. There are a lot of ways to look at the pricing. In every asset class, I would guess we could all point to something in this market that we set a record on, price per foot on the office side, price per on the multifamily side, etc. But if you look at it relative to the risk-free rate, cap rates are just in a premium over where you could otherwise place your money, to the treasury market. So if you look at the spread, cap rate spread over treasuries, we’re still at or greater than historical averages. ... I think we probably reached the limits of where pricing can go from a cap rate perspective; if you’re an institutional investor or if you’re an insurance company or a pension fund, you just have certain actual returns that you have to deliver. And I would submit that we’ve probably reached that and it’s sort of around a 5.5 or 6 IRR. In a market like Dallas, price increases are going to be due to net operating income growth. So the cap rate compression play that the capital markets play in the world, we believe is largely played out, and it’s all about fundamentals.
VANDERSTRAATEN: That’s why the interest rate question about the Fed raising the rates is, in our view, more important relative to our customers than it is to our business. 
MORSBACH: That’s true. 
VANDERSTRAATEN: If you start seeing businesses that have been running for seven, eight years on no-cost debt, if you see that changing, then there would be some concern on the demand side. That’s one of the things that we’re the most focused on.
CARR: I tend to agree that pricing is getting to a point where if we’re not at the low in terms of caps, we’re getting close. There’s been so much appreciation since the last correction that there’s been a lot of value creation, so there are a lot of profit-takers looking to monetize. That’s why there’s a lot of product on the market across the country right now. It will be interesting to see as we start moving up closer to new replacement thresholds if pricing clears as easily as it has over the last couple of years. When we first came out, it was, you know, pretty easy to make a bet because you were buying so far below new replacement, but as we start to push up, investors are going to be a little more cautious. 
VANDERSTRAATEN: I think there’s more uncertainty about how much time there is to run through an investment. 

O’BOYLE: Another thing that’s driven pricing has been the cost of construction. I know in the multifamily sector, if you compare today’s costs with where they were two years ago, you may be up 20 percent. 
VANDERSTRAATEN: Yeah, it’s huge. We’ve been involved in each product type on the construction side, and it’s dramatically different. There’s probably $100 swing even in the last 18 months per foot on an office building, relative to where we were. Quite a bit of that is land, which has run up. To start a building from scratch today, would put you, with structured parking, well over $400 a foot in an urban location. 
How are buyer and seller expectations matching up? 
VANDERSTRAATEN: It never quite matches up, does it? I know with what we’re selling, it never matches up right. 
O’BOYLE: There’s still a large number of transactions, so it has to be up, but I think if some of these cap rates get any more aggressive, then I think you could have some issues. 
MORSBACH: But the facts sort of play out. There are a lot of people meeting in the middle on a trade. I think we’re still hitting pricing expectations, since we haven’t seen any price degradation across asset class, not in this market, really not in any market; but the depth of the bid pools has been shrinking. That’s not just a pricing metric. That also is sort of a human resources issue. There are more transactions, people have less time to look at them, so you have, by definition, fewer people at the finish line. It’s always an art keeping that together. 
VANDERSTRAATEN: Well, there are a lot of transactions in every product type. So they’re clearing the market. People are finding investments that they think make sense, even in the long-term. 
O’BOYLE: One property we sold in Plano had 65 property tours. There’s so much money chasing value-add deals because it’s like, “Well, here’s what I think I can do and I can raise it to this level.”
VANDERSTRAATEN: They say it’s easy to find yield, but it’s hard to find margin. So when you see a deal that has margin, then you’ve got a lot of people …
MORSBACH: “Margin” defined? 
VANDERSTRAATEN: … higher profitability. 
MORSBACH: Potential? 
So what is the biggest roadblock to getting deals done? 
VANDERSTRAATEN: My competitors. 
MORSBACH: Everyone else with money. 
VANDERSTRAATEN: Exactly. And there’s some seriousness to that, too. There’s quite a bit of capital searching for a home, and that’s who we tend to compete with on the buy side. It’s getting more and more difficult. 
CARR: There’s no one key roadblock because every deal is different. It can be a physical issue, it can be an environmental, it can be a financing or tenant-related. 
MORSBACH: Despite the velocity and the amount of capital and real estate really being an attractive asset class, deals are still really hard to get done. Because when people are pricing at what they perceive to be at the margin, underwriting gets refined to a level where there’s a lot of angst and there’s a lot of homework and there’s a lot of diligence and there’s a lot of tours and you’ve got to prepare for an investment committee. People are asking a lot of really tough questions. Dallas has held up to those questions heretofore, but they’re not easy. And this is certainly not the Wild West. These are highly-disciplined, mostly institutional investors that are making some significant bets. Every trade has roadblocks; it’s just a tricky market. 
