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Commercial Real Estate

Sarah Erickson: DART Rail Line Creates New Office Divide in Dallas CBD

Downtown office buildings that are north of the DART Rail are feeling the positive effects of the world-renowned amenities in the Arts District and surrounding area. Those to the south aren't as fortunate.
Sarah Erickson

In 2006, the majority of downtown Dallas office buildings were duking it out for deals with mid-teen lease rates, while occupancy declined. Many large tenants were relocating to new developments in the central business district and Uptown. However, most buildings along Ross Avenue experienced tremendous improvement in rental rate and occupancy.

For example, in 18 months beginning first quarter 2006, Chase Tower improved occupancy from 78 to 93 percent, and rental rates from $27+ E to $36 + E. Many in the industry began to say that the CBD was  “A Tale of Two Cities”—the “haves” and the “have nots.” The “haves” were buildings along Ross Avenue; the “have nots” were all other CBD buildings.

I believe that we are about to experience a similar but expanded dynamic as what we saw in 2006.

How and why did Ross Avenue buildings—particularly Chase Tower, Trammell Crow Center, and Fountain Place—establish themselves as market leaders in 2006, while the rest of the submarket languished? Two key factors attributed to their success.

First, with the AT&T Performing Arts Center well under way, everyone in the city was buzzing about the Arts District, and tenants wanted to look at it, touch it, and feel it. Existing signature skyline buildings along Ross Avenue provided the best views of the Arts District’s coming attractions and signed new deals with tenants desiring to see all of the action.

Second, with 2 million square feet of new buildings under construction in the CBD and Uptown in 2006, cocktail conversation for decision-makers looking in and around the Arts District centered around rental rates in the $30s and $40s, creating an opportunity for Ross Avenue buildings to strike deals at similar rates with tenants that wanted an Arts District location but needed near-term occupancy.

Today, office developers are circling to land their first lead tenant for a new, CBD or Uptown office building. With seven million square feet expiring in the CBD during the next five years, there are plenty of prospects. Once developers find their lead tenant, decision-makers will once again become comfortable discussing $30 and $40 rates, which means that existing buildings in the surrounding area will be able to improve rental rates. This time, however, the AT&T Performing Arts Center is no longer something people talk about, it’s something people go to. It has delivered, and looks spectacular.

With $354 million of delivered Arts District amenities via the AT&T Performing Arts Center, the impact of the Arts District will reach beyond Ross Avenue in this next cycle. Furthermore, $700 per square foot residential condos are under construction at Museum Tower, the Woodall Rodgers Park is set to deliver year-end 2012, and the Perot Museum of Nature and Science is targeted to deliver in 2013.

The great divide for this next cycle is now the DART Rail; the Arts District is center ice. Buildings in the CBD that are north of the DART Rail are already feeling the positive effects of the world-renowned amenities in the Arts District and surrounding area. According to CoStar, office buildings north of the DART Rail are on average 80.4 percent leased, quoting $21.98 + E, while buildings south of the DART Rail are 65.5 percent leased, quoting $17.25 + E.

As the success of the Arts District continues to grow, so will its influence.

Sarah (Payne) Erickson is senior vice president and co-manager at Stream Realty Partners. Contact her at [email protected].