Real Estate Roundup

DAVID DAVIDSON, one of Dallas’ leading dirt brokers, is amazed. “Land prices are going up,” he says. ’And I mean up. Prices have gone up more in the last nine months than in any nine-month period in the 11 years I’ve been a broker. In some prime areas of the city, prices have gone up more than 200 percent since January 1. But that tripling hasn’t scared anyone. My sophisticated developers don’t believe that land is overpriced.”

Ron Witten, president of M/PF Research, a real estate and consulting research firm, sees a similar boom in residential property. “A tremendous flow of capital is rushing to the apartment market. Last year, we started 19,000 new units. Already this year we’ve begun construction on 40,000-a 111 percent increase. And I see no signs of a slowing in construction. We may start more than 50,000 units by the year’s end. That’s more than in any year we’ve been keeping statistics.”

George Roddy, CEO of DRESCO Inc., another real estate research and analytical firm, recently computed the sales of commercial property for July (the last month for which figures are available). Apartment building sales were up a whopping 233 percent over July 1982, representing the highest turnover in the last 18 months. Office buildings posted a hefty 183 percent gain. “In the real estate market, Dallas only has two speeds: fast and stop,” says Roddy. “There’s no intermediate.”

Judging from discussions with local real estate experts, Dallas is in the fast lane. And Dallas keeps on developing, despite the recession and the trumpeted glut in some areas of the market. “Only in Dallas would the real estate community continue to coin bucks when the rest of the nation is in the midst of a gut-wrenching depression,” Roddy says.

Of course, Dallas does have some Achilles’ heels. The city has added so much new office space that it’s become a buyer’s market. “Concessions are very substantial in this very competitive situation,” says John Stallings, an executive vice president and the head of the office-buildings division of Henry S. Miller Co. Or as Patrick Lott, vice president and resident manager of Coldwell Banker, puts it, “In this kind of market, developers get aggressive. A tenant with a good credit rating can knock a landlord’s socks off.”

“Free rents of six to nine months on a five- to nine-year lease are common,” Lott says. “But I’ve seen leases where as much as one year of free rent was part of the terms.” And if prospective tenants don’t need free rent, they can still have it their way. The landlord can pool those same dollars and apply them toward tenant finish-out, moving expenses or the buying-out of a tenant’s old lease.

Still, old trouble spots are begin- ning to clear up. Las Colinas, the highly touted mecca for out-of-town corporations, stopped singing its siren call when the recession tied its prospective tenants to their hometowns. But now, Stallings says, Las Colinas “has enjoyed a real increase in activity.” Witten says, “We are finally on the way to getting that market back in balance.” Stallings is quick to add that “with 3 million square feet scheduled to be completed this year, we could have up to 4 million square feet vacant. This market will remain soft for some period of time, but it’s encouraging to see how much activity has centered on Las Col-inas this year.”

The industrial and warehouse market, a blemish on the Dallas real estate scene for the last few years, is also seeing better days. “The industrial market is beginning to change,” Witten says. “We are seeing a real transition from all bulk warehouse space to a big increase in higher finished space for office/showrooms. We’re seeing a shift to lower ceilings and more landscaping. This change is helping the market move.”

While the areas that have slowed Dallas real estate are now picking up steam, three areas are moving ahead full throttle: land sales, retail strip-shopping center development and multi-family housing construction.

Since land is the foundation of any development, it is an important element in the real estate mix. In Davidson’s corner of the world, which encompasses the booming sections of Dallas (Metro-crest and Irving north of LBJ), land prices are the talk of the town. “The deals are staggering,” he says. “One parcel of land will sell for $20 million and then, 90 days later, will change hands for $40 million. Then, 90 days later, someone else will pay $50 million for it. And the ones making the deals are sophisticated, local, old-time developers who are financing their purchases with sophisticated financial institutions in a joint venture. We’re not talking about rich, know-nothing cowpokes,” he says.

Davidson predicts that prices will spiral even higher. “Land is like any commodity. There’s only so much of it. I don’t think prices have topped out yet. I don’t think people really understand how much Dallas is going to grow in the next 10 years. Dallas could become the next LA.”

Land prices are going up because a seemingly unlimited amount of money is flowing into Dallas real estate. And, although Davidson says that “The nation’s pension funds are more than ever back in the marketplace” and that “Wall Street brokerage houses are slamming together syndication deals,” it is Dallas’ own savings and loan institutions that are leading the way.

Davidson says that 70 percent of the land deals he’s working on today are purchased by local people with local money. Three years ago, he says, 70 percent of the deals were made by foreigners with foreign money. “Savings and loans are having a heyday, and they deserve it,” he says.

