During the past decade, Dallas has prided itself on the fact that it is one of the capitals of the so-called “New Economy.” However, a slump in the telecommunications and computer industries is now giving the Dallas real estate market an old-fashioned slowdown. Since late last year, the biggest high-tech companies in North Texas have laid off thousands of workers and cut operations as part of the worldwide Internet and telecom recession.

The impact on the local economy and real estate market has been mixed so far. Some sectors — most notably the office market — are experiencing the biggest shakeout since the early 1990s. Other parts of the real estate sector, including shopping centers and apartments, are going strong.

“Things aren't all rosy, but they aren't all thorns, either,” said Elizabeth Trocchio, new branch manager and senior managing director in the Dallas office of New York-based Cushman & Wakefield. “The real estate market here is not getting worse, and I don't think it will get worse. That's the good news.”

Even better for all types of real estate owners, developers and lenders are statistics that show the Dallas employment market has remained relatively robust. In the face of layoffs in some sectors, the Dallas-area economy created almost 83,000 jobs in the 12-month period ending in June, according to figures from the U.S. Bureau of Labor Statistics.

While that's down about 20% from job growth in calendar year 2000, it's still strong enough to make Dallas the second fastest-growing employment market in the country, behind only Washington, D.C., as of mid-year 2001.

“The continued job growth in the Dallas area is really phenomenal,” said Mark Dotzour, chief economist at the Texas A&M University Real Estate Center, College Station. “The job market is benefiting from the economic diversification that Dallas has succeeded so well at.”

However, Dallas will not come through the high-tech slowdown totally unscathed. “I don't think the impact of the high-tech slowdown has been overstated for Dallas,” Dotzour said. “A lot of that pressure is being focused on the office market.”

Jeanette Rice, an economist in the Dallas office of New York-based Lend Lease Real Estate Investments, said even with the high-tech industry problems, the situation could have been a lot worse. “There are a lot more strengths here than weaknesses,” said Rice, chairperson of the Mortgage Bankers Association of America's Commercial Real Estate Finance Research Committee. “We have lost about 10,000 high-tech jobs, but most of those people have found new positions.”

She noted that office absorption was negative in Dallas for the first half of the year, but added that roughly 75% of the country's metropolitan markets also have experienced negative absorption during that time.

Available: Office space

Depending upon which market survey you read, the Dallas area experienced a net decline in office leasing during the first half of the year of between 500,000 sq. ft. and 2 million sq. ft. The big spread between estimates can be explained by the different statistical measures used by brokerages. Regardless of the exact numbers, the negative absorption marks the first such net move out by office tenants in the Dallas area since the 1980s real estate market bust.

“It's happening everywhere where corporate America is downsizing,” said Reagan Dixon, vice chairman and COO of Dallas-based Cawley Wilcox Cos. “If it wasn't for the tech bust, we'd be fine. That threw a lot of additional sublease space on the office market that those companies don't want anymore.”

Studies estimate that more than 5 million sq. ft. of sublease space has been added to the market this year. That's on top of the almost 5 million sq. ft. of speculative office space opening its doors in the Dallas area in 2001. Until demand improves, it will be hard to fill all the empty office space, brokers say.

“It is nothing like it was in the 1980s, but we are having a slowdown from last year,” confirmed Roger Staubach, founder of Staubach Co., Dallas. “Beginning last year, we saw companies decide not to expand, and there is a lot of space up for lease.”

At mid-year, the overall office vacancy in the Dallas area had risen to just under 20% for all types of space, according to a report by the Dallas office of New York-based Julien J. Studley Inc., a property broker. The vacancy rate for Class-A office space registered slightly lower at 16.5%.

“Overall, the Dallas market can easily be described as a tenant's market,” said Greg Biggs, a branch manager in Julien J. Studley's Dallas office. “Concessions are increasing because of the 37.2 million sq. ft. of available space on the market. We are also seeing the amount of sublease space continue to steadily increase.”

Very few office projects have been started in the Dallas area this year, as lenders and developers pull back from the slowing market. “The good news is, we believe construction is at a very manageable level,” said Denny Alberts, president of Fort Worth-based Crescent Real Estate Equities, one of the largest office owners in Texas.

