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Beware The Bermuda Triangle Of Dallas

“It’s sort of odd how Dallas has these really strong markets right next door to really weak markets. People don’t write much about weak markets, but the truth is, South of Ross [Avenue] these pretty nice buildings that were built in the '80s have done very poorly,” according to Hall Group Chairman and founder Craig Hall.

An uptick in CRE activity in other pockets of Downtown has caused market experts to wonder if it is finally time for the southern part of Downtown to come back to life, or if it is in store for more weakness.

Rendering of the Luminary, 401 North Houston St.
Rendering of the Luminary, 401 North Houston St.

The Dallas office market is booming almost everywhere with the notable exception of a pocket south of Ross Avenue. For years, no one has been able to put a finger on exactly why it is floundering despite bordering one of the hottest office submarkets in Dallas. 

“[This area] has befuddled me for years because it’s so close; you have equal quality assets that could be two or three blocks away but yet have a significant rent difference between the two,” Crescent Real Estate Managing Director of Asset Management John Zogg said. 

Zogg said many of the structural reasons behind this rift in rents (such as safety concerns, lack of vibrancy and bad public perception of the area) have been or are being addressed, yet Southern Downtown is still the Bermuda Triangle of Dallas office markets. 

Hall said he has been looking for the right opportunity in the Southern Downtown pocket, but that nothing has convinced him to buy yet.

According to Zogg, investors get cold feet when it comes to Southern Downtown because it does not behave like the numbers say it should.

“There’re a lot of smart real estate investors that have made bets based on the price per pound in that southern part of Downtown that have lost, but the underlying theory is still good. I think nowadays the pieces are in place for it to come together; it just needs [to] happen,” Zogg said.

Investors are so reluctant to make bets on this area that they have redeveloped fringe markets like the Dallas Design District and West End in lieu of South Downtown, which is a mere one-eighth of a mile from Uptown, the belle of the Dallas office market. "Location, location, location," be damned.

Crescent Real Estate Managing Director, Asset Management, John Zogg
Crescent Real Estate Managing Director, Asset Management, John Zogg

Zogg said it takes a lot of capital, strategy and patience to convert '80s buildings, like the ones characteristic of Southern Downtown, into something that feels new and can attract high-level tenants, and that is a resource drain no one is quite ready to take on for this risky market. It is a classic Catch-22 because investors want this area to pencil out, but no one wants to make the first move because the area is notorious for sinking investments.

The silver lining for Southern Downtown is that the tide seems to be turning as its identity is slowly changing. Within the area, budding retail developments and the placement of multifamily assets (9,000 units of condo and apartment, according to Zogg) have begun to turn up the vibrancy. Around Southern Downtown, the success of Ross Avenue and The West End are starting to sweeten the prospect of investing in the area and that gives market watchers like Hall and Zogg hope that it might finally be time for Southern Downtown to bloom again. 

“As Uptown, which has a land scarcity — there’s really not that many options to go build office buildings in Uptown anymore — and you think about Ross Avenue and how great that it’s starting to do, that has to spill over into the southern sector of Downtown,” Zogg said. “It’s just taking longer than anybody thought.”

To find out more about Downtown Dallas' future, join Bisnow for its Future of Downtown Dallas event on Feb. 22.