For the first time in years, thrift institutions are flush with cash. Money-market funds (which savings and loans were first allowed to open last Christmas) proved a powerful magnet, drawing millions of dollars into their coffers and providing a vault of money ready for use. At the same time, Congress lifted the restrictions on the kinds of business that savings and loans can do. Thrifts wanted to diversify out of their historical residential real estate lending role, and spilling out into other areas kept these conservative institutions within their comfort factor. Almost all commercial real estate deals being negotiated now are joint ventures, with the bank putting up the interim Financing in return for a share of equity in the project.

“The biggest conduit for all these deals are the savings and loans,” Witten says. “The ability to sell money-market funds has given them an immediate and unlimited access to money. If they need funds to invest in a commercial project, they can raise the interest on their money fund one-fourth of a point, and they will get response from depositors to fund the loan.”

And as land sales are cooking, apartment construction is boiling over. The boom is fueled, in part, by savings and loans, which have made finding financing almost as simple as getting cash from an MPACT machine.

Witten says that for the first time, apartment developers have abandoned the typical North Dallas quadrant (condominium developers who can afford to pay more for the land have driven them out) and have begun developments all over the city. Witten worries that these suburban markets from Denton to DeSoto will be hit the hardest when occupancies start to fall. “They don’t have the proven market demand that North Dallas does,” he says.

Although there may not be enough tenants to fill the units, there are certainly enough real estate syndications to buy the apartment complexes when the cement mixers finally pull away. Roddy says that private syndications are up 40 percent over last year’s numbers. “Real estate limited partnerships will become as big today as mutual funds were in the Seventies. People realize that real estate in Dallas makes a lot more sense than the crapshoot of other investments,” says Jim Suellentrop, an executive vice president of the Glazer Financial Group (a company that locates syndications for its clients).

“The presence of the tax shelter investor is being felt in Dallas,” says Richard Behrens, a partner in the Dallas office of Price Water-house, which specializes in real estate. “Investors are looking for good profits. Interest in Dallas is expanding faster than the number of properties. It’s a seller’s market.”

This source of money provides the kindling to keep apartment starts red-hot. “Right now, there are so many buyers for income properties out there that developers are building apartments not because the market needs them, but because they know they can sell them to syndicators,” Witten says.

All eyes are turned to the retail sector, which is the current rising star on the Dallas real estate scene, according to experts. “Retail is becoming the hottest segment of the commercial real estate market,” Witten says. “Construction is way ahead of last year.”

Witten says that retail (mainly strip shopping centers because no new covered malls have been announced since Galleria opened last October) is rolling because “for the customer, the recession is over and confidence is back. Merchants are seeing sales go up.” Because of increasing business, stores are looking for more space. But shopping centers are already 90 percent occupied. “To meet this pent-up demand, we have to build new centers,” Witten says.

All of the new apartments are powering this retail renaissance. Residents need places to buy their groceries and to dry-clean their clothes. Consequently, more community neighborhood shopping centers are springing up. “Starts of these centers are up sharply. I think the numbers will go much higher,” Witten says.

This retail activity is also jacking up rents, which seem to parallel the rise of land prices. “Any time you have a new generation of centers, the rents go higher than they have ever been before,” Witten says. But, like Davidson, Witten says, “Developers aren’t meeting any major resistance among tenants.”

The big news, says Ken Hughes, president of Kenneth H. Hughes Interests Inc., is the off-price retail centers (malls composed of businesses selling merchandise below retail prices). Hughes, who leased Galleria when he was with Henry S. Miller Co., says that these centers “feature warehouse construction within an enclosed mall.” The first one in the area is now under construction in Piano and no performance figures are available yet. “I’m sure they will be successful,” says Hughes.

Hughes says that an influx of foreign money is fueling the retail and restaurant boom: “Most retailers in Europe are not expanding because they don’t see the Continent [Europe] as a growth market. So they come to the States.” The foreign retailers that are most interested in the U.S. are the small, independent chains with 10 to 50 stores.

Of the 50 states, the likes of Beylerian and Daniel Hechter (French menswear retailers who have a lease in Galleria as their pioneer entries into the U.S. market) chose Texas first. We can thank Hollywood for that. “Ten years ago, it was impossible to get anyone to even think of Texas,” says Hughes. “Today, merchants think they know what Texas is like, and they think they understand Texas because of the Dallas TV program. The show has been a great thing for Dallas real estate even if it doesn’t really represent the way we are. Europeans have built up in their minds the idea of the rich Texan. That’s who they are coming here to sell to. Look around, and you will see a substantial French colony in Dallas.”

