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Commercial Real Estate

Dallas Commercial Real Estate 2011 Market Predictions

Local brokers tell us what to expect. (The outlook is good.)
photography by Elizabeth Lavin

When I moved to Texas and began reporting on the Dallas commercial real estate market 10 years ago, it didn’t take me long to peg the industry players as an overly optimistic bunch. And that’s not necessarily a bad thing. After all, it’s exactly that kind of can-do spirit that built this city and helped pull it out of a couple of severe downturns (which, admittedly, would not have been quite so severe if not for that if-you-build-it-they-will-come conviction).

The current prolonged recession hasn’t killed the optimism of area commercial real estate executives, only dulled it just a bit. But if you’re going to be bullish on Dallas, now is the time. North Texas has one of the most stable local economies in the country and leads the way in both job and population growth.

There’s still an abundance of office space in Dallas-Fort Worth, but some of it is obsolete, and occupancy in a few submarkets is tightening. Economic development officials in Far North Dallas, for example, are complaining about the lack of available big blocks. “Our pipeline is very active, but we’re short on office space,” says Jim Gandy, president of  Frisco Economic Development Corp. “We’re seeing deals we can’t accommodate get bumped out of Frisco.”

Even aggressive developers like Hall Financial Group and Duke Realty Corp., both of which already have large office parks in Frisco, aren’t going to turn dirt on speculative construction without a substantial prelease or until rental rates improve.

Tenants are starting to edge away from North Dallas, heading farther north or discovering the appeal of the center city. This is true even of the real estate companies themselves, with three big brokerages—CB Richard Ellis, Cushman & Wakefield and Colliers International—recently trading in their North Dallas digs for new offices in Uptown. The looming ripping up of Interstate 635 won’t do anything to temper the trend.
So, what else should we expect to see in 2011? For that, we turned to the experts.

Top executives from Dallas real estate firms recently gathered at the D CEO office for a series of conversations about the market (and the commercial real estate blog we plan to launch; be watching for details). Their outlooks—mostly optimistic—varied by the sector in which they operate (office, retail, industrial), and by which side of the negotiating table they typically occupy (tenant vs. landlord, buyer vs. seller, etc.). Here’s what they had to say:

President, Jones Lang LaSalle
“It will still be a tenant’s market in 2011. We’re somewhere in the range of the bottom of the cycle now. The capital markets teams have been standing around for 18 months. In 2011, they’re going to be busy again, as we’re going to see a real upturn in sales. There’s a lot of hot money out there just waiting for the right deal at the right price. In terms of relocations, Dallas will still be a front-runner city. We’re already on the short list of most everything out there. Population growth will continue to be a big factor. We just hit 6 million people and are projected to be at 9 million by 2025. Single-family lots, apartments, everything will be affected by that growth. If the projections are right, we have a lot of work to do; but Dallas is poised to take advantage of the trend.”

Principal, Capstar Commercial Real Estate Services
“We are very near or at the bottom of the cycle now. But with no new development and few big blocks of space available, things could turn pretty quickly—next year is possible, if there’s an influx in the market. What’s likely is that things will stay flat, with an uptick in the second half of next year. In-migration is having a positive influence. The number of people we’re adding each year affects everyone in this room. I think current trends will continue, with activity picking up in the third and fourth quarter of next year.”

Senior Managing Director, CB Richard Ellis Inc.
“According to our latest CBRE MarketView reports, the industrial and office markets combined only have 56,000 square feet under development. And for the fourth quarter, there is only 70,000 square feet in line. In all of my years in this business, I’ve never seen development numbers that low. In terms of leasing, I’ve been seeing a state of recovery—a slow recovery. But I don’t feel that the numbers tell the whole story. As Chris said, the market could turn with just a few big deals. And in comparison to the rest of the country and to Texas as a whole, Dallas-Fort Worth is as strong as any. When I’m out selling to non-locals, I tell people to come see the area for themselves, because I know they will feel the vibrant atmosphere and enthusiasm of our people.”

