GlobeSt.com EXCLUSIVE: 2004 Office Sales Closing In on $2B Record

"It is surprising to see pricing is so robust given the fundamentals," John Alvarado, senior vice president for Dallas-based Trammell Crow Co., tells GlobeSt.com. "It's been very, very robust...but it's been that way across the country." Dallas, on the other hand, is flashing on radar screens for all breeds of buyers after a relatively lackluster 2003 on the sales front.

Alvarado's investment sales analysis shows 25 buildings changed hands last year for $575 million. To date this year, there have been 45 sales, totaling $1.1 billion and another 10 to 15 more office deals are on the docket to close before New Year's Eve. Dallas' record year was 1998, with 77 sales and a grand total of slightly more than $2 billion. In a third-quarter comparison, there were 16 closings this year for $453 million versus the banner year's 13 deals for $367 million.

So far this quarter, five buildings have reeled in a combined $235 million. Still to come is this year's gorilla deal between Fort Worth-based Crescent Real Estate Equities Co. and JPMorgan Investment Management of New York City, which picked up partnership interests in five trophy properties in Houston and Dallas. The $1.2-billion deal is sure to push Dallas above its high water mark although it's too difficult to ascertain the Big D's share in the structured package. Word is the "Queen of the West"--the 1.3-million-sf Crescent in Uptown--commanded $270 per sf.

"There's no doubt in my mind we will set a new benchmark," Alvarado says. "We're seeing prices like we've never seen before. Everything that's hit the market has traded" except 1700 Pacific, which Alvarado and the TCC team expect to show again in early 2005 after resolving lease issues with two major tenants.

Alvarado predicts the New Year will be just as heated in the pursuit of value add and stabilized core assets. The big play to watch, he says, is Equity Office Properties portfolio sale, which includes all that it owns in Dallas. There's also talk Turtle Creek Center and the Centrum will end up on the sales block.

The price per pound has jumped from $111 per sf last year to $132 per sf on a blended average for class A assets. Top-tier buildings, whether suburban or urban, are collecting top dollar: 2100 McKinney in the CBD raked in $240 per sf while the Legacy I and II in Plano banked $184 per sf. In the past 2.5 months, seven sales have closed at more than $150 per sf.

Much of the capital funding the Dallas plays is coming from California and New York. This year's big spenders have been private investors, who've shelled out $481 million in comparison to the pension funds' $301 million year-to-date tally, according to Alvarado.

Behringer Harvard Funds has been one of the more active local buyers, spending $83 million this year on seven properties. At last count, it's bought 2.4 million sf of office product and has another one million sf under contract, 100,000 sf of retail space, two acres of developable land and a five-acre tract holding a vintage Hilton at Mockingbird Lane and Central Expressway, now being gamed out for an $80-million redevelopment project with a 185-room, four-star hotel, 60 condos in a nine-story tower and 25,000 sf of street-level retail.

"It's always easier to find deals in your own backyard," Robert Behringer, chairman of the board and CEO for Behringer Harvard Funds says, stressing "we can't get weighted too heavily" although that's where he's latching onto off-market deals to outmaneuver out-of-state competitors flooding his turf. "It's changed dramatically from last year," Behringer says. "The investment community now realizes very low cap rates are going to be part of the environment...not just here, everywhere."

Behringer says the green light flashed to buy in Dallas as the economy started to improve because it's known for fast-paced recovery. "You can create value very quickly in the short term," he explains.

Behinger's team is running up against aggressive US pension funds, their advisers and other listed REITs in the $50-million and over bracket for stabilized core product. Those kind of deals, he says, started trading at or above replacement costs about six months ago as well-heeled players began buying for yield rather than by the per sf. Under $50 million, the competition is coming from 1031 exchange syndicates, TIC structures and high net-worth private investors. "The only advantage you might have as a buyer is having a relationship with that seller or broker," says Behringer, who admits the team's in talks for several off-market office deals around town.

"There was a fundamental change in the investment community's perspective," Behringer says. "We are seeing more activity here because they know prices are only going to be going higher." In the US overall, prices for better classes of assets are closing 15% to 18% higher than last year, he says.

Alvarado's stats show there are 2,078 office buildings in Dallas and only 2% of the stock has sold this year. "Any of the higher quality, well-leased assets is a potential sales candidate next year," Behringer says, "if it hasn't already sold this year."

Behringer says more owners will be enticed to sell due to the aggressive pricing from buyers with deep wells of capital earmarked for real estate. "I think everyone in the business is going to be very active for many years," he says, "and I don't think we're going to be able to satisfy the demand."