The 2007 ULI/PwC Emerging Trends in Real Estate report said of Dallas: "Wide-open Texas markets favor developers, but ‘they are never good places to invest.'"
Ten years later, the groups are singing a different tune. Dallas Fort-Worth "is rapidly approaching the level where it is considered as a core primary market," the emerging trends report of 2017 stated, putting Dallas near the top of its ranking of best markets for investment.
Tentpole projects over the last decade have changed outsiders’ opinion of what Dallas can do. By increasing density, luring big players, adding amenities and breaking into new levels of pricing, a handful of deals in particular have pushed Dallas to mature and put the city in the running as a new gateway market.
Grabbing The Spotlight
Pre-recession, Dallas was viewed as a volatile secondary market, Cawley Partners CEO Bill Cawley said. Foreign money and institutional capital were hardly present in the DFW metro. Show Full Story
“Dallas was never a market that anybody had any long-term faith in,” he said. “An institutional investor that’s got a long-term view, they hated Dallas,” he said.
Dallas had two big hurdles to overcome in the eyes of the rest of the world: vacancy/overbuilding woes and low rents. PwC/ULI’s report year after year lamented that Dallas repeatedly had vacancy larger than 20%. (“Building resumes, although the Metroplex office vacancy rate hovers above 20 percent. What more do you need to know?” the 2007 report said.) Investors did not trust rents to stay steady.
“I think this cycle is the first true cycle where rent growth has been real; it hasn’t been artificial; it hasn’t been propped up with free rent and incentives to try to get people to pay what a developer needs for it to make sense,” Cawley said.
Dallas-Fort Worth is now the No. 2 target in the U.S. for real estate investment dollars, right behind Los Angeles, CBRE’s 2017 Global Investor Intentions Survey indicates.
ULI/PwC’s Emerging Trends in Real Estate report has placed Dallas in the top five most promising real estate markets in the United States for the last four years. The report highlights massive job and population growth, relatively low cost of living/business, access to space and access to talent as the big drivers for Dallas’ rise. A business-friendly environment, stable fundamentals and the gradual emergence of meaningful barriers to entry have driven Dallas through the longest economic boom in recent memory.
Aside from these macroeconomic factors, there were a number of developments, sales and relocations that made Dallas the powerhouse it is now. These deals were major turning points in the story of Dallas, taking a foundation laid as early as the 1980s and transforming Dallas from a one-trick, Midwestern pony into a globally recognized growth engine.
Klyde Warren - 2012
It is hard to believe Klyde Warren, one of the most recognizable and valued gems in Dallas, has only been here six years. Its green space, in a time where green space is a highly sought-after amenity, almost single-handedly sparked the birth of the now vibrant Arts District.
Construction on the park started in 2009. It was part of a larger push for parks in the Downtown area stemming from a plan that originated in the 1990s to revitalize Downtown, which had been largely neglected since the savings and loans crash of the 1980s. At the time the revitalization project began, there were 40 vacant buildings in Downtown, Downtown Dallas Inc. CEO Kourtny Garrett said. The park initiative included the construction of a number of parks beginning in 2008, but it was in 2012 when Belo Garden and Klyde Warren opened that the initiative started to prove its worth.
“I was not a huge fan of the Woodall Rogers deck. I was like, ‘That’s so stupid. I can’t believe they’re gonna tear it up, put in all this infrastructure, the traffic’s gonna be bad and it’s not gonna matter.’ I’m the biggest idiot in the world for saying that because [Klyde Warren] was a game-changer,” White Box Real Estate Managing Director Grant Pruitt said. “It’s probably one of the coolest things and best things that’s happened in the city.”
The park made people take notice of not only Downtown but Dallas as a whole. During the last decade, the creation of parks in the Downtown area has introduced the green space necessary to woo Downtown dwellers, ultimately increasing the vibrancy of the area and setting it up for late-stage urban development, namely retail and soft goods.
“There’s a whole new class of investors in Dallas that were not here five or 10 years ago,” Crescent Real Estate Equities Managing Director John Zogg said. “The success of Klyde Warren I think taught the city these kind of investments stimulate incredible returns for them; plus it gave Dallasites something to be proud of.”
Klyde Warren has injected rocket fuel into its surroundings. JLL research indicates the park has sparked 33% rent growth since it opened. Average rents between Class-A and B product are in the high 30s, comparable to some of the best submarkets in DFW. Vacancy improved by 4.5 points, which translates to 1.4M SF of office space absorption.
“So now of course I got greedy and I’m like ‘well hell, we ought to go stick a deck park over 30 on the back side,’ because I’m like, ‘look, you’ve got to integrate those, too, and if you can just create this massive cityscape that flows back and forth it would be great,’” Pruitt said.
