DEVELOPERS’ DEFINITION

Who in the world is going to move into all these buildings?” Every day thousands of Dallasites, dodging barricades or stuck in traffic jams, ask that question. Cocktail conversations revolve around how many developers will be forced to fold their tents; how many banks, already hard hit by non-performing energy loans, will have to weather a new storm of non-performing real estate loans. How many overly aggressive savings and loans will go belly-up? And how many high-living real estate brokers and leasing agents will soon be standing on street corners selling pencils? There need be little doubt that the down phase of the city’s real estate cycle has arrived: Overall, new building permits are declining in number, construction is decreasing in most categories of development, projects are being delayed or canceled and financing for new projects in most categories is scarce.

But there is good news. First, the overall downturn may not be all that severe. Any slump in development will more likely be the result of oversupply of particular products in the Dallas area market or more general national economic conditions than the result of a general disintegration of the city’s economy. Second, the slump itself may be real in the aggregate, but aggregates can be misleading. Some segments of the development industry do not appear headed down. And even those segments that are may still find ample opportunities for profit and growth if they are willing to look harder for the right niche and be more discriminating.

As in all down cycles, of course, some people are going to be hurt. There may be some unemployed construction workers; architects will have less work; and yes, there is likely to be a substantial shakeout in the development industry itself. It is also true that some banks will see problem loans develop-especially savings and loans that have lent to anyone able to stack bricks.

Even Dallasites whose livelihoods aren’t directly dependent on the real estate industry-including those grown wary of the city’s “keep the dirt flying” philosophy-have begun to worry that the predicted real estate bust is more than just the to-be-expected slump in a highly cyclical industry. Taken together with the deep semi-conductor and computer industry slump, the congressionally mandated cutbacks in defense spending and a general dimming of the Sunbelt’s luster, many fear the real estate slump may be symptomatic of a far larger economic malaise about to settle on the city most believed was a perpetual prosperity machine.

“Not long ago,” developer Steve Van points out, “Everyone in Dallas was busy patting themselves on the back for having developed so diverse an economic base. There wasn’t going to be any ’Houston’ here. But Houston is close at hand, and when general economic conditions go flat, especially in the development industry, everyone starts to get nervous and worry that maybe it can happen here.”

Many Dallas business leaders share Van’s view that Dallasites may have gotten a little too smug and a little too ready to believe their own press clippings. But, he adds, “Cycles are a part of life, especially in this business, and we shouldn’t be too quick to panic when the drought arrives.”

“When you talk about real estate and development,” suggests Rosanna Stanley, managing partner of the real estate management and research firm of Fults and Associates, “most people automatically assume you mean office buildings. But the industry is very segmented.” Among the segments described by Stanley are residential, hotel, retail, industrial/warehouse and, of course, office buildings. “There might be a glut in office space but strong demand for retail or industrial properties. One market is not automatically tied to another,” she explains.

Even the segments are segmented. “Consider residential,” says Stanley’s partner Jerry Fults. “You have a wide range of prices in single family, you have multi-family and then you have high-rises and second or recreational homes. That market is very segmented.” The same holds true for other divisions of the real estate industry, Fults adds. “You may find that the market for 500-room high-rise hotels is overbuilt, but the market is able to absorb smaller hotels with lower room rates and no meeting facilities.”

Another type of segmentation is geographic. “Not every area of the city is badly overbuilt, and absorption rates are uneven from area to area,” explains Coldwell Banker’s Dallas area first vice president Ken Sandstad. “Take the Stemmons Freeway corridor. In spite of that area’s locational advantages, leasing activity is low and vacancy rates are increasing. The Stemmons vacancy rate went from 17.7 per cent to 20.7 percent in the second quarter of this year; yet there was little construction activity to swell the supply,” adds Coldwell Banker’s downtown office resident manager, John Plotnik. In contrast to the Stemmons decline, Sandstad points to Las Colinas, an area that only a few months back was deemed in dire trouble. “With no new buildings having come on line to skew the figures, Las Colinas had absorption of over 400,000 square feet last quarter,” Sandstad adds.



ANOTHER PROBLEM in accurately measuring the building industry’s local health lies in the choice of relevant statistics and their interpretation. In the Dallas area office building market, for instance, the current occupancy rate appears anemic at 75 percent (meaning a vacancy rate of 25 percent). But, Stanley points out, 57 percent of this vacant space is in buildings that came on line after 1983, and those are buildings still in their normal lease-up time. “According to our figures, the occupancy level in pre-1983 buildings is 82.4 percent,” she adds. Another positive statistic to Stanley is the fact that of the record 13 million square feet of space that became available in 1983 the occupancy rate is a reasonable 74 percent. Stanley and Fults agree that construction must slow down, but they don’t see the current situation as all that alarming.

