Even in the bleakest times, the Trammell Crow Co. machine rolls on. And 2002, which presented more than its share of roadblocks and potholes, was no exception for the 35-year-old firm, which had a reasonably active development year despite a year-end Class-A office vacancy rate of 16.5% and much higher rates in major markets such as Austin (27.8%), Denver (22.5%) and South Florida (20.2%), according to CoStar Group Inc.

Add some pockets of opportunity on the East and West coasts to a handful of large projects that have been in the pipeline for a year or two, and you find Dallas-based Trammell Crow perched atop the “Top Office Developers” chart in 2002 with 13.9 million sq. ft. of office space developed or under construction, up from its No. 9 position in 2001. Trammell Crow completed 14 major office projects around the country in 2002. In those 14, the total vacancy rate registered 20.6% at year's end with estimated gross rents of $25.53 per sq. ft., slightly below the year-end national average of $26.09 per sq. ft.

National figures for the first quarter of 2003 show that Class-A vacancies rose slightly to 16.7% over year-end 2002 marks, but rents managed to inch up to $26.46, reports CoStar.

“When the market is going strong, we are doing two-thirds speculative projects and one-third user-driven,” says John Stirek, Trammell Crow's president of development and investment for the Western region. “When it's tough, that flip-flops. But we are moving ahead.”

Still, these are far from go-go days for Trammell Crow, which has a national network of 30 offices. Stirek describes the firm's current office-development philosophy as “finishing up projects in the pipeline.”

Change in Strategy

In early 2000, when the company recognized the approach of a down cycle, it refocused on projects considered largely non-cyclical, such as build-to-suit corporate offices, healthcare facilities and government buildings. Along the way, it added a few well-located, mixed-use deals. “But we knew that if you're 100% dependent on spec development, well, that eventually catches up to you,” says Stirek, a 17-year Trammell Crow veteran. He adds that the firm “probably overbuilt” its cost structure up until 2000. “But we got that in line in the latter part of 2000 and 2001.”

The publicly traded company did give birth in 2002 to the largely speculative, $52 million Arena Corporate Center office complex next door to Arrowhead Pond of Anaheim, home to the Anaheim Mighty Ducks. Stirek says a “good portion” of the two-story, 383,250 sq. ft. project has been pre-leased but declined to disclose tenants.

In addition, Trammell Crow this year is beginning speculative construction on a 280,000 sq. ft. office building in Washington D.C., the first phase of a $300 million complex called Patriot Plaza. The property will contain nearly 1 million sq. ft. in three buildings, and its framework is designed to hold blast-proof windows so the building can accommodate a government or private tenant.

Improving Balance Sheet

Despite a relatively busy development year in 2002, Chris Roth, Trammell Crow's president of development and investment for the Eastern region, cautions that Trammell Crow “is making less money per project, working harder and the deals are tougher to put together.”

The company's performance on Wall Street reflects that challenge. The stock price (NYSE: TCC) has been on a roller coaster ride over the past year, falling about 45%, from $14.45 per share in late June 2002 to $7.89 as of March 11. Since that time the stock has rallied 30%, rising to $10.25 at the close of trading on June 13.

JMP Securities has raised its 12-month target price for Trammell Crow from $11 to $12 per share, maintaining a “market outperform” rating. Why? Trammell Crow has announced the completion of a $15 million share repurchase program, which has given JMP analysts confidence in management's ability to grow earnings. Also, the company's balance sheet has improved dramatically over the past year due to property sales.

In the first quarter, Trammell Crow's net income rose to $1.1 million, or 3 cents per share, up from $196,000, or 1 cent per share a year earlier. The positive earnings surprise was due to transactions closing earlier than expected. Revenue, however, declined to $160.8 million from $172.1 million. For the year, Trammell Crow expects earnings per share to rise 10% to 20% over 2002 levels.

Michael Horohoe, principal of tenant rep specialist Office Space Search U.S.A., says major office development opportunities dwindled in 2002 for most national players, a pattern he expects to continue. “While some people around the country think the worst is behind them, I don't think we've reached the bottom,” he says.

Trammell Crow reported revenues of $736 million last year, down from $779.7 million in 2001. “Our improved focus helped us weather this storm,” Stirek says. “We think we are surviving relatively well compared to most companies.”