02/23/2011

2 Office Listings Test Soft Market in Dallas

Separate owners are testing investor demand for properties in Dallas' struggling central business district by offering two big office complexes.

A Blackstone partnership is marketing the 1.2 million-square-foot Plaza of the Americas, which could command upward of $120 million, or $97/sf. Meanwhile, local developer Lucy Billingsley could attract bids of up to $150 million, or $295/sf, for the 509,000-sf One Arts Plaza. HFF has both listings.

The estimated price tags would put the capitalization rates at 6.5% for One Arts Plaza and 7.5% Plaza of the Americas, well below the 8% average for Dallas office trades last year.

Dallas continues to be dogged by weak fundamentals, such as an abysmal 73.2% occupancy rate for its 30.2 million sf of office space. That has left sales activity in the doldrums, especially downtown. While trades in central business districts nationwide soared by 239% last year, they plunged by 75% in Dallas, to a paltry $9 million, according to Real Capital Analytics, which tracks deals of $5 million and above. (Sales elsewhere in Dallas and its suburbs lifted overall activity in the market to $1 billion, the 13th highest in the nation.)

Those disappointing numbers have some local pros saying that the gap in expectations between buyers and sellers remains wide and could make it tough for listings such as Plaza of the Americas and One Arts Plaza. But One Arts Plaza could benefit from its location in the Arts District, which is the focal point of an effort to revitalize downtown.

Market pros described the sellers' price expectations as high. The buzz is that they might decide to refinance instead if bids fall short. That thinking could have factored into their selection of HFF, which also has a strong mortgage-brokerage operation.

Plaza of the Americas includes two 25-story office towers, a 143,000-sf retail pavilion and an ice-skating rink. A Marriot hotel is also part of the complex, but is separately owned and not part of the offering.

The office space is 73% occupied. The tenants include National Union Fire Insurance (138,000 sf until 2019) and J.P. Morgan (111,000 sf until 2022).

Filling vacant space could be a challenge, in light of the fact that the building is already in line with the average occupancy rate downtown.

Pricing estimates vary widely, with some market players calculating that Plaza of the Americas isn't worth more than $85/sf, or $105 million. The property is at 600-700 North Pearl Street, at the intersection of San Jacinto Street and next to the city's arts district. Blackstone, the big New York fund shop, owns a stake in the complex via Equity Office Properties, the Chicago REIT it acquired in 2007. Blackstone's partner is European Investors, a New York asset manager.

One Arts Plaza, constructed in 2007, was the first office property built downtown in nearly two decades. Billingsley, the daughter of legendary Dallas developer Trammell Crow, spent $159 million on the project, according to a case study by the Urban Land Institute.

The 24-story skyscraper encompasses 486,000 sf of office space, 22,000 of retail space and 60 luxury condos that were marketed separately and are virtually sold out. There is also a six-story garage with 996 spaces.

The two biggest office tenants, 7-Eleven (262,000 until 2022) and law firm Thompson & Knight (181,000 sf until 2023) have their headquarters in the building, which is near the Meyerson Symphony Center, Nasher Sculpture Center, Wyly Theatre and Winspear Opera House.

Securing the 7-Eleven lease was crucial for enabling Billingsley to obtain a $130 million construction loan, according to the Urban Land Institute. As a result, 7-Eleven received a sweetheart lease with below-market rents, local pros said. Overall, rents average 30% below the market asking rate.

Billingsley prefers to stay on as asset manager.

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