“As of June 30, the amount of Class-A space under construction was 2.3 million sq. ft., down from 3.2 million sq. ft. as of Dec. 31,” Alberts said. “Fortunately, Dallas is demand-driven and capital-constrained, and it continues to be one of the most competitive markets in the nation, if not the world, when companies consider expenses such as salaries, occupancy costs, taxes and dependable power,” he added.

A large block of the office surplus is located in downtown Dallas, which is more than 25% vacant, and in suburban business districts that have felt the effects of consolidation among high-tech tenants. Even in those areas, landlords are continuing to make office leases with “Old Economy” companies.

Hall Financial Group has signed several leases this year in its Hall Office Park, which is located at the north end of the Dallas North Tollway in the suburb of Frisco. The Dallas-based development and investment firm has two new office buildings under construction containing 320,000sq. ft. This year, Hall Financial has rented blocks of office space to apparel maker Levi Strauss, Navistar International and Dan River.

“We haven't just concentrated on the high-tech companies,” noted Larry Levey, development president for Hall Financial. “We're still in the business of leasing office space, and there are other companies out there hunting for offices.”

Just south of Hall Office Park, Granite Properties, a locally based developer, is finishing up construction on its second 10-story tower in Granite Park. The 256,000 sq. ft. building joins the first tower Granite completed and leased in the office park in 1999.

“Deal flow is definitely off from a year ago but it's not dead,” said Michael Dardick, president of Granite Properties. “We are about 20% pre-leased in the new building, and the first building is 100% leased.”

Like most landlords, Granite is under pressure from tenant reps to compete with sublease space coming onto the market. “It's what you would expect when demand goes down significantly,” Dardick said. “So far, we haven't cut our rates or had to offer any substantial concessions.”

With new office space in suburban Dallas renting from the low- to mid-$20s per sq. ft. annually, sublease space is being offered at a discount of $3 per sq. ft. to $4 per sq. ft. Before the tech bust, local developer Billingsley Co. concentrated on attracting high-tech tenants to its International Business Park located west of the North Tollway corridor.

“Year to date, we've signed 170,000 sq. ft. of deals,” said developer Lucy Crow Billingsley, managing partner at Billingsley Co. “I think that's pretty good considering what you hear about the market. We have more than a half-dozen other prospective leases we are working on.”

Billingsley Co.'s biggest lease of late was also one of the largest suburban office deals in the Dallas area this year. International Rehabilitation Associates, a subsidiary of Philadelphia-based CIGNA Corp., leased 85,000 sq. ft. in one of the buildings at International Business Park.

Most landlords aren't letting the fall-off in tenant demand cause them to panic. Chicago-based CMD Realty owns 2.8 million sq. ft. of office space in the area that remains above 90% occupancy, said Kevin Brands, who heads the company's Dallas office.

Landlords say many tenants are stretching out lease decisions while they monitor the economy and office market. “The decision period has been much longer,” said Clif Cone, a vice president of leasing at Prentiss Properties Trust, Dallas. “It is taking people longer to make up their minds and evaluate the market. But we've been able to hold the line on most of our properties.”

The biggest block of empty space Prentiss Properties has in its Dallas inventory is a 150,000 sq. ft. building in Las Colinas left vacant in a telecommunications consolidation. Unlike past cycles, Las Colinas and other business districts near Dallas-Fort Worth International Airport haven't noticed a surplus in office space this year.

“It's a relatively small inventory compared with what is on the Tollway,” said Phil Baker, chief executive of Irving-based Baker Commercial Realty. “There are only two major buildings under construction, and those should be OK. The Las Colinas area continues to be a prime location.”

Macfarlan Real Estate Services, Dallas, is finishing construction on a 7-story, 200,000 sq. ft. speculative office building called Las Colinas Highlands. The $33 million project is being developed in partnership with RREEF America.

As the suburbs have recorded negative office absorption this year, downtown Dallas has recorded almost 500,000 sq. ft. of net office leasing. That's good because with a vacancy rate of more than 25%, Dallas has one of the weakest downtown office markets in the country.

“We are seeing positive absorption of office space downtown,” said Joel Pustmueller, a principal at Trammell Crow. “I think downtown will outpace the suburbs this year.”

While suburban business districts have depended on high-tech companies for growth, downtown has relied on “Old Economy” firms such as lawyers, insurance companies and utilities.

