VISITORS TO DALLAS TAKE HOME memories of the Kennedy Memorial, the Dallas Museum of Art or glitzy shopping malls like the Galleria. But chances are, no one who has been to “Big D” in the last few years has fond memories of Main Street.
With its shuttered storefronts and vacant office blocks, the city's old downtown retail and office district has been easy to forget. Like many American cities, Dallas has been struggling to enliven its sleepy downtown.
Now, there's a new push to transform the historic downtown financial district into a residential and retail destination as the economy emerges from the recession. Since Jan. 1, developers have unveiled plans for $100 million in new developments. And even bigger deals are waiting in the wings.
“It's obviously encouraging to a lot of people that something is finally happening down here on Main Street,” says Gerald Sampson, president of Dallas retailer Neiman Marcus and chairman of the Downtown Partnership Inc. “We have a long way to go and it's not all fixed, but I'm very encouraged with what I am seeing.”
The growing residential base downtown makes it possible to move forward with the Main Street project, which is taking place at a time when the office vacancy rates across Dallas (including areas outside downtown) has reached 22.3%. Mean while vacancy levels in the CBD have skyrocketed to 25%. (Please see sidebar on page 36) Despite the gloomy office market, the real estate community has high hopes for the Main Street retail and residential project.
Jill Tiernan, senior vice president at Dallas-based The Weitzman Group, notes that more than 14,000 residential units have been constructed in the city's core in the past decade. “More buildings are under contract downtown than at any time in the last 10 years for multiple uses, including multifamily, hotel and retail,” she says. “The Main Street project should help bring more specialty retailers into the mix.”
The Downtown Partnership, which is made up of major property owners, business leaders and economic development officials, is about to begin a redevelopment of the 10-block area along Main Street. The area is lined with many storefronts that went dark as business growth shifted to the suburbs.
The partnership plans to spend almost $40 million restoring the Main Street corridor. Baltimore-based RTKL Associates Inc. is doing architectural work for the project, and Washington, D.C.-based Madison Retail Group has been hired to help market the space to new retail tenants. To accomplish its goal, Madison Retail Group has sought marketing agreements with all of the building owners in the district.
“The response has been incredible,” says Dallas broker Jack Gosnell, who is working with Madison. “Any time you try to get 30 property owners to sign agreements, it's a touchy situation. We were thinking we were in for a long battle, but that's not been the case.”
The group will use part of the property tax generated by downtown businesses to fund streetscape improvements, fix up the facades on vacant buildings and remove asbestos from empty structures. Brick pavement and sidewalks, festive overhead lighting and colored banners are part of RTKL's plan to spice up the tired streets. Plans also call for a streetcar line to transport shoppers, office workers and apartment residents.
Unlike some urban renewal projects that construct mixed-use complexes to look like old structures, the buildings are already there — they're just buried under peeling paint and paper-plastered windows.
Many Main Street storefronts are earmarked for new restaurants and clubs. Datum Engineers of Dallas is renovating a row of old brick buildings along Main Street into restaurants and shops. The 30,000 sq. ft. strip was almost fully leased before construction began and more buildings in the area are being acquired.
“I've worked for three years to get the activity level that is happening now,” says Tiernan of The Weitzman Group, which is leasing Main Street buildings for Datum.
Developers also are doing their part to add more residential and office space downtown. In March, a partnership that includes Denver and Dallas investors began work to restore one of the city's first skyscrapers. The 20-story Davis Building — a former anchor of the Main Street financial district — has been empty since the late 1980s.
Building owner Hamilton Properties of Denver has partnered with Regent Partners Inc. of Atlanta and Barker Nichols LLC of Dallas to convert the former office building into 183 loft apartments and approximately 21,000 sq. ft. of retail space. The $35 million restoration of the 76-year-old tower is the latest in a series of redevelopments of Main Street historic buildings.
“It is a beautiful, historic building that just needs to be enhanced and refurbished to become vibrant again,” says Sampson. “Because of the Davis building's position on Main Street, it becomes a major anchor and an all-important resident base.”
About a half dozen of downtown's largest landmark buildings — the Kirby Building, Magnolia Building, Wilson Building, the former Titche-Goettinger department store and the old Santa Fe Terminal Warehouse — have been successfully remodeled into loft apartments.
In the last few years, developers have built more than 625 loft apartments in the Main Street district, served by 35,000 sq. ft. of rehabbed retail space. Another 661 residential units are planned.