Fults sees other statistical pitfalls to be avoided in determining the office market’s health: “All surveys are going to vary somewhat as to square footage and vacancy levels, but they all focus on the speculative multi-tenant projects. A firm that builds its own building and vacates leased space in a spec building will show up on surveys as negative absorption, even if that firm occupies a greater amount of space in its new buildings.” Fults points to JCPenney, which moved into a new company-owned building, vacating more than 100,000 square feet of leased space in Richardson. “Penney didn’t pack up and leave Dallas; they’re still here and still occupying office space. But most surveys will record the move as a net loss in absorption,” explains Fults.

If statistics regarding calculations of office market health can prove baffling, statistics on the area’s healthiest development industry segment seem pretty straightforward. A recent Coldwell Banker study on major (100,000 square feet and over) industrial buildings showed only 4.1 percent of such space to be vacant in Dallas, compared to 4.9 percent nationally. This represents a drop from 5.2 percent in the first quarter. Of considerable interest to market analysts is that only 2.6 million square feet of warehouse space was completed in Dallas during the first half of 1985, while three times that amount was either purchased or leased. “This means we have a very healthy bulk warehouse market in Dallas,” says Sandstad. “Developers in Dallas have gauged the trends very well. We expect demand to continue to be strong.”

Perhaps even more glowing than the industrial real estate market is the Dallas area retail market. “This should be a fourth-in-a-row record-breaking year for retail space construction,” exults Herbert Weitzman, president of Henry S. Miller’s commercial and retail section. He adds a note of caution, however: “There are growing signs the market is getting saturated, and I expect to see a downturn in construction activity in 1986.” Still, major new housing tracts, both in new areas to the north and within LBJ, are providing opportunities for new, more compact retail centers and for strip centers. In addition to the need for new facilities to serve new areas, the retail industry seems in good health generally. Low interest rates, low inflation and steadily increasing income levels seem to have created a “buy” market. Most national and state surveys of consumer confidence are at all-time high levels, and analysts expect the strong retail market to continue through the first half of 1986.

“Vacancy levels in Dallas were around seven percent last quarter and with more than seven million square feet of new space coming on line this year, we can expect that vacancy level to trend upward,” says Weitzman. “But,” he quickly adds, “rents are good with some high-quality projects getting up to $20 per square foot. You may begin to see concessions creep into the marketplace next year, but for now, even though rents are flat, they are at good levels.” Weitzman is especially encouraged by retail developments with new designs, quality planning and appearance and top locations. However, along with most analysts, he expects more marginal projects to begin to suffer as the year ends.

One segment of the development industry that has been on the ropes for a while now is the hotel industry. A large wave of new hotels hit the area in late 1982 and 1983, causing occupancy rates to nosedive while the increased competition forced room rates down as well. But the first two quarters of 1985 have seen occupancy rates move upward to a 68 percent level and average room rates increase from 1984’s $55 average to just under $60. Occupancy levels and room rate increases have been especially strong in the downtown and market center areas. Bob Kaminski, a Dallas area developer associated with Prism Hotel Development Co., believes the hotel business is on the rebound and expects to see new construction under way by next year. “With the exception of the badly overbuilt LBJ/North Dallas area, there has been a rebound in both occupancy levels and room rates. I think this means you can expect to see some new construction under way soon.”



KAMINSKI DOUBTS, however, that much of it will be of the 500-room high-rise genre. “My guess is you will see a trend toward smaller hotels with smaller meeting facilities or maybe none at all. This does not mean the hotels will be oriented toward the cheaper end of the market. If you cut off the expense of massive meeting facilities and provide more personal amenities, you may have a very high-end property.” Other hotel industry analysts, however, expect to see some new major hotel ventures show up in areas with new residential and office development. Even Prism has plans for a 400-room Doubletree Hotel in the fast-developing area along either side of the LBJ extension toward the airport. “It’s true,” agrees Kaminski, “that you are going to see some large projects announced, but I also expect there will be considerable caution in site selection. Still, whether you go big or small, if you are careful in your research and planning you can find ample niches for new inns.”

Kaminski is also reasonably optimistic that there are plenty of niches in an office building market growing increasingly soft: “Some areas are definitely headed down, but there are also areas headed up.” The slowing of new construction is also a good sign for the former Lincoln Properties partner. “If the current downturn in construction continues, if some people will show a little patience, then in maybe two years this city will be in great shape and ready for the next ’up’ cycle.” As proof that many developers are showing good judgment, Kaminski points to the recent halt in construction of a major North Dallas office tower by Folsom Properties. “It took guts to shut down a project after construction had begun, but Folsom has the financial strength and the smarts to cut his losses and wait for a brighter day.”

