Commercial Real Estate Back in the Heart of Texas

Texas’ major markets are bustling with real estate activity, having rebounded from the recession that followed the area’s oil boom of the early 1980s. "The economy is very strong," says Scot C. Farber, CCIM, of Jones Lang Wootton in Dallas. "Personal spending and consumer and business confidence are generally strong."

Now, industry players hope the markets won’t face the same overbuilding woes of the past if growth is properly monitored.

The following is a look at the Lone Star State’s major markets.

Active Office
"There is a tremendous amount of activity" in Dallas’ office market, says Buddy Tompkins, CCIM, of the city’s Wilcox Realty Group. "Existing office space in suburban markets is virtually non-existent. Several million sf of new projects are under construction, mostly in Las Colinas and far north Dallas."

The Dallas-Fort Worth area has benefited from both a brisk local economy and a significant number of new jobs, he says. Lease rates for existing class A and AA product range from $22 psf to $28 psf per year on a full-service basis; new product is similar in price, not including electricity costs, he says. "These rates represent huge increases in the past three years," he says.

Office sales prices "are up on quality product to the point that they are pushing replacement costs," Tompkins notes. "Top-of-the-line product is selling between $125 [psf] and $150 [psf]."

"Office looks very strong for the next two years in the Dallas-Fort Worth area," he concludes. "There is some concern about overbuilding. However, the favorite comment now is, ‘We’re not overbuilt, we’re only overannounced.’ If some of the announced buildings get cold feet, we should stay in equilibrium."

Houston office, too, "is an extremely active, hot market," reports Jeff Black, CCIM, of the CB Commercial Real Estate Group, Inc., office there. "Houston had positive absorption of over 8.3 million sf in 1997," the best results in almost 15 years, he says.

Office occupancies are up "dramatically," he says, with an overall rate of 88.7 percent. Class A suburban lease rates run about $15 psf to $18 psf per year and CBD rates run $16 psf to $20 psf per year. Sales prices average $94 psf for class A properties and $52 psf for class B—and are rising, Black says. There’s about one million sf of new construction, he says.

Helen Jobes, CCIM, of Synermark Commercial Real Estate Co. in Austin, feels that her city is "way ahead of [Dallas and Houston] as far as recovery. Austin’s been hot for two years." Some two million sf of office space currently is under construction in Austin, she says, where occupancy averages 98 percent. "It’s really quite a lot of square footage for a town this size," Jobes says. "For a long time, nothing was being built." Now, "Every building that’s been built has been leased before it’s finished," leasing at $24 psf to $27 psf, she says. Recently, five office buildings in the suburbs sold for $177 psf, she says.

Robust Industrial
Dallas’ industrial market also "has been very robust the last three years," according to Farber. "Currently, there is an estimated 15 million sf of new construction," he says. "This is the highest level this decade. However, some of this space is only rumored to be happening.

"As long as we have strong in-migration, we should be OK," Farber predicts, "But 15 million sf is a significant amount of space to absorb—absorption for 1997 was 7.1 million sf."

The area’s industrial occupancy rate is 94 percent, down slightly from previous years because of the new construction, he reports. Sales prices average $28 psf to $30 psf. "Some of the newer product is higher, but new construction is keeping prices psf in check," Farber says.

In Houston’s industrial market, manufacturing and oil-related businesses have boosted the local economy, which has meant lots of activity and a "shortage of buildings," says William F. Taber, CCIM, of Taber Real Estate Co. in Houston. Both build-to-suit and speculative construction are occurring, he says. Current industrial lease rates average $0.15 psf to $0.60 psf; sales vary widely by property, he says.

Taber calls his outlook for the market good, but adds, "There are always things called real estate cycles that surprise us."

Rising Retail
Dallas’ retail market is at its strongest in 20 years, says Vance C. Miller, CCIM, of Henry S. Miller Commercial in Dallas. "Lower interest rates and rising retail sales encourage strong investor demand for Dallas-Fort Worth retail investments."

The healthy north Texas economy has helped to generate jobs, in-migration and, consequently, retail sales, he says. The area’s occupancy rate is at 94 percent and growing. Lease rates run $15 psf to $25 psf per year for well-located strip centers, $15 psf to $20 psf for power centers, and $18 psf to $30 psf for malls, Miller says. Recently, the area’s retail construction mainly has consisted of build-to-suit and anchored centers with preleased space.