In mid-March, developer Intradel Corp., based in New Orleans, received approval for a $14 million conversion of the historic downtown post office into 91 apartments. Constructed in 1930, the classical-style building will retain a post office facility on the ground floor.
“We're multifamily developers and we've built a lot of garden-style apartments in the last 10 years,” says Intradel president Kerry Kirby. “We're getting into the urban redevelopments now.”
So is Dallas developer Lazarus Property. The independent investment and development company is redeveloping the former 1505 Elm office buildings into 67 luxury condominiums. The buildings originally were constructed in the 1950s and sat vacant for years. The developer expects the projects to be completed in the fall.
Beyond The Rooftops
Not all of the downtown development involves conversions of old buildings. Dallas developer CLB Partners Ltd. is finishing work just north of the financial district on a new, 21-story condominium tower. The 60-unit McKinney Avenue Lofts building will be completed this summer.
Houston-based developer Camden Property Trust has completed the first 17 of almost 70 townhouses planned in its Park at Farmers Market development on the east side of downtown. The 3-story townhouses have sold well in the first phase.
Meanwhile, New York developer Palladium Co. hopes to move ahead with a $600 million complex of shops, restaurants, apartments, hotel rooms and office space on the northwest corner of downtown. The company recently dropped plans for similar mixed-use developments in Charlotte, N.C., and San Jose, Calif., but emphasized it intends to proceed with the massive Dallas project if the city approves $30 million in public-sector incentives. The city council is expected to vote on the issue in May.
The ambitious mixed-use development is envisioned as the centerpiece of the 65-acre Victory development, which adjoins the year-old American Airlines Center sports arena. The sports center and Victory projects are part of the redevelopment of an area once occupied by rail yards and crumbling warehouse buildings.
Leasing Activity Picks Up
With all the infrastructure and residential investments downtown, leasing activity is beginning to pick up.
Of course, the CBD has a lot of lost ground to cover: At 25%, office vacancy rates downtown are among the highest in the country. The recent signing of two big leases gives developers hope that the high vacancy rate will begin to head downward. Accounting firm KPMG has leased more than 130,000 sq. ft. in the former Maxus Energy Tower at 717 N. Harwood St. for a consolidation of its Dallas operations. CarrAmerica Realty, Washington, D.C., has been hired to oversee the $25 million renovation of the office space.
And Oncor Electric Delivery Co., a subsidiary of Dallas-based TXU Corp., has leased 147,410 sq. ft. of office space in the Lincoln Plaza tower at 500 N. Akard St.
Investment Sales Pick Up — Slowly
Like the comeback downtown, brokers and investors say that the investment property sector in Dallas is slowly turning around. “There is an increase in activity and we are finally seeing some deals,” says Jack Minter, who heads the investment sales operation in Credit Suisse First Boston's Dallas office. “There is probably more money looking at real estate now than I have ever seen.
“It's just a question of what buyers expectations are and what the seller expects,” he says. “I'm hoping we'll see even more improvement as the year goes on.”
After a flood of trophy building sales in the late 1990s, the commercial property sales market has been moving in slow motion in Dallas in the last two years. Commercial property sales were down by almost 14% in the Dallas area last year — the third straight year of declining sales.
Dallas investor Ray Washburne was looking for a high-profile building on the edge of downtown's CBD when he paid $17 million for the 16-story, 156,000 sq. ft. Woodall Rodgers Tower in January.
“I purchased it as a long-term investment,” Washburne says. “I've bought about 3 million sq. ft. in the last year-and- a-half, and we are still looking at additional deals.”
One of the highest-priced building sales per square foot in years took place in February when the 26-story, 450,000 sq. ft. Univision Tower in downtown Dallas sold for more than $90 million. Global Innovation Partners LLC of Los Angeles bought the 20-year old high-rise located on the northeast side of downtown. Meanwhile, the Dallas office of Eastdil Realty brokered the sale of Las Colinas Corporate Center I & II, a complex near Dallas-Fort Worth International Airport that was purchased for $60 million by a partnership set up by Metropolitan Life Insurance Co. “The velocity of buyers coming through our shop looking for product has certainly increased over the past 90 days,” notes Evan Stone, managing director of Eastdil Realty.
He says there's no doubt Dallas will return to expansion mode, the only question is — when?
Steve Brown is a Dallas-based writer.
DALLAS-BY THE NUMBERS
City: 1.18 million
Metro area: 5.22 million
Source: U.S. Census Bureau
UNEMPLOYMENT RATE: 6.6%
AMR Corp. (parent company of American Airlines), 29,669 employees
SBC Communications Inc., 15,400 employees
Verizon Communications, 14,500 employees
Source: Dallas Morning News
VACANCY RATES (METRO AREA):
22.3%, year-end 2001
16.2%, year-end 2000
Rent per sq. ft.: $23.58 year-end 2001
Source: Grubb & Ellis Co.