FLEISHER: These aren’t really roadblocks, but there are things we’re looking at or concerned about. On the construction side, HVCRE, which is high volatility commercial real estate, how the banks are going to understand that regulation and how that’s going to impact their ability to make construction financing, requirement of certain amount of equity, and how that equity has to be counted. We’re seeing that there has to be some absorption of that change and how that impacts the construction. Also, in the CMBS market, with the requirement for the issuer of the securitization to make representations for all the contributors to the class of that securitization, there’s some concern about how that’s going to impact the CMBS market, which is a large component of refinances or acquisitions—will it affect pricing, and will that crowd out some of the smaller investors? So those aren’t present-day roadblocks, but those are factors that we’re tracking.
Let’s shift focus a little bit and talk about redevelopment projects in the core. After years of hardly any activity, so much has traded recently, and we’re seeing new investment along Main, Commerce, and Elm. What is the status of the downtown Dallas market, and what is the outlook? 
CARR: I’m very bullish—I think all of us here are—on what’s going on in the Dallas central business district. There are a lot of new stakeholders that are investing millions of dollars. There are 10,000 people living downtown; it’s transitioning into a 24/7 environment, with neighborhoods like Main Street and the Arts District, there has recently been a lot of investment made in the West End—and these are smart people who are looking at transitioning into a creative space environment—and then you’ve got Victory. So there’s just a lot going on. If the economy stays on the same trajectory, and we all feel like we’ve got some runway room, three to five years probably, you’re going to continue to see capital invested and it’s going to continue to improve. 
MORSBACH: The key word you said, and I agree with you wholeheartedly, is “stakeholders.” When you have a base of well-capitalized stakeholders, that’s an important distinction. Because a lot of these buildings—downtown in particular—were the definition of zombie owner. They couldn’t reinvest in their assets, so the buildings were languishing, and, therefore, the tenants weren’t happy. It’s a natural degradation. The inverse of that is happening now. You have really well-capitalized owners that have business plans to put more capital back into the market and regentrify some of these buildings. When I say “well-capitalized,” I mean there are three billionaires who have invested in downtown Dallas in the last six to 12 months, and they’re continuing to invest. That starts to open the eyes of institutional capital, which is starting to look again. So it’s a real transformative thing.
VANDERSTRAATEN: I think one of the most encouraging things is the new buyers are local decision-makers, so that bodes well for us because they’re going to be seeing their friends and others around town. They want to do the right thing and they’re trying to help the city move up a level. It’s much more healthy to have that decision-making local at this point in the market.
O’BOYLE: And I think the way that it’s spread around the core of downtown, as you go East Dallas, you go the Cedars, or you go look what’s going on in the area up around the Knox and McKinney … and West Dallas. What’s encouraging is you’ve got so many of these different submarkets in Dallas, surrounded by the core, it’s lifting up the entire city.
FLEISHER: I think there’s an opportunity for redevelopment. Just look at the rent disparity between Uptown and downtown. We’re talking about $20 in just two blocks. As you mentioned earlier, Brian, people are looking for value-add. You have to tell a story and you have to paint kind of a canvas and picture of what I’m going to do with this opportunity in front of me. To me, just a two-block disparity in price and rent gives developers that opportunity to try and create something. 
What have you guys seen in terms of the impact of Klyde Warren Park? 
VANDERSTRAATEN: It’s become the new center. I think it’s hugely impactful. 
O’BOYLE: Is that the bringing down of the Berlin Wall? 
VANDERSTRAATEN: Yeah, maybe not quite that impactful. But from a pricing standpoint, you could almost start from the park in the center and go out. If you get next to or near the Park, it’s a big deal. It shows how important negative spaces are in an urban environment. And what I mean by negative is “not built.” Beyond retail and everything else, the element we probably need more than anything is more green space. 
MORSBACH: Along with the statistical impact of stakeholders around the park and valuations, there are also the intangibles. Just think about the connectivity now. Downtown and Uptown is all one. Ross Avenue is a really great place to be, and that wasn’t necessarily the case not very long ago. So what the park has done for the city and in bringing people back to the urban core—and getting rid of that old canyon. I’m not sure the story has ever been better for downtown Dallas than it is right now. 
VANDERSTRAATEN: When I started my career here, I think there were 300 people living in downtown Dallas. It’s now 8,000.
MORSBACH: Yeah, 8,000 to 10,000. 
VANDERSTRAATEN: That’s an unbelievable swing. 
O’BOYLE: And look at infrastructure in the region. Look at what we’ve done over the years with LBJ and Central and the other major traffic arteries, the George Bush and State Highway 121 and what that has done to move traffic, and the impact of values around those traffic arteries—it’s amazing.
FLEISHER: And the investment in DART and the light rail, too.
CARR: That’s huge, because corporations like Toyota and Liberty Mutual, when they come in, they want the infrastructure so they can count on being able to get where they need to go. But they also want the arts and the kind of international appeal that Klyde Warren has brought back into the picture. Trying to attract international capital, you do need a thriving urban area; what Klyde Warren has done is tie the Arts District and created that buzz that is really attractive to international visitors. 
How are foreign investors coming to look at Dallas? Are they being brought to it because of the news of Toyota, or are firms actively out recruiting more foreign investment? How is that playing out?