In the near future, Miller foresees some fallout in the restaurant sector. "Many will close—but the real estate should resell," he anticipates. In addition, "Retail chains will continue to expand and grow. Some will close, but will be easily re-leased; hot areas will be growing areas—grocer-anchored centers."

In San Antonio retail, Steve Raub, CCIM, of Investment Realty Co., LC, reports "significant construction, catching up from absolutely no construction in the Ôdepression’ from 1986 to 1992." Activity will slow, he says, but will continue to meet the demands of neighborhoods under construction. "There has been significant big-box power center activity—eight projects completed in the past three years and one new one just announced," he says. However, older retail strips are just barely stable and mom-and-pop operations are struggling. "Small local shops must find a special niche to compete with the less expensive merchandise sold in the big boxes," he says. Moreover, "Obsolete and poorly located big boxes will be converted to office service centers."

San Antonio’s retail occupancy is about 90 percent and lease rates average about $11 psf per year, triple net, having risen steadily since 1992, Raub says. Sales prices have doubled since lows in the early 1990s, to between $40 psf and $60 psf. The area has no significant real estate investment trust activity; instead, most financing comes from private investors.

Multifamily Market
The threat of overbuilding is expected to slow down Dallas’ multifamily development, according to Marcus & Millichap’s National Investment Market Report 1998 Forecast. However, 16,000 new units recently were under construction or in the pipeline in Dallas. The area’s strongest apartment demand has been occurring in Las Colinas/Irving, North Dallas, Farmers Branch/Addison, Prestonwood, and East Dallas, reports Marcus & Millichap.

The Houston multifamily market is "an investor favorite," according to the Counselors of Real Estate’s Real Estate Report, with occupancy rates exceeding 90 percent and few new developments in recent years.

Great Hospitality
Dallas’ hospitality market is "going great," says A.K. Mago, CCIM, of Mago & Associates. The market has a "lot of new properties coming up," he says.

The average daily rate for Dallas-Fort Worth in 1997 was more than $88, with occupancy exceeding 70 percent, according to PKF Consulting/Hospitality Advisory Services.

Market Glance
Oklahoma Outlook

Like Texas, neighboring Oklahoma also experienced the energy-oriented highs and lows of the 1980s and early 1990s, as well as a more recent revitalization, as shown in a look at commercial real estate in Tulsa and Norman.

"Tulsa’s economy is at the highest level since the oil boom of the early ‘80s," says Robert E. Grant, CCIM, of Whiteside & Grant, Realtors. "But more importantly, it is more stable now because the community has attracted diversified business."

Tulsa’s industrial market is strong, Grant says. "But the strength may not be reflected in [the] number of transactions, due to [the] low inventory of functional industrial buildings." Occupancy levels have risen steadily since 1992 and are at about 95 percent. "Sale prices are up largely due to the shortage of inventory under 100,000 sf," he says.

Looking ahead, "current new construction and anticipated proposed spec development will increase inventory and absorption," Grant says. "Spec building will likely accelerate over [the] next two to three years."

Tulsa’s office market is in "excellent shape," proclaims Angela West, CCIM, of Tulsa Properties. Vacancies are at their lowest since 1982, at about 10 percent. Lease rates average $15 psf annually for class A, $12 psf for class B, and $11 psf for class C, all up from last year, she says. The average CBD sales price is $31.79 psf, while suburban class A and B sell for $35 to $45. Prices are up from last year, she says.

In multifamily, "There’s lots of activity in land sales for multifamily development in Tulsa, primarily the southeast corridor," says Larry Kelley, CCIM, of Herndon & Kelley Co. "With Tulsa’s hot market and economy overall, I foresee higher-end as well as economy apartment complexes being developed and absorbed up to 90 to 95 percent occupancy by the market."

In Norman, home to the University of Oklahoma, part of "the Interstate 35 corridor has very little land left for commercial land costs are inching upward, with prices seldom below $8 psf," reports Judy J. Hatfield, CCIM, of Equity Realty, Inc.

The area’s office market is healthy, with vacancy at about 7 percent and average lease rates of $11.60 psf, she says. In the industrial arena, most of the area’s existing sites are occupied, but local developers are ready to build on available land, she says.

In addition, "Norman is seen as a great community in which to retire, so developers have at least three assisted-living center projects working and I think we will see at least a couple more during 1998."