That doesn't mean downtown brokers are celebrating. They still see a lot of work ahead. “Downtown today is so much better than it was seven or eight years ago,” said Pustmueller. “But it has happened at such a slow pace, it's like water torture. Everybody hoped there would be a big resurgence downtown, but it just hasn't happened.”

During the last few years, developers have built more than 3,000 new residential units in the downtown area, many of them in renovated historic buildings. And expansion of the Dallas Area Rapid Transit light rail line is making it easier for workers to commute to downtown.

To attract after-hours visitors to the central city, a new $420 million sports arena was opened this summer on the northwest edge of downtown. Built by Dallas-based Hillwood Development and Dallas business mogul Tom Hicks' Southwest Sports Group, the American Airlines Center arena is the centerpiece of a 65-acre, mixed-use development called Victory. Plans for the rest of the project and a timetable have not been finalized.

Retail: What recession?

Although there has been a smattering of store closures in the “Big D” market, many retail developers and brokers can be excused for asking, “Where's the recession?” At the same time that some national chain stores were shutting their doors this year, developers of new shopping centers enjoyed better than expected retail demand.

“The past six months have seen steady leasing from existing retailers and retailers new to the market, active new construction, steady rental rates and healthy occupancy rates,” said Herb Weitzman, president of Dallas-based Weitzman Group, the state's largest retail property broker. “There have been concerns that weakness in the national economy may impact the Dallas-Fort Worth market.”

However, job and housing growth — two key factors in retail growth — have posted strongly positive results, ensuring the continued health of the retail market.

Weitzman Group is forecasting that shopping center occupancy levels in the Dallas area will remain at a healthy 90% throughout 2001. That's due in part to lower construction levels.

According to Weitzman, construction this year is expected to total at least 4 million sq. ft., compared with more than 8 million sq. ft. of retail built in 2000.

The largest retail project to open its doors in the Dallas area this year is the Shops at Willow Bend mall in West Plano. Completed in early August by Bloomfield Hills, Mich.-based Taubman Centers, the 1.5 million sq. ft. regional mall is anchored by Neiman Marcus, Dillard's, Lord & Taylor and Foley's department stores.

More than 150 stores and restaurants are featured in the retail center, including many that are new to Texas. “To be able to attract nearly 50 retailers new to the state speaks not only to the quality of the shopping center but also to its outstanding location,” said Robert S. Taubman, president and CEO of Taubman Centers.

Developers have added more than 5 million sq. ft. of new shops and restaurants to north Dallas suburbs during the past three years. One major project is still under construction and set to open in early 2002 — the 265,000 sq. ft., eight-building Shops at Legacy retail center is planned as the centerpiece to the 2,655-acre Legacy Business Park in West Plano.

Dallas developer Femhi Karahan is building the project, which is anchored by a Robb & Stucky furniture store (already open). The retail center is adjacent to a new 400-room Doubletree Hotel and is connected to a 384-unit apartment community developed by Post Properties, an Atlanta-based REIT.

Karahan said that demand for space in the new urbanism-style center, spread across 23 acres, is still strong from tenants, including restaurants and specialty retailers, but some national apparel retailers have pulled back from the market during the last few months. “They have already opened a lot of locations in the Dallas area,” Karahan said. “I think they are just slowing down for now.”

Closings of several large national retailers, including Wards, Sears HomeLife, Krause's Sofa Factory and Weiner's is contributing to more than 1 million sq. ft. of space coming back on the Dallas market this year. Because of those closings, retail absorption turned negative in the area for the first time since the early 1990s.

“The better retailers are continuing to go forward with their expansion plans,” said Mickey Ashmore, president of Dallas-based United Commercial Realty. “They see this period as an opportunity for them to get some good locations. Even though we have new vacancies on the market, there are tenants that will re-lease it.”

Vacancies aren't a problem at two new Dallas central city retail centers. In the midtown Dallas market near Southern Methodist University, local developer UC Urban has opened its new Mockingbird Station development. The 20-acre, mixed-use complex includes 211 luxury apartments and more than 50,000 sq. ft. of specialty retail space constructed adjacent to one of the busiest commuter light rail stations.