MORSBACH: Yes is the answer to both questions—it’s any and all things. There has been a little bit of divergence in the way investors are investing in real estate. Heretofore if you were sovereign wealth or a large institution, you would have no problem with your board or your investment committee if you go to D.C., New York, LA, San Francisco—the top core markets, gateway markets easy. And people in this cycle have really started to look at fundamentals. Where is a good place to do business, where am I going to have a job, where am I going to have net demand for the real estate that I’m going to buy or invest in? And so Dallas all the sudden shows up on top of everyone’s charts. I mean, when ULI and PWC came out with their report and we’re No. 1—that report goes across the world. So even if people didn’t understand Dallas, they want to know, why is Dallas No. 1? Well, it’s because it’s the job growth, predicted employment growth, great city infrastructure, low cost of living—all this stuff starts coming to bear. It starts with some private global investment and then it starts to turn institutional. What we’ve seen heretofore is mostly private Asian capital. But now, the second largest insurance company in China is actively soliciting an office buy in Dallas, as you’re probably aware. They’re calling us and asking to visit with us. It was shocking. Inbound solicitations? But this is the information age, and everyone has it at their fingertips. Dallas cannot hide anymore. Everyone around the world can now look at all the positive fundamentals we’ve been discussing. 
O’BOYLE: Well, when you look at, like, a Toyota move … I’m not in the office space, but when the godfather of Japanese industry has put the blessing on it, then I would imagine you also get the Japanese doctors and CPAs and the Japanese schools, then all the sudden it’s a pile-on effect. Other Japanese companies say, “Well, if it’s good enough for Toyota …” They’re like the snowplow. They plowed the way, put the social infrastructure in place, then it becomes a lot easier for those other companies to assimilate, and with a direct flight from Tokyo, and all of a sudden, it’s a great place to plant your roots. I think as we see more instability across the world, people will just continue to look for a safe place.
FLEISHER: At JLL, we have offices in these various markets. So part of what we do is we have discussions with those offices where they’re advisers to those companies like Toyota and other companies, so that we’re having more of a global discussion, and Dallas is entering that discussion. I think the ability to have conversations with those offices is also attracting the companies that we’re advising for and bringing them to this market. 
Dallas has just gotten a lot bigger too—just the size of the market. So that’s probably a factor, as well. OK. Let’s go around and get everyone’s overall predictions for capital markets activity next year and maybe two or three years out.
CARR: Well, I think all of us are going to be pretty consistent in that we’re very bullish and optimistic about the next three to four years. If you take a look at the drivers—the population growth and the job growth, for the foreseeable future, things are going to be very good for this region of the country. 
FLEISHER: In 2006 and 2007, there were a tremendous amount of loans, commercial real estate loans that were put on, a lot of investment sales. Those deals are now cycling, so we’re seeing a demand to refinance or sell or recapitalize the 2006 and 2007 vintage. That leads to activity in 2016 and 2017. In my mind, 2018 is a question, whether that will be a slower year just because, you know, activity breeds activity, and without the need for a capital market transaction, there could be a slowdown in 2018. But, like Gary, we’re very bullish on 2016 and 2017.
O’BOYLE: The next three to five years in the multifamily market is going to continue to be bright. We hit a 14-year high on occupancies, at 94 to 95 percent occupancy, and we’ve had the best same-store rent growth that we’ve had in 20 years. So, we’re going to continue to see a significant number of transactions.
MORSBACH: I would like to find a reason to disagree. I really would. People want to understand the potential headwinds, things that could be issues. And Randy referenced a great data point, which we talk about all the time. Again, we’re transactional people, so our focus is on transactional flow. There’s almost $1.5 trillion dollars of mortgages that mature from 2015 through 2018, so those are forced transactions that will have to happen. One way or the other, whether it’s a workout or refinance, something has to happen, because there’s a maturity event. But maybe more interesting from our perspective is what’s happening on the equity side of the balance sheet. There has been more capital invested in real estate than ever before, and it continues to be the most sought-after asset class. Global capital, domestic capital, private capital—allocations are increasing across the board. 
VANDERSTRAATEN: I would agree the short-term feels like it’s pretty baked in. 2016 feels very positive. Two things we track on the short-term risk factor would be, you know, if interest rate is going up, it causes the stock market to have an overreaction, and sometimes you get institutions that become overweighted in real estate. That’s about the only thing I can think of that would restrict capital coming into the market. I don’t think that that’s very likely, but that’s something we would track. On a longer-term basis, what we always try to pay attention to is how much debt is in the typical capital stack. I think what we got in trouble with in 2007 was not really valuation, it was that we had CMBS and things pushing debt up into the 90 percent range. You’re starting to see mezzanine funds kind of creeping up again. It’s not very prevalent yet, but I think that’s one thing that we would just keep an eye on, if you start getting kind of second note debt pushing up into those same sort of higher debt levels. Then when there is a hiccup, you get a lot of properties that are exposed, which is a negative thing. So again, I don’t think any of those things are very likely, but they’re things that we track. Short-term, I’m very positive on deal activity—in Dallas particularly.