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DALLAS-Professionals on the street have noticed the absence of large CBD leases as the curtain falls on the third quarter. Of the handful polled, the consensus is it’s just a momentary blip primarily caused by the number of buildings in play and the fallout from recast leases of a few years back.

The only lease larger than 100,000 sf in the last quarter that anyone can recall was the law firm of Thompson & Knight LLP, which ended a three-year search with a 170,000-sf reservation for Billingsley Co.’s under-construction One Arts Plaza. The $125-million project has scored the top wins for the Arts District, a CBD micro-market that has evolved into a buffer between the inner core and Uptown. That doesn’t mean the “heart of the CBD” is losing its draw: brokers say a half dozen leases for 100,000 sf or more are circling the city’s older, class A high-rise stock.

Summer historically is a slow decisionmaking time, but the pace most often picks up immediately after Labor Day. That’s not been the case this year.

“It’s been awhile since we’ve had a buzz Downtown,” Michael Wyatt, executive director for Cushman & Wakefield of Texas Inc., admits to GlobeSt.com. “The CBD is going through a period of transition and uncertainty. Not great uncertainty, but uncertainty.”

Unlike recent years when uncertainty was tied to the economy, it’s now a reflection of the investment sales market, where in-place contracts have brought leasing to a near standstill for Downtown landmarks like Bank One Center. The seriousness of the situation deepens if all other in-play trades are taken into account: Chicago-based Trizec Properties Inc., Radnor, PA-based Brandywine Realty Trust and possibly Fort Worth’s favorite son, Crescent Real Estate Equities Co. “There is a lot of uncertainty in the existing product,” Wyatt says.

To further fuel the issue, most large CBD tenants reworked leases during the last slump. “There’s not a whole lot of existing business that hasn’t been recast,” Wyatt points out. The trophy buildings are nearly full, leased to tenants who shored up their spaces with early renewals in the past two years when the industry was offering deep discounts for long commitments.

In addition, the CBD’s brass-and-glass high rises have been “eclipsed by the sex appeal of Victory and Uptown,” Wyatt says. “There has been organic growth in the core CBD, but it’s just been one floor at a time and it’s not enough to balance the losses to the newer buildings. At some point with construction costs on the new development that’s going up, you’ve got to think they’ll look at existing buildings.”

Wyatt says the planned and under-construction lease quotes have pushed above $30 per sf. From one end of the CBD to the other, the class A average rate for direct space is $23.18 per sf. The Uptown-Turtle Creek micro-market is $28.21 per sf. “You can still drive a fantastic deal Downtown,” Wyatt says. The dilemma, though, often is parking, which is why city officials need to get creative with perks like DART passes to sweeten the abatement pool, he suggests.

“We are beginning to see some activity that’s full-floor or multiple-floor transactions,” says Daryl Mullin, C&W’s senior director. “Activity begets activity. We’re seeing a little expansion from tenants Downtown.”

Jeff Eckert, senior vice president with Trammell Crow Co., also is optimistic about the Downtown. “It’s not quiet. Larger deals have not closed because we’ve just gotten through Labor Day and we’re just into October,” he stresses. “There has been a tremendous amount of smaller deal flow which I think is a testament to the high-quality buildings at a favorable price point compared to what Uptown is doing.” Still to come, he says, are the inevitable fourth-quarter closings. “We’re being told by brokers that decisions will be made in three to four months,” he says.

James Quick, senior associate for Transwestern Commercial Services’ Urban Advisors Group, tracks deals larger than 10,000 sf in the Downtown market for his firm. Not even a lot of mid-size deals closed in Q3, he says, citing “under-contract” buildings and reworked leases as possible culprits.

The revisions of recent years now have brokers working on deals that come due in 2008 and 2009. “We’ve done a lot of the work. There’s really not anything large in ’07 and only a little bit in ’08,” Quick says. “There’s going to be a slow time in the market unless you have new tenants coming into the market.” He explains those tenants who’ve been around for a long time have “gotten on the right cycle” to make the most of the ups and downs of the CBD market.

There’s been an undercurrent of talk as to whether Dallas’ “heart” is shifting a few blocks due in part to city officials’ plan to build a park over the freeway to join Uptown and Downtown. “If Main Street or Commerce Street becomes our southernmost boundary, there’s nothing wrong with that,” Quick says. “It doesn’t make the Main Street corridor an unattractive part of Downtown. It just makes it different.”

C&W’s third-quarter stats show CBD absorption redlined by 153,028 sf, setting up a 28.1% vacancy in the 28.7-million-sf inventory. The CBD market has 864,300 sf under construction. In Uptown-Turtle Creek, absorption redlined 80,223 sf, with vacancy standing at 12.4% in an 8.26-million-sf submarket. There is 607,531 sf under construction.

The CBD setback is not an illusion. CB Richard Ellis’ preliminary Q3 numbers also show absorption backslid 128,612 sf in 20 class A buildings with 20.8 million sf. Across all classes, absorption dropped into the red by 169,099 sf.

Wyatt believes the CBD will benefit as construction costs rise. “Tenants will be driven to value-add space. The CBD will be that story. We had all thought and wished for a turnaround, but the CBD’s hope is a visionary leader of a company who wants to go for a great value and somebody who might be able to use mass transit.”

The ongoing buildup for a critical mass of residential and retail continues to breed optimism in the ranks. “We’ve been doing the right things,” Wyatt stresses. “Unfortunately, it’s not coming as quickly as we’d hoped.”

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