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Dallas CRE Forecast Boosted By Tenants Fleeing Other Cities

The fate of Downtown Dallas' office market remains unclear after civil unrest struck the city's urban core this summer and as the coronavirus pandemic drags on, relocation specialists say.

“I think it’s been too early for any trend to have developed, because people are just starting to come out of the shock, and the reality of where they locate is going to look substantially different from what they have now," ESRP Executive Managing Director of Site Selection Susan Arledge said.

But the area has seen an uptick in interest from tenants looking to resize their footprint or relocate from other markets that have been harder hit or more expensive than Dallas thus far.

"What I think we are seeing more often is companies looking at their current location and deciding, 'Do I stay here and renew if my lease is expiring or do I relocate?'" she said.

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While it's unclear if the coronavirus will eventually cause mass abandonment of Downtown areas when leases expire, the Dallas Central Business District itself has already been impacted, with more office workers staying home and businesses contemplating changes in their future footprints. 

"We have seen more move-outs in the Central Business District in the last 12 months relative to other sections of the metroplex," CoStar Senior Market Analyst Bill Kitchens told Bisnow. 

Over the past year, Downtown has lost major players like Tenet Healthcare, which moved farther north, and Baylor Scott & White, which relocated from the Central Business District to Deep Ellum, keeping it inside Downtown Dallas but well outside the traditional Central Business District. 

Kitchens said that through the second quarter of 2020, the entire metroplex saw office net absorption fall 815K SF, with Downtown Dallas accounting for 560K SF of the lost square footage. As of Sept. 16, weekly office occupancy in Downtown Dallas as judged by keycard and other building system recordings was back to 39.9% Downtown, according to a Kastle Systems study. 

Commercial real estate professionals say the area is turning into a tale of two cities. Workplace usage downtown remains under 40%, but districts like Deep Ellum and the West End have seen interest from potential tenants outside Texas.

Wildcat Management founder and developer Tanya Ragan is in the process of leasing 65K SF of prime office and retail space inside the historic Purse Building in the West End District. Her building was vandalized during mass rioting over the summer, but it's now attracting attention from businesses trying to relocate to Dallas from harder hit East Coast and West Coast cities. 

"We have given around a half a dozen tours in some form the last couple of weeks," Ragan said. "Things have definitely picked up. It is almost a panic of how quickly some of the companies want to leave their states."

While the tours are not always specific to the West End, many people arriving from other markets are keen on the urban core and the historic Purse building's early 20th century patina, Ragan added. 

This enthusiasm from out-of-state has Ragan betting on Downtown Dallas becoming a possible exception to the urban market exodus that's reportedly impacting other major U.S. cities. She's not alone in this assessment; Arledge said she sees Texas office markets gaining interest when it comes to businesses outside of Texas that are tired of high taxes and escalating crime rates. 

"We have a lot of interest in relocation from the East and West Coast," Arledge said. "It's not Downtown-centric, it's really location-centric, and the issue is where within the metroplex do we need to be."

Downtown remains of interest to some out-of-staters because it's one of the areas with large blocks of trophy space left. Whether they begin biting in the next six months remains to be seen, but they are definitely shopping, she says. 

"What I have seen is it's not driven by downtown or the suburbs, it is driven [by their intention] to get into a different environment, to get out of a New York City or a San Francisco ... or an area where the cost of living is high," Arledge said. 

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Deep Ellum by night

DEEP ELLUM IS SURVIVING FOR NOW, BUT THE NEXT SIX MONTHS ARE CRITICAL

The entertainment-focused Deep Ellum district in Downtown Dallas, which also offers creative office, has recovered from widespread civil unrest in late May, according to Deep Ellum Foundation Executive Director Stephanie Keller Hudiburg.  

Of 400 businesses in the district, Keller Hudiburg says she can count on two hands how many businesses were unable to survive after a period of civil unrest and the initial pandemic outbreak. Even though most of the businesses in the district are doing their best to survive traffic drops and the ongoing negative impact of the coronavirus, the area is still garnering positive attention.

"We have frankly seen new restaurants open," Keller Hudiburg said. "We have seen new tenants interested in the area."

In September, August Real Estate Co. even announced aggressive plans for redeveloped offices inside The Continental Gin Building and 333 1st Avenue.

But there are deep risks that remain in the creative district, which is populated by a mix of office, bars and restaurants. The coronavirus remains a burden for bars and independently owned businesses, and the foundation is advocating for various national pieces of legislation to create stimulus for bars and restaurants in Deep Ellum. These tools also will support local offices by providing momentum for the entire neighborhood, Keller Hudiburg said. 

There's the Save Our Stages Act introduced in Congress to help support closed live music venues, and the RESTAURANTS Act of 2020 to help support food and beverage outlets impacted by the virus. 

"I am so far very encouraged that we have a very resilient business community," Keller Hudiburg said. "That said, the next coming months will be telling, so I know we are as a community rallying behind the Save Our Stages Act and other tools and resources to make sure ... we are advocating for resources for our businesses to be able to remain solvent at this challenging time as COVID continues."