Uptown Submarket Continues Active

DALLAS-Much of the office commercial real estate news in 2012 centered on one submarket: Uptown. This area, adjacent to downtown Dallas, attracted plenty of tenants, investors and developers. And, in examining the early part of 2013, it doesn't seem as though things are likely to change.

Experts from Colliers International's local office tell GlobeSt.com that the submarket's current and continued popularity rests on economic basics; namely, supply and demand. "There isn't a whole lot of product out there, and that's driving rental rates upward," says Ben Lurie, a senior associate in Colliers International's investment sales group. Even with announced office development projects, office space is still constrained. "It'll easily take 18 to 20 months to get something built," Lurie comments. "I think we'll be in single-digit vacancies before any of those new projects deliver." Right now, vacancy in the submarket is at 11%, down from 15% just six months ago. Vacancy has dropped 820 basis points since 2011. With the submarket tightening, rental rates increased 3.3% during 2012.

Many drivers have led to the ongoing interest in the Uptown submarket, not the least of which is amenities in the form of museums, restaurants and the recent opening of Klyde Warren Park. The infrastructure has also improved – an Uptown-specific exit was recently added to the Dallas North Tollway which "creates better accessibility to Uptown and Turtle Creek, and is another positive dynamic in the area," notes Creighton Stark, senior vice president in Colliers' investment sales group.

The high demand exhibited by tenants has led to a high demand for Uptown office buildings from investors. Since 2011, at least 14 buildings in this submarket traded hands, while cap rates have dropped between 50 and 75 basis points.  

And 2013 has started off with two more buildings sales: Talon Private Capital acquired 2525 McKinnon and Beacon Investment Properties snared 2626 Cole. Though sales prices weren't disclosed on either transaction, Lurie and Stark point out that buildings are going for well north of $200 per square foot.  This price-per-pound could be considered a steal, when it's taken into account that building from the ground up can cost upwards of $350 per square foot.

As such, "I believe now is the time to sell," Stark comments. "We're at the peak now, and the market has taken into account that both rent growth and increases in occupancy will occur." Because buyers are considering all of that into their purchase prices, cap rates will continue to drop.

Also dropping is the amount of large, contiguous blocks of space.  Given this trend, Stark and Lurie believe the submarket could see build-to-suit projects, as opposed to speculative development, announced in 2013.  And when it comes to anything spec, "developers still need the lead tenant," Lurie says. "Lenders are reluctant to lend without contractual leases in place." But lenders are a lot more positive when it comes to Uptown building sales. "For stabilized properties in that market, lenders are glad to lend money, and at historically low rates," Lurie remarks.

The question here is whether Uptown's success will spill over into the CBD, which continues to struggle. Stark and Lurie believe that downtown's fringes – most noticeably, around the Arts District, will do extremely well. However, buildings in the interior will likely continue to struggle. "You can see this in the rental rates," Stark points out. Though one "fringe" CBD building, 2100 Ross, is commanding $18 to $20 per square foot, "the interior buildings are asking more like $14 to $15 per square foot," Stark says.

Stark goes on to say that tenants unable to find quality space in Uptown are examining downtown and properties along Central Expressway/US 75 as alternatives. But both Stark and Lurie acknowledge that tenants currently leasing in Uptown are content to stay there. "As tenants look at comparable spaces remaining in Uptown buildings, when they see how few alternatives there are, they tend to stay put," Lurie adds.