MARKET REPORT THE PHOENIX RISES CAUTIOUSLY

THE DEVELOPERS AND F1NAN-ciers who created the Great Dallas Office Building Boom of the 1980s can finally relegate all those stories about completely vacant skyscrapers to their attics.

Their vision for all the space built with capital from fly-by-night S&Ls has finally been realized- It just took more than a decade to get there.

In the past two years, the inventory of vacant office space has decreased by more than 8 million square feet. Outside downtown, more than 90 percent of the space in multi-tenant office buildings is occupied, and downtown is starting to fill up, too.

In fact, blocks of 100,000 square feet or more are hard to find. And rents are reaching $32 in some places.

All that adds up to a once-familiar sight: construction cranes signaling office-building construction. More than 1 million square feet is under construction and as much as 15 million more is planned. The beginning of a new round of building begs two questions: What is going to be built? And where? Have we learned from the ’80s or will there be another blight caused by inappropriate overbuilding?

Two key players in Dallas real estate- Cushman & Wakefield managing director Reagan Dixon and Fults/Oncor president Jerry Fults-have different insights on Dallas’ commercial real estate market.

For the long term, Fults is the optimist and Dixon the skeptic. For the short term, they both share an optimism based on five years of positive absorption and responsible construction starting to rise.



The Job Market

The jobs are here, In fact, the Dallas-Fort Worth area is in a virtual tie for second place among the fastest-growing office-employment markets, according to David Birch, president of Cambridge, Mass.-based Cognetics, Inc. The area added 152,000 such jobs in ’96, he says.

That the area is high on the list is a function of geographical luck, history and tradition, and foresight in the form of the aviation complex straddling Irving, Grapevine and Euless.

“Dallas is very centrally located, it has a very good airport and a very positive business climate. It is receptive to the entrepreneur,” says Birch. “That combination works out pretty well.”

Says Dixon: “We’re now absorbing 3 to 4 million square feet a year, and we haven ’( built nearly that much space in the past 10 years. We’re going to have overdemand for at least two years. Even if you started to build today, you couldn’t get it ready to go for i 2 to 18 months.”

The jobs have been created primarily north, which results in the “no vacancy” signs flashing on almost every office building north of Woodall Rodgers Freeway. There was one catalyst after another coaxing business out of the CBD,” Fults says. As Dixon puts it, “A business likes to have a building in a place that’s proximate to its workforce. Businesses are locating north because north is where the land is; that’s where the good schools are. And for the executives who make decisions, that’s where their houses are going to be.”



Downtown Bounces Back

DOWNTOWN HAS JUST LESS THAN one-quarter of the total office space in Dallas and more than half of its vacant space. While the Central Business District stands at two-thirds occupancy, the reality is that if a company wants to relocate into a space of 100,000 square feet or more. i t has to come downtown.

The best thing that happened to downtown was the suburban market filling up,” Dixon says.

Both he and Fults both see a lot of advantages to today’s downtown.

The reason you’re seeing a move downtown is because of cost,” Dixon says. “You have an inversion of sorts; you have office space in the suburbs more expensive than office space downtown, It probably won’t be that way forever, but it is now.”

Fults/Oncor’s figures show CBD offices renting for an average of $ 17.07 per square foot; that’s S 1.50 to $2 less than (he average rent in the LBJ corridor and north, almost $4 less than Las Colinas and $5.51 less than the Preston Center area.

The advantages of downtown are starting to cause a reversal of the flight to the suburbs. “It’s the hub of public transportation, and downtown has the best set of fiber optics in the Southwest. To some companies, that’s heaven-sent,” Fults says.

Although downtown occupancy is about 63 percent, much of that vacancy is found in older, inefficient, obsolete and asbestos-laden buildings.

Fults and Dixon’s views differ on the future of those structures. Fults believes some will be razed and others will be converted for different uses, including residential. Dixon thinks modern buildings will take their places.



The Hot Markets

MOST OF THE CURRENT CONSTRUCTION IS IN Las Colinas and north of LBJ between North Central Expressway and the Dallas North Tollway.