The Dallas office building market was also on the rise last year. According to M/PF’s spring office survey, Dallas absorption (the net increase in occupied space) climbed 56 percent over the previous six months, reaching the highest recorded level for any six-month period since 1978. From September through March, 3.5 million square feet were occupied in the Dallas/Fort Worth area. But because of the flood of new space that became available after New Year’s Day, gross occupancy declined by one point. As the report states, “These absorption levels are particularly impressive, due to the poor economic climate nationally.”

M/PF found three leading office building submarkets in which space was virtually gobbled up. Again, the Central Business District led the way with 877,100 square feet. North Irving (principally Las Colinas) was next with 557,900 square feet. The Central Expressway-LBJ Freeway area was third with 440,300 square feet. The M/PF report says that each of these areas doubled its absorption this spring over-last.

On the LBJ corridor, which connects Stem-mons Freeway to Central Expressway, a number of new buildings have recently been announced. “That means lenders are still interested in supporting that area,” Stallings says. “That market didn’t get as overbuilt as everyone thought it would. There had been good absorption out there,” he says. Lincoln Centre, on the southeast corner of Dallas Parkway and LBJ Freeway, has been the star performer. Phase IV is ready to break ground on the Harvest Hill side of the project. The same is true of Galleria office tower; space moved swiftly, even at prime rates.

Two of the newest stars on the high-rise scene are actually older, heretofore forgotten areas: Oak Lawn and Preston Center. High-rise condominiums became popular in Oak Lawn because of high land prices, which made low-rise structures unprofitable, Witten says. Both areas are also relatively close together and have easy access to the Dallas North Tollway, Highland Park and University Park.

In Oak Lawn, the Bank of Dallas Plaza is the” premier development. Like Lincoln Centre and Galleria Tower, the bank building leased quickly; Phase II already is breaking ground, with 50 percent preleased. Ken Hughes explains the qualities that are required for such success in areas outside the Central Business District: “The standards of buildings in Oak Lawn have not typically been high in the past. Generally, they have had suburban (less-expensive) finish-outs. But the Bank of Dallas building has downtown finishes. There are a lot of mirrors and stainless-steel chrome columns. There will be a major sculpture out front. Those are the kind of amenities people want and are willing to pay for.”

A like philosophy applies in Preston Center area, which has seen a blur of activity along the Tollway. “This market added almost 400,000 square feet of space this year,” says Stallings. And although the area has been zoned for commercial development for the past 10 years, it was not until this year that it began to blossom.

Real estate experts say that if companies are considering moving or exercising options on new space, now is the time for signing the leases. Right now, owners and developers are willing to accept near fire-sale rates in addition to the six months’ free rent. But, they say, prices this fall are beginning to firm up. Bargains soon may be more difficult to find.

The Office Network found that the rates for Dallas office rentals (cost per square foot) are in the middle of the national price range. The average quoted rate for buildings under construction in the Central Business District was $26.50 per square foot. The best rate can be found in Kansas City ($12.50) compared to New York City, which brings $46.75. Houston was closer to home at $25.87. Stallings says that average per-square-foot rates on the LBJ corridor range from $16 to $20. In the Urban Center at Las Colinas, they range from $18 to $25.

Also noteworthy are two projects that have burst upon the scene in a flurry of activity: Bramalea Texas’ $1 billion development at Dallas Main Center (the first phase, InterFirst Plaza, is already under construction), and Southland Corp.’s twin 50-story office buildings on Central Expressway.

Not only will Bramalea Texas’ development include Dallas’ tallest office building (70 stories), but it will also include an underground level of shops and restaurants lighted by a sidewalk atrium. The project includes a Farmers Market-type area so that people can buy fresh fruit and vegetables on their way home from work.

The second grand design is Southland Corp.’s Cityplace, Dallas’ first major commercial development that will straddle a major thoroughfare. The twin towers will sit on both sides of Central Expressway at Haskell, with a pedestrian bridge lined with trees (a la the esplanades in Paris) spanning the highway. The project also includes upper- and middle-income housing and acres of green space, with McKinney Avenue restaurants and bars as an added draw.

“You’ve got to attribute our market to thepositive psychology loose in the marketplace,”Roddy says. “It’s like we’re in a wonderland.People from all over the country and all overthe world are buying Dallas deals. Before, people in Dallas weren’t taking part. They couldn’tsee the forest through the trees. They didn’tknow what was happening. Now they realizethat Dallas real estate is a mecca.”