The shopping center is almost fully leased with major tenants, including an eight-screen Angelika Film Center, a Virgin Entertainment Group superstore, Urban Outfitters, Café Express, Bath & Body Works, Victoria's Secret, Rockfish Seafood Grill and Ann Taylor.

“The tenants are doing spectacular business — much better than they anticipated,” said developer Ken Hughes, who built Mockingbird Station in partnership with Simpson Housing. “Nearly every space in the project is leased up or spoken for.”

Apartment sales pick up

The big news in the Dallas apartment market this year isn't new construction starts, but sales. Concerns about the national economy and the potential for overbuilding have turned investors away from most kinds of Dallas commercial real estate.

“I can't think of when I've seen the market this dead — at least no time recently,” said George Roddy, founder of Roddy Information Services, a Dallas-based real estate consultant. “If anything, that makes the recent apartment sales stand out that much more. Apartments are about the only thing selling.”

Several major apartment transactions have been completed in the Dallas area this year. Des Moines, Iowa-based Principal Capital Real Estate Investors, an affiliate of Principal Financial Group, purchased the year-old Phoenix apartments in the midtown Dallas area. The 449-unit complex is located next to a commuter rail station and is near Southern Methodist University. Terms of the purchase were not disclosed, but the sale has been estimated at more than $40 million.

“It is a unique asset for Dallas, given it is within a few hundred yards of a grocery store, light rail and high-end retail,” said Mark Hanrahan, a director at Principal Capital Real Estate. “From the property's current success, it is clear there is definitely interest from renters, and we look for it to perform very well over the long term.”

Two large Irving apartment complexes also have sold this year. Post Properties sold the 908-unit Post Shores apartments to Boston-based Metropolitan Properties of America. The luxury complex was built in two phases in the 1980s and 1990s and is located on the large man-made lake that is Las Colinas' centerpiece. Along with the apartments, the project includes 50,000 sq. ft. of retail and office space, plus a public marina.

At mid-year, apartment occupancies in the Dallas area averaged just over 95%, and net rents were up about 4% from a year earlier. Demand for additional units has slowed but remains positive.

“Looking at the big picture, Dallas-Fort Worth's volume of apartment demand dipped because of the slowing pace of new job formation and the lower level of new product completions in recent years,” said Greg Willett, director of research products at M/PF Research, an apartment research company based in Carrollton.

Some developers are still adding product. Billingsley Co. has begun construction on the next phase of its Austin Ranch apartment community just west of the Dallas North Tollway in the north suburbs. The Dallas developer has already completed and almost fully leased 548 units and is building 460 more apartments.

“The performance of our existing apartments is so good that we didn't see much risk in building more,” said Lucy Crow Billingsley. And developer Amicus Partners, Dallas, has opened the first 224-unit phase of its Plano Transit Village apartments adjoining a light rail station in the historic downtown Plano. Work began in September on the 220-unit second phase.

“Dallas has continued to have good job growth, and no one is forecasting the multifamily market will go down significantly,” said Amicus founder Robert Shaw. “But there are still properties struggling in specific submarkets where there have been a lot of recent completions.”

Industrial stays strong

Dallas industrial developers can count themselves doubly fortunate. Not only are there still tenants in the market for warehouse space, but there also isn't the volume of empty space that'splaguing the office and shopping center sectors.

During the first half of the year, warehouse tenants leased more than 4 million sq. ft. of Dallas-area warehouse space, according to Kennedy-Wilson International, based in Beverly Hills, Calif. “At mid-year 2001, the Metroplex office market could be described as a tenant's market,” said Bob Young, manager of Kennedy-Wilson's Dallas office. “The industrial market on the other hand continued to post positive growth, although at a somewhat slower rate.”

Kennedy-Wilson estimates that the overall Dallas industrial vacancy is just over 9%. About 5 million sq. ft. of new space was added to the market in the first six months.

Major warehouse builders with a presence in the metro area include Dallas-based Hillwood Development, Chicago-based First Industrial Realty Trust, Indianapolis-based Duke Realty Corp. and Panattoni Development of Sacramento, Calif. Duke recently began a two-building warehouse project northwest of Dallas in the Trinity Mills Business Park near Interstate 35K. Plans call for two buildings with about 200,000 sq. ft. each.

Steve Brown is a Dallas-based writer.