LEASING Office Supply: The Turnaround

THERE ARE AT least two ways to tell any story, and that goes double when the subject is office leasing in the Central Business District. Here’s the bright picture: According to Cushman & Wakefield of Texas, Inc., vacancies are down and absorption is up in downtowns newer Class A and Class B buildings. Of the 16.5 million square feet of Class A space, 23.2 percent was vacant in 1995. By mid-1996, though, the vacancy rate had

dropped to 21.6 percent. The vacancy rate for 3.2 million square feet of Class B space dropped from 36.2 percent at year-end 1995 to 32.2 percent at mid-year 1996.

Now the clouds: Figure in the 2.5 million square feet of older Class C buildings-the Jurassic Park of downtown- and downtown has a 35.9 percent vacancy rate. Only one other sector in die city has a higher percentage of empty buildings-Southwest Dallas at 37.3 percent.

Vacancies in the Class C buildings increased from 59 percent in 1995 to 61.8 percent by mid-1996. But ignore those buildings, and downtown has plenty to sell that is bringing tenants back from die suburbs-large blocks of available space, very competitive {read: cheap) rental rates, safe streets and DART rail are just some of the assets commercial brokers are touting to prospective tenants. It’s enough to make Jerry Fults of the Fults Companies, an independent commercial real estate firm, declare it “a somewhat historical reversal of a trend that began in the 1950s,” when companies began moving to the suburbs.

Recently, NationsBank renewed its leases for space in five downtown buildings, meaning that more than 6,000 of the banks employees will stay in the CBD. Still, Craig Hall, who last year moved his Hall Financial Group, Inc., downtown to St. Paul Place m The Arts District (after 15 years in the suburban market), believes the rhetoric is still running ahead of the reality. When Hall purchased St. Paul Place in October 1994, it was half-empty. After making major upgrades and offering competitive rates, St. Paul Place is all but full.

“At 96 percent leased, we’re one of the most successful buildings downtown, but downtown is still a very challenging market,” Hal! says.

“Obviously, downrown still has a healthy amount of available space,” says Mike Lafitte, vice president of Premisys Real Estate Services, manager of NationsBank Plaza. “If you look across the city at the large blocks of space- 100,000 square feet or more- downtown has the majority of them.”

In fact, outside the CBD, there are only two Class A buildings that offer 100,000 square feet or contiguous space and none that offer larger blocks, while downtown offers eight Class A choices for the 100,000-square-foot user, two for the 200,000-square-foot user and one for the 300,000-square-foot user. Vacancies are under 10 percent along the LBJ Freeway corridor, in Preston Center, Far North Dallas, Far North Central Expressway, Las Colinas and the Mid-Cities, with Preston Center at 5.7 percent-virtually full.

Lafitte says that with continued job growth in Dallas, a number of large lease transactions are out there looking for new homes and many of them will land in downtown Dallas in the coming year.

Greg Biggs, a commercial real estate broker with Cushman & Wakefield of Texas, helped relocate HKS to downtown this summer. The architects moved from 6688 N. Central Expwy. and leased 24,000 square feet downtown in Trammell Crow Center. Among the considerations that led HKS downtown. Biggs says, were a growing synergy, DART trains, increased security and rising rental rates in the suburbs. Compared to the suburbs, downtown is a bargain. Cushman & Wakefield tracks the average gross rental rate in the Central Business District at $13.68 per square foot compared to an average rate of $18.42 in Preston Center, $17.61 in Uptown and Turtle Creek

or 517.59 in Las Colinas.

Downtown’s Class A buildings, primarily those major landmarks along Ross Avenue near the Arts District, compete head to head with the suburbs and can command much higher rents than the overall average of $16.90 a foot for Class A space downtown. Tenants sometimes pay a $4 or $5 premium for a location near the Arts District on Ross Avenue, downtown Dallas’ “Fifth Avenue.”

Bob Edge, a commercial real estate broker with Cushman & Wakefield who specializes in the downtown area, says that downtown will continue to recover from the real estate glut and crash of the ’80s, albeit slowly compared to the extremely rapid recovery in the suburban office market.

“That tells us a lot of things, one of which is that new job creation is growing at a significantly faster rate in the suburbs than it is downtown,” Edge says. “But it also reminds us that we had an awful lot more vacant space downtown to begin with, so we have a longer way to go to recover.”

While tenants are turning to downtown’s Class A space because choices in the suburbs are dwindling, Edge says vacancies in Class B buildings are dropping because the gap in rental rates between Class A and Class B space is increasing. Class A rates have begun to rise while Class B rates remain steady, enticing some class A tenants to choose Class B space for expansion.

“We have a lot of good Class B space downtown that many tenants are beginning to look to for back office space,” Edge says. So while the law firms and executives remain in the Class A buildings with the impressive lobbies and views, Class B space fills up with accounting and support services.

And what is in store for the Class C buildings that continue to empty out?

“If you are an optimist,” says Edge, “you believe some of the better ones will be converted to residential space. Aside from that I don’t know, Some of them will eventually be torn down and converted to parking.”

Looking into his crystal ball, Edge sees the empty space that remains in downtown’s Class A buildings filling up over die next five years and at least one announcement of a new major building downtown. Looking further into the future, he expects that downtown growth will continue to push toward the north.

“The trend goes back 40 years,” Edge says. “When I got to town in the ’60s Commerce was the main street. Then it was pushed north to Main Street and now to Ross Avenue. There’s no reason to believe that trend will change. Years from now, Woodall Rodgers will be a freeway that goes through the middle of downtown.” “