State Farm Relocation - 2013
“The landmark relocation in my view was State Farm picking Texas … Dallas was never a market that an institutional investor was comfortable with because they just felt like it was too volatile,” Cawley said. “I think the defining turn of the market, even though we were feeling it, was when State Farm came and picked Dallas. Right behind it came two or three other large relocations that changed the perception of Texas.”
State Farm’s move paved the way for Raytheon to put down roots at CityLine in Richardson and raised the bar for the city, Richardson Economic Development Partnership Executive Vice President John Jacobs said.
“State Farm created the momentum and was the catalyst for the roadway and utility infrastructure that led to the relocation to CityLine of a 2,000-employee Raytheon operation along with two hotels, the Aloft and Drury, a Whole Foods-anchored retail center, a host of great restaurants and over 2,000 multifamily units to date,” Jacobs said.
Among the HQs Richardson now hosts are Blue Cross Blue Shield, RealPage, Samsung Mobile and Fujitsu Network Communications, along with the numerous regional/divisional HQs in Richardson.
Vacancy in the Richardson/Plano submarket was 16.9% in 2012, pre-State Farm. Since State Farm's relocation, vacancy has floated around 9.9%. Average rent in the submarket was $21.56 in 2012 and it grew to $27.49 by Q4 2017.
Toyota Relocation - 2015
Toyota’s arrival in Plano in 2015 marked the explosion of office activity in West Plano.
Legacy West was little more than an undeveloped 100-acre tract in sleepy Plano until Toyota broke the levee and a whole slew of big corporations set up shop there.
“The Toyota move, it was a game-changer. It supercharged the West Plano market, and it put the region on the map. It’s one thing to have all the consolidations and stuff that we’ve had here. It’s another thing when a top-five brand in the world says ‘we’re going to put our U.S. headquarters, we’re going to move it from the Los Angeles area to West Plano, and this is why we’re doing it, and it’s for recruiting; it’s for retention; it’s for the war for talent; it’s to put our footprint here for the next 50 to 100 years,’” CBRE Vice Chairman Jeff Ellerman said.
Toyota helped birth the now white-hot Legacy West. J.C. Penney, KDC Development, The Karahan Cos. and Columbus Realty joined forces to develop the acreage around J.C. Penney’s headquarters, and Toyota was the first major build-to-suit to land in the newly created Legacy West.
Now Legacy also has major offices for Liberty Mutual, JP Morgan Chase and FedEx and is one of Dallas' highest-profile developments.
“West Plano has exploded,” Ellerman said. “The secret sauce of our market is the availability of labor, and as companies have expanded here, whether it’s relocated, or consolidated here or added jobs here, it has been because of labor … It’s this circle where the companies come here because the labor is here; the labor is coming here because the companies are here and it’s this upward, self-fulfilling prophecy.
“North Texas sticks out very brightly relative to its competitive cities.”
Dallas Farmers Market - 2013
The Dallas Farmers Market, fully privatized in 2013, drew residents Downtown and set the area up for maturity. Along with the development of parks and retail, the Dallas Farmers market put a regional, walkable destination in the middle of Downtown.
The Farmers Market as we know it began in 2011 when the city kicked off the first phase of a public-private initiative called the 360 Plan, aimed at creating a transit-boosted, vibrant, mixed-use urban center. At that point, the Farmers Market was unprofitable and struggling to keep its sheds open.
The plan proposed privatizing the languishing Farmers Market to stimulate surrounding development and make it profitable again. According to Garrett, the plan worked and the Farmers Market became one of the biggest drivers of residential growth Downtown.
“The plan really cast a vision for the whole neighborhood that leveraged the Market as an anchor and then looked at really creating one of the most, what I would call traditional neighborhood districts in Downtown,” Garrett said.
In 2011, there were fewer than 1,000 residential units in the neighborhood surrounding the market, most of which were concentrated in the Camden apartment complex. That has more than doubled since to 2,200 units housing over 3,000 residents, drawn by the Market’s walkability and amenities like grocery shopping. Another 664 units are under construction, which will add room for 1,000 residents in that neighborhood alone.
The residential growth is not limited to the area immediately surrounding the Farmers Market. In 2007-08 there were less than 5,000 residents in Downtown. Now there are 11,000-plus, and experts feel the city is well on its way to creating a dynamic, mature Downtown.
“This last five years … Fundamentally, there’s [been] a big, big change. I’m excited about that change, and for the residential market, multifamily, I think that bodes very well for us,” Genesis Real Estate Group President Gordon Ip said.
The Joule - 2009 and 2012
Redevelopment is a theme across the country, and the Joule helped the trend take hold in Dallas. The redevelopment — and subsequent re-redevelopment — of the Joule Hotel was a major catalyst in the revitalization of Main and Main in Downtown and proof of the efficacy of adaptive reuse projects.
