GlobeSt.com EXCLUSIVE: Office Building Sales Crest at $993M

"We definitely have seen significant activity in the last two years," says John Alvarado, senior vice president of investment sales for Dallas-based Trammell Crow Co. Last November, it appeared Dallas was poised to hit the 1998 record of $1.3 billion in 45 sales. Though that didn't happen, the "capital wave" was still the strongest since the record was set, he tells GlobeSt.com. In comparison, 23 buildings sold in 2003 for $502 million.

To no one's surprise, TIC buyers led the investment pack honing in on North Texas. The deep pockets shelled out $449 million of the $993 million in sales, according to Alvarado. REITs spent $204 million, pension funds put up $151 million and foreign investors accounted for $149 million.

Alvarado expects this year's sales to be much like last year's with one exception. "We think the Canadians will become the most active purchasers of US property," he says, citing a roster of names starting to compete with the IPC US REIT and Dalfen America, both Toronto-based buyers picking up Dallas deeds last year.

TIC groups, unlike pension funds, are buying Dallas properties for the upside in vacancy. "We are seeing trades of a lot of non-stabilized type properties that are being bought on a value-add basis," Alvarado says. "Pension funds still have a difficult time buying in Dallas because of the high overall vacancy."

The top pocket of sales came in the LBJ Freeway as investors eyed buys for their promise in a sure-to-come rebound after freeway construction wraps up. Buyers spent $231 million for a dozen buildings in the LBJ corridor, according to Alvarado's records. In contrast, six buildings in Uptown/Turtle Creek pulled in $194 million, five in the CBD for $106 million and four along Central Expressway netted $186 million.

On a per sf basis, the average was $90 per sf, a $10 per sf drop from 2003. To put that into perspective, Alvarado's research shows New York City leads the nation with $308 per sf. The other top markets are Washington, DC, $279 per sf; San Diego, $276 per sf; San Francisco, $260 per sf; Boston, $244 per sf; and Los Angeles, $219 per sf.

With the per sf prices soaring on the coasts, California buyers are and will continue to rush Dallas. "There's more potential here," Alvarado stresses, citing higher cap rates but acknowledging the risk. "It's not a market for the faint of heart. My advice is always don't fall in love with your real estate here. You buy at the right time and sell at the right time."

A couple office building sales are nearing the finish line as January draws to a close. The deal to watch this quarter is the Chicago-based Equity Office Properties' portfolio, which includes nine buildings in Dallas/Fort Worth. Word is EOP, now at the best and final stage, has a pair of California investment groups vying for a lock, stock and barrel buy of the $750-million package in 10 cities.

Alvarado predicts a number of quality assets and smaller class B office buildings could come to market if interest rates rise. "A lot of owners have been holding onto their properties because interest rates allowed them to," he says, adding forced sales or foreclosures are likely to increase unless there's a dramatic increase in absorption or rents, neither of which is a strong likelihood based on 2005 forecasts.