Dixon has his eye on the Preston Center as an area ripe for further construction, while Fults foresees an explosion north of Highway 190, soon to become the George Bush Tollway. Fults calls it “the new LBJ.”

“The areas to watch are from LBJ at the Tollway, north to Frisco, down [Highway] 121 to [Dallas-Fort Worth International] airport,” Fults says. “Anything within the triangle begins to make a lot of sense.’”

Another market soon to be popular will be North Central Expressway south of Northwest Highway. “It’s starting to come back in a big way,” Dixon says. “It’s a good alternative for people who don’t want to be in the CBD because prices haven’t gone up as much as in other areas.”

Fults thinks some of the five- to 10-story buildings that dot North Central will follow the trail blazed by Dr Pepper and come tumbling down to make way for taller, more efficient buildings.

Dixon agrees. “As soon as the market gets hot, you’ll see the functionally obsolete buildings get torn down to make way for the best use for the market. You’re talking about buildings built in the ’50s, ’60s and ’70s that can’t produce. They aren’t cost-efficient; they have asbestos; they are underpowered and underparked; they are not set up for the office space of the ’90s.”

So when will the market get hot? Fults believes it’s starting to boil now, with the new DART light-rail line acting as the heating element.

“We’re just now beginning to see value starting to increase in clumps around the DART stops,” he says. “I know of at least one developer looking at Mockingbird Lane-in terms of tearing down and building back up-who is taking the value of the DART line into consideration.”

However. Dixon says, don’t look for any huge skyscrapers yet.

“I foresee a lot of new 150.000-, 200,000-square-foot, two-story, three-story buildings that will attempt to keep the rent down,” Dixon says, somewhere around $20 per square foot. Then, at about the turn of the century, “if the area is right and the location is right, we’ll see some 300.000-. 400,000-square-foot buildings that will have some structured parking.”

Fults calls these two-story buildings “tech space,” and he feels a lot will be built in Frisco, North Mesquite, North Richardson and Plano.

“If you look at the development around DFW and look at any other metro airport, we still have light-years to go,” Fults said. Rail lines connecting Dallas and Fort Worth with the airport “would really tie us together” and attract companies that do business in both cities.



Hand Over the Money

THERE’S NO DOUBT ABOUT IT, LEASING Dal las-Fort Worth office space in the future will take a bigger chunk out of a business’ bottom line. Rents overall have increased 10 percent in the past year. For “modern” buildings, meaning those built after 1982 with more than 100,000 square feet, the increase is 14 percent. The rates today run the gamut, from $6.90 per square foot downtown to $32 per square foot in the Crescent area-electric bill not included.

The rent hikes aren’t anywhere near complete yet. Fults’ recommendation: Sign a long-term lease now and beat the price increase. He predicts that rents will continue to go up for the next five years.

But those rental figures, Fults added, are what’s required to sustain development. “So that is the price of entry if you want to be in modem buildings, and that’s where most tenants will want to wind up because of their needs.”

Higher rents mean higher capitalization rates, which potential building buyers consider. When buildings sell for more money, land values go up.

Increased land values and increased demand also result in more build-to-suit projects; which means it’s no coincidence that Dr Pepper, DSC and Fina have all staked claims in North Piano’s Legacy Park. They need the additional space and the price they were willing to pay for the land was high enough for landowners led by EDS to let it go.

The Lessons of the ’80s

NO ONE WANTS TO SEE A REPEAT OF THE ’ 80s bust, And, for the moment, Fults and Dixon agree, office-building construction is proceeding responsibly. Ground isn’t being broken until an anchor tenant is in place. and banks are underwriting loans much more thoroughly.

Dixon’s concern is what the market will be five to 10 years from now. “I would hope we could say we have professional buildings out there as long there’s demand, and that when demand drops off, they’ll stop building. If that happens, then we won’t get into trouble,” he says.

“If we have banks lending money to build just for the sake of building, then I fear we could get back into that same situation of the ’80s. But it won’t happen anytime soon.”

Meanwhile, the developers and S&L moguls of the ’80s are probably gazing skyward at buildings that caused them to lose their shirts and asking: What took you so long?