Though the Magnolia, in 2006, was the first major redevelopment, The Joule is special because it brought in retail and rejuvenated a whole block in the middle of Downtown, a critical step in rejuvenating Downtown Dallas as a whole.
“The Joule is a catalyst in so much that it brought a very unique hotel experience to the market, very forward-thinking, certainly filled the gap that we had. Also its location was incredibly critical because it sits right there basically within that block that is really the Main and Main of our city that had been sitting vacant,” Garrett said.
There were two waves of tax increment financing projects created by the original City Center TIF enacted in the 1990s and its expansion in the early 2000s. The first wave yielded projects like the Magnolia and the Kirby Building while the second gave Downtown The Joule, The Mercantile and 3rd Rail Lofts.
Since the Joule, Dallas has seen a number of other ambitious adaptive reuse projects ranging from hospitality to mixed-use, including the buzzy Statler Hotel, the AC Hotel Downtown Dallas and the Drever.
Sale of 2000 McKinney - 2015
“I think back to when I first visited Dallas about 10 years ago … and I remember at the time having a conversation with professional sales brokers about valuations … there was a psychological barrier,” JP Morgan Executive Asset Management Executive Director Dale Todd said.
That barrier was a $300/SF office valuation ceiling across the metro. An office building in Preston Center sold in 2007 for $307/SF, but then valuations stagnated. The sale of 2000 McKinney Ave. blew the lid off the whole market with a record-setting price of $505/SF.
“Dallas has definitely crossed the line ... it’s a global city now,” Todd said.
This sale and the all-around success of Uptown has paved the way for more record-setting numbers in the near future and an overall boost to the rest of the submarkets along the way, Eastdil Secured Director Jonathan Napper said.
Napper said this is because of relative value. Dallas is not necessarily a gateway market, but it is a primary market, he said. It has a strong affordability factor, along with strong growth and return on investment.
“We’re seeing a valuation push. In fact, we’ll have a comp in Legacy that will be worth $500/SF in probably the next 60 days,” Napper said. “I get a lot of weird looks when I say, ‘McKinney & Olive, $700/SF …’ but the math makes a lot of sense.”
The Next Steps To Gateway
Looking forward, experts say Dallas is slated for greatness. Barring a macro event like the Great Recession, experts agree that Dallas will remain a strong market as long as in-migration and job growth keep fueling demand. But three tentpole events need to happen to make Dallas even more attractive in the eyes of out-of-state institutional players.
Weathering A Downturn
Dallas will not prove its worth until it stays steady through another down cycle, Cawley said. That will show whether there is fluff in its success and will show the market's maturity. Cawley predicts the downturn will come in about two years, and he feels the market will hold up under pressure.
“I think we have to go through a dip and see what happens in the dip and see how this market reacts long term. How much of our gains are we going to give back? I personally think we’re not going to give a lot back. I think this market slows, but it’s not going to be an armageddon like 2007,” Cawley said.
Adding To The Skyline
Zogg said the next phase in the city’s life will be an increased emphasis on projects that increase the city’s clout, particularly through iconic architecture. He said McKinney & Olive is really the first attempt at an office building with world-class design in 30 years and that its success will likely push developers to spend more time and money on design, ultimately leading to the expansion and improvement of the skyline.
“Think about Dallas’ skyline, one of the best in the world, and it’s defined by I.M. Pei, Philip Johnson, Rick Keating and some other great, internationally acclaimed architects. We’ve not built an office building with that caliber of design in 30 years. We forgot what great design is all about ... I think going forward, we’re going to spend a lot more time thinking about the design of our buildings, and developers will realize that there’s a big return for doing great design,” Zogg said.
Most experts agree the future of Dallas as a global city depends on making Dallas Independent School District nationally competitive. Perception that Dallas proper lacks good public schools is a major knock on an otherwise impressive pitch for incoming companies. Downtown Dallas is a good example of the need for public schools. Though it is quickly becoming a 24/7 live-work-play hub ideal for young people, it has zero public elementary schools and thus struggles to serve its growing under-18 population. Until the schools come, people will continue to leave Downtown as they have children, and as millennials enter that phase of life, this is something to watch for in the next decade.
“If you’re a booster of Downtown, I think you should be a booster of DISD because on the office side, our clients are looking for locations and office buildings where their people can have affordable housing and great schools within 30 to 45 minutes of their buildings. The better that DISD is the more companies will be willing to relocate down here,” KDC Senior Vice President of Development Collin Fitzgibbons said.
Dallas has shown what a difference a decade can make — maybe the Dallas of 2028 will have driven these hurdles into the dust and taken its place on the global stage.
“Dallas is really a much better market in terms of diversification than it was in the past, and that’s been true in every cycle,” Hall Group Chairman and founder Craig Hall said. “I see it continuing to expand in that way. It’s got a lot of positives going for it.”