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DFW Capital Markets Roundtable: Feel 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.
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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.

Randy Fleisher, Trey Morsbach, Bill Vanderstraaten, Gary Carr, and Brian O'Boyle
From left: Randy Fleisher, Trey Morsbach, Bill Vanderstraaten, Gary Carr, and Brian O’Boyle (photo by Michael Samples)

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 for a panel discussion. Participating were Gary Carr, vice chairman of CBRE; Randy Fleisher, managing director, JLL; Trey Mosbach, senior managing director, HFF; Brian O’Boyle, founder and vice chairman of ARA, a Newmark Co.; and Bill Vanderstraaten, co-founder, Chief Partners.

Q. 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.

Q. Along with the airport and job growth, what are DFW’s greatest selling points as an investment market, and what are its biggest challenges? 

VANDERSTRAATEN: 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.

VANDERSTRAATEN: Yeah.

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.

Q. 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.

Q. It’s not just the millennials, is the boomers, too. 

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.

 To read the rest of this in-depth discussion, click here to visit the free DFW Real Estate Review site. Additional discussion topics include:

• What about the other sectors—office, industrial, and retail?

• What are you seeing out there with regard to pricing, and what’s driving pricing trends?

• How are buyer and seller expectations matching up?

• What is the biggest roadblock to getting deals done?

 • What’s driving the increased interest in foreign capital looking at Dallas?

• Overall, how will the North Texas investment sales market perform in 2016?

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