6.8% vacancy, year-end 2001
6.0% vacancy, year-end 2000
Rent per unit: $711 year-end 2001
Source: Marcus & Millichap Research Services
10.9% vacancy, year-end 2001
10.1% vacancy, year-end 2000
Rent per sq. ft: $14.15 year-end 2001
Source: Grubb & Ellis Co.
8.6% vacancy, year-end 2001
5.8% vacancy, year-end 2000
Rent per sq. ft.: $3.76 year-end 2001
Source: Grubb & Ellis Co.
58.3% occupancy, year-end 2001
65.3% occupancy, year-end 2000
Source: PKF Consulting
MAJOR PROJECTS UNDER CONSTRUCTION:
Nissan Motor Acceptance Corp. regional office, a 3-story, 268,000 sq. ft. building
Developer: Champion Partners, Addison, Texas
Owner: Wells Real Estate Funds, Atlanta
Cost: $20 million
Knox Park Village mixed-use development, a 4-story, two-building retail and office complex
Developers: Shafer Property Co. and Lachlan Alliance, both of Dallas
Davis Building redevelopment, a conversion of 76 year-old landmark skyscraper into 183 loft apartments and more than 20,000 sq. ft. of retail space
Developers: Hamilton Properties Corp., Denver; Regent Partners Inc., Atlanta; and Barker Nichols LLC, Dallas
Cost: $35 million
The Shops at Legacy, a 240,000 sq. ft. urban-style retail and office complex
Developer: Karahan Cos., Dallas
Cost: $50 million
Completion: First phase (100,000 sq. ft.), spring 2002
Network Associates North Texas regional operations center, a 3-story, 170,000 sq. ft. complex
Developer: CarrAmerica Realty Corp., Washington, D.C.
Completion: Fourth-quarter 2002
OFFICE SECTOR STILL HURTING
Although there is plenty of excitement in the retail and multifamily sectors thanks to the Main Street redevelopment project, the office market in Dallas remains in the doldrums.
After enduring a total office absorption of negative 3 million sq. ft. in 2001, Dallas building owners were hoping for a rebound in the first quarter of this year. They didn't get it.
Instead, absorption levels fell by another 1.2 million sq. ft., according to statistics provided by New York-based Cushman & Wakefield's Dallas office. Vacancy rates in metro Dallas at the end of March were 22.3% — up from about 16% a year earlier — and 25% in the CBD, according to Grubb & Ellis.
“Yes, the first-quarter numbers look pretty bad,” says Mike Wyatt, one of Cushman & Wakefield's senior office brokers. He doesn't expect the market to pick up quickly, even though the national economy is improving. That's because the commercial real estate industry typically trails a turnaround in the economy by 12 to 18 months, he notes.
The drop in office occupancy was due to a combination of company consolidations and cutbacks in employment. Indeed, 2001 wound up being the worst year on record for the North Texas employment market.
After years of huge job gains, total employment in Dallas-Fort Worth fell by 36,000 in 2001. The news stung the local real estate market, which at first was assured by economists that employment growth would rise by almost 50,000 jobs. The numbers were much better in the previous two years — the region gained 109,500 jobs in 1999 and 110,300 in 2000.
The commercial property sector is concerned about how the rest of the year will play out for the office market.
“With 34 million sq. ft. of vacant office space and more than 8 million sq. ft. of sublease space, we are talking about some substantial vacancy numbers,” says Greg Biggs, Southwest regional manager of New York-based Julien J. Studley.
Surprisingly, corporations have continued to sponsor new build-to-suit projects. “When you look at the long-term cost, the freestanding corporate campus is still competitive with subleasing opportunities that are perhaps short term,” says Steve Van Amburgh, chief executive of locally based Koll Development Co.
Koll just completed a 170,000 sq. ft. office building off the Dallas North Tollway for the regional operations of Intuit Corp., a software producer.
Although rent rates in the market today are favorable for space users, companies remain hesitant to make new deals for office space, says John Gates, president of the Southwest corporate services division of The Staubach Co.
“I don't see a lot of urgency in the market right now, and we aren't seeing that many corporate growth deals,” says Gates. “There is a lot of empty space out there. I don't think it's a disaster, but the problem's not going away in a hurry.”
— Steve Brown