Most analysts seem to feel that leasing activity in the Dallas Central Business District will continue strong, although vacancy levels will rise due to large amounts of space ready to come on line during the next 12 months. Says Fults: “Downtown has the money center banks, the Big Eight accounting firms and the major law firms; they aren’t going to move because they must be in proximity to each other. After that you have an enormous number of other companies that must be in close proximity to these concerns, and then you have firms that simply like the prestige of being close to the blue-chippers downtown.” Although Coldwell Banker’s Plotnik says his company’s most recent report shows an increase in the downtown vacancy rate from 14.7 percent to 15.1 percent in the second quarter, he agrees that downtown Dallas should remain strong. “Dallas is still a full percentage point below the national downtown vacancy rate average, and that shows continuing strength in the Dallas market. And while you have a large amount of downtown space about to come on line, most of these buildings are of high quality and should be much in demand.”



JUST NORTH OF the downtown area, north of Woodall-Rodgers Freeway, begins the most dynamic area of office leasing in Dallas-the Turtle Creek/Oak Lawn area. Forget the increase in vacancy levels from 21.8 percent to nearly 28 percent in the second quarter; that increase is due to the large amount of new space completed in the first half of this year. Of greater interest and more indicative of the strength of the area is the fact that 733,667 square feet of space was absorbed during the year ending June 30,1985. This represents a nearly 30 percent absorption of total occupied space in that area. “There was a time,” recalls Stanley, “when Oak Lawn and Turtle Creek were almost the exclusive province of boutique-type businesses, advertising and public relations firms and small shops that like the laid-back ambience of the area. Now, with large new projects, the area is becoming very competitive with downtown, with large, prestige companies moving in.” Kaminski agrees: “This area offers proximity to downtown; if you want to take a bus you can even get downtown quickly without having to drive and park. And parking is available, rents are lower and there is access to top restaurants.”

A third area showing strength is Las Colinas. According to Coldwell Banker’s Sand-stad, “Las Colinas is an incredibly strong magnet for out-of-town companies moving in. That CEO or site selection official disembarks at the airport and heads toward Dallas. What’s the first thing he sees? He sees a beautiful, sprawling city with lakes, canals and space. Some guy from an eastern high-rise thinks he’s died and gone to heaven. Sometimes they just want to check into the Four Seasons and look no further.” Of course, as Sandstad is quick to point out, there has been no new construction in Las Colinas in the past year, and the only major project planned for completion in 1985 is the second phase of the highly successful Xerox Centre. Other analysts believe an expansion of residential developments near Las Col-inas, including Triland’s Valley Ranch just to the north, will further spur absorption.

One “hot” area that may surprise Dallas-ites is that to the north of LBJ along the North Dallas Parkway, including developments such as the Quorum and Bent Tree. Sandstad says the area has seen gross leasing activity of over 1.6 million square feet during the first two quarters of the year. One man not at all surprised by the continued growth of the Far North Dallas area is the man perhaps most responsible for the many deals that have spurred the area over the past few years. David Davidson, the man many call the king of Dallas land brokers, has restricted his area of operations to the northern corridor because, as he says, “The growth trend of the city has always been to the north, and I’m convinced the strongest high-end growth will continue to be in that direction.” Davidson agrees with most analysts that the area is becoming overbuilt, but, he says, “Once the tollway extension is completed the area will become super-attractive. There is ample residential space nearby with wide price ranges.”



IF THERE IS a consensus among Dallasarea real estate industry analysts, it is this:They are concerned about an overbuilt officemarket; upbeat on the industrial market;cautious about the near-term future of retaildevelopment and optimistic for the hotel industry. They also believe the media has takenon a crisis psychology when there should benone. “Sure, things are trending downwardoverall,” agrees Davidson, “but Dallas stillhas a strong economy and good growth potential. We will see a slowdown and that’sgood. But we’re not about to see a crash.”Kaminski goes a step further: “There are 50million square feet of vacant space inHouston, but only about 20 million in Dallas. Houston’s absorption is almost nil whileours is high. Job creation in Houston isnegative; it’s down in Dallas but we’re stillmanufacturing jobs here. If developers willshow a little patience and a lot of smarts thiswill be one of the shortest and least severedown cycles in the city’s history. In two yearswe’ll be back on top again.”