Dallas Skyscrapers May Be Pushing 40-Plus, But Investors Love Them Anyway
Skyscrapers in the Dallas Central Business District are four decades old, and it would be easy to overlook them among the glittery new developments rising around town. But investors looking for long-term holds in second-tier markets with rising rents keep giving the buildings a second look when they hit the market.
With a slew of these iconic buildings on sale today, the business district is entering a new investment cycle.
“There is a substantial amount of product on the market in the CBD in terms of number of buildings and square footage, maybe the highest level at any point in time over the last 30 years," Younger Partners Managing Principal Scot Farber said.
Those projects are garnering substantial interest from investors with capital to distribute.
“We have one asset for sale called 2100 Ross, and we have had significant tour activity and many people signing up to look at the deal — almost 160 different groups,” said John Alvarado, senior vice president of CBRE's Capital Markets Institutional Properties practice.
“I noted that whenever I toured people through, they were either on their way, or they had just come from another tour. I think all of the assets that are currently for sale [in the CBD] are getting strong looks, and those assets include Bank of America Plaza, Saint Paul Place, 2100 Ross.”
CBRE also sent a joint-venture option out to the market this year on One AT&T Plaza. It came to market just months after the asset sold to investors in 2018.
HFF is marketing to investors the 1.34M SF Class-A office building known as 1700 Pacific Ave.
Investors looking at the buildings are not necessarily chasing the hottest market, particularly with Uptown and many newer builds nearby. Rather they are chasing rising rents and a chance to pull in returns over time.
“I think a more important consideration prompting owners to look at a potential sale is the liquidity in the capital markets today,” Alvarado said. “There is an interest globally for central business district assets. Dallas in particular has benefited … from some positive trends with respect to demand and absorption that has been significantly higher the last couple of years than it was in the previous historical period.”
Net absorption in the CBD reached 830K SF in 2018 and 84K SF in the first quarter of this year, according to JLL data.
CBD absorption has bobbed up and down over the last decade. It was negative 389K SF in 2008, and then positive or negative a couple of hundred thousand square feet on any given year until falling to 1.2M SF of negative absorption in 2016. It bounced up to positive net absorption these past few years, JLL said.
The Downtown district is benefiting from unprecedented steady rent growth, with CBD rents in the first quarter of 2019 hitting $29.56/SF, up from $27.51 in 2017, $26.22 in 2016 and $24.08 in 2015, according to JLL. The same JLL data shows CBD lease prices coming in nearly $10 lower eight years ago.
"Where we sit today in 2019 is the first time in maybe decades where we have seen consistent strong rental rate growth year over year of 4, 5, 6 or 7% in the urban core. Investors have looked at that and said Dallas has changed. Dallas is maybe mature,” JLL Vice President of Research Walter Bialas said.
“It’s been a good market at this point in the cycle,” Bialas said when discussing the CBD's appeal to global investors. “Dallas had a series of up and down recessions over the years going back to the '80s and '90s and through the 2000s even as our suburbs were being built up.”
As larger tier-one markets like Washington, D.C., Los Angeles and San Francisco face dramatically rising sales prices, investors are eagerly probing markets like Dallas-Fort Worth and Atlanta to search for rising rents with some upside left on longer-hold investments, Bialas said.
“There is a potential for significant upside for patient investors,” Farber said. “The buildings can be purchased at a significant discount to replacement cost. There will probably not be any major new construction of office product in the CBD core in the foreseeable future. Those groups that can create and develop new parking solutions could put themselves in the forefront of increasing occupancy.”
The nearby Uptown area still has a much lower vacancy rate of 15.1% when compared to the CBD's 22.2% vacancy rate, Younger Partners Director of Research Steve Triolet said. That can make it a more appealing market for investors. But he said ongoing refurbishment opportunities keep Downtown intriguing.
“While Uptown has grown through new construction, the CBD has made progress by chipping away at older functionally obsolete properties by converting them to other uses,” Triolet said. “Even among the more prominent, older inventory in the CBD, properties like Trammell Crow Center and 2100 Ross, landlords have been investing in significant amenity enhancements to helpfully reposition the properties against their newer competitors.”
Sellers also may pushing properties to market after watching the 1900 Pearl building reportedly set a new record this year by selling for a whopping $700/SF, according to the Dallas Morning News.
Even though 1900 Pearl's sale may have put the area on the map in terms of what is possible at the top end of the scale, the building is not necessarily a trendsetter for other Downtown Dallas office products, largely because it is new.
"The CBD is big; it has the highest concentration of 1M SF-plus office properties in the Metroplex — 12 skyscrapers if you count AT&T’s headquarters," Triolet said.
“The average office skyscraper in the Dallas CBD is 42 years old and the most leased multi-tenant skyscraper, Chase Tower, has an occupancy rate of 80.3%. Pricing and occupancy expectations for these large properties are significantly different than new construction like 1900 Pearl.”
Alvarado agrees 1900 Pearl's sale is far from the status quo when it comes to Downtown office building sales.
“Certainly the 1900 Pearl sale, I think it raised some eyebrows in terms of the pricing that could be achieved in Central Business District buildings, but 1900 Pearl is a little bit of a different animal than what is currently inventory in the CBD,” Alvarado said.