Executive Director, Cushman & Wakefield
“We are close to the bottom of the cycle now. I’m glad to see the end of the one-year lease extensions; they’re almost as difficult to execute as a 10-year lease. I think corporations have come to grips with the new norm and are ready to make decisions for the longer term. However, there are big challenges to overcome before a rebound occurs. For 2011, I think we will see more of the same. We’ll know the market is back when we see ongoing competition for space.”

Director of Leasing, Hall Financial Group
“I believe we’ll start to see rental rate increases in 2011; not market-wide, but in specific submarkets where the vacancy rates are tightening. In terms of demand for office space, corporate tenants are still being cautious and are still somewhat in consolidation mode. But the Dallas area typically benefits when companies consolidate, with its central time zone and central location. Where I’m seeing activity is from the small to midsize local and regional companies. They’re starting to take some expansion space, which means they feel confident enough about their business to plan for the future.”

Principal, Case Commercial Real Estate
“In 2011, we will continue to see blend-and-extend deals. Companies need to feel more confident about the U.S. and world economy before stepping out. Until there is significant job growth, businesses will just make do. This will put added pressure on landlords. That being said, Dallas will benefit from population growth and its general stability. About 10 percent of my work is in Dallas; 90 percent is in other markets. Compared to places like San Francisco and Chicago, Dallas is weathering the storm very well.”

President, Transwestern
“I don’t know if 2011 will be any easier, but things are going to be better. The capital markets teams are building back up their business and there is some real potential on the leasing side. I want to believe that it’s not just wishful thinking, but until we see sustained job growth, nothing is for certain.”

Principal, PegasusAblon Properties
“If one was to chart all of the current real estate debt and view it as an actuary chart, one would find the peak of the bell curve to be in 2013-2015. So wherever we are at in the current market cycle, we could be here for quite a while, as we work our way through all of the deleveraging. The good news for Dallas is that the next big market driver is already here: in-migration. People continue to come to DFW at a rate of more than 100,000 people per year, which will drive new business growth, new industries, and demand for commercial real estate. Dallas, Houston, and Vancouver are slated to be the three highest-growth metropolitan areas in North American over the next 15 years, and we will see significant commercial and residential growth accordingly.”

CEO, The Retail Connection
“The market is as interesting and as exciting as I have ever experienced, with more dynamics at play than ever before. This has led to huge activity; however, as I often tell our team, ‘You can’t confuse motion and progress.’ At the same time, you can’t have progress without motion—and we are definitely in motion. The activity is positive, but also concerning—particularly the kicking of the can toward resolving the challenges associated with the unprecedented amount of commercial debt that’s rolling. These are definitely interesting and exciting times, with a tremendous amount at stake, which in turn will create unprecedented challenges and opportunities during the next five years. There will be clear winners and losers, and as always, capital, knowledge, and relationships are going to be invaluable.”

Regional Executive Vice President, Duke Realty Corp.
“There’s a lot of money on the sidelines, and we’re going to see a lot more deleveraging at some point, with people buying up all of the bad real estate that’s out there. I think everything is going to have to run through the system and get flushed out. Looking at leasing, industrial in 2011 should be about the same as 2010, maybe a little better; I think office leasing will be down. Not many tenants are ready to make long-term commitments without significant job growth.”

Executive Vice President, Colliers International
“We will keep bumping along the bottom for a while. We’re getting decent short-term activity, the one-year renewals and two-year renewals. That allows everything to just keep moving. Next year, banks will continue to fail, and smaller developers that have been hanging on will begin to let their properties go back to lenders. 2010 was far better than 2009; 2011 will be a lot like 2010.”

Executive Managing Director, Grubb & Ellis
“I’m more optimistic than some others. I think 2011 is going to be better than 2010. Companies can’t sit on their hands forever. Dallas should benefit from some relocations and things will pick up.”

Principal, Transwestern
“Our firm’s transaction volume is way up. There has been a dramatic shift in the last couple of months. There are only so many Band-Aids a company can slap on before they need to make a decision. We’re seeing tenants that are expanding and adding additional sites. Another trend we’re seeing: acquisitions. In the last several weeks, three of my clients have been acquired by other companies. We’re at the botton in terms of rental rates; history says we’re at the bottom of the cycle. I think 2011 is going to be a great year.”