Columns Magazine’s Vibrancy vs. Vacancy: Lessons From Downtown
AIA Dallas Columns Magazine’s spring issue features an article written by Younger Partners’ communications manager Tonie Auer and includes broker Robert Grunnah as one of the expert sources on the ups and downs of vacancy in Downtown Dallas over the years. You can view the article here.
If you take a look at the history of downtown Dallas vacancy rates, there is a story behind each wave of ups and downs reaching back to the 1950s. And it all leads to the recent revitalization that we are seeing today.
In the 1950s and 1960s, downtown Dallas was not only the central business hub of the city, it was also the historic retail and entertainment core, says Kourtny Garrett, Downtown Dallas Inc. president and CEO.
“You had the streetcars running and Theater Row,” she says. “It was a destination for entertainment, shopping, as well as business.”
“The 1950s and ’60s were the heyday downtown. There was both retail vitality and office vitality,” says GFF Chairman Larry Good, FAIA. “I have fabulous memories of taking a bus downtown and seeing all of the department stores from Neiman Marcus to Sanger’s, James K. Wilson, and all the great retailers. The movies were all open at the Majestic, the Palace, the Capri, the Melba. Downtown was humming.”
But the abundance of highway construction between the 1960s and 1980s contributed to the flight of retail and office to the suburbs from the central core, Garrett says.
RISE OF THE SKYSCRAPERS
By the late 1970s throughout the 1980s, office towers sprouted and overbuilding became a Texas tradition. “That’s when the vacancy piece of the puzzle became a problem,” Garrett says.
Greg Biggs, JLL managing director for tenant representation, says the millions of square feet of skyscrapers developed in downtown Dallas in the 1980s changed two things. First, there was more space available than tenants to occupy it. Second, developers gave building architects free rein to design massive projects that were more about making a statement of prominence.
“Back then, employees would go to work for a big firm and work their way up to a partnership and the corner office and be there for years. It was a time when ‘who the employer was’ made a statement. As times progressed and the workplace changed, employees began to dictate how the space was used. Employers are in a daily battle to retain and recruit the best employees. Employees now enter their career and if they don’t like where they are for whatever reason, they’ll leave and go somewhere else or work there for a while and start their own business.
“That transition has driven much of what has happened in downtown Dallas office occupancy. Many of the businesses that used to be in downtown have migrated to the suburbs and created offices that are more efficient and better suit their employee needs,” Biggs says.
On the other hand, Garrett says, “Overbuilding, combined with the market crash of the 1980s and the consolidation of retail nationally, led to the sidewalks rolling up at 5 p.m. We had a quiet downtown except for the 9-to-5 folks. Downtown was now automobile-driven with no vibrancy. There were some discount stores left at ground level and a couple of restaurants that came in, but no reason for people to really go out on the street.”
Downtown became an office park by the 1970s as the retailers one by one closed their doors in favor of more successful suburban locations, Good says. The big banks, law firms, accountants and architects were enjoying “officing” in downtown, and the banks each built their monuments, he says.
“There were some pretty impressive high-rise office buildings that hit a crescendo around 1978 to 1988,” Good recalls. “The last one to be built was 2200 Ross [Texas Commerce Bank tower, now Chase Bank tower].”
VACANCY MOVES IN
Younger Partners broker Robert Grunnah says that in the era of new construction in the early 1970s and 1980s, vacancy started to rise, especially in the Class B and Class C properties. When developer Trammell Crow built Trammell Crow Center, the extended negative cycle began in earnest.
“Comerica and the Bank of America buildings were added, among others, and they all struggled; Fountain Place as well,” Grunnah says. “After that boom of construction in the 1980s, there was no new construction downtown until projects in the Arts District. Office rents in downtown were flat for 20 to 25 years. With the success in the Arts District, former Class B buildings became C, and then vacant, and then no one wanted to lease them.”
Grunnah says the downtown buildings languished through the late 1980s and early 1990s. The collapse of the savings and loan industry hit hard, followed by the RTC debacle that resulted in many building owners losing their properties or even giving them back. The Resolution Trust Corp., a U.S. government-owned asset management company, was established in 1989 to liquidate primarily real estate-related assets such as mortgage loans held by the savings and loans.
“The downtown Class B and C buildings remained vacant, with most essentially owned by former lenders waiting for something to happen,” Grunnah says. “All of these buildings had environmental issues like asbestos. And with no demand for office users, they couldn’t afford to remodel them, so they sat empty.”
Good says the early 1990s saw the first wave of residential conversions of the most beautiful of the empty office towers. But while it was a nice trend, it was slow and didn’t have legs because many of the other middle-age office buildings were “hard to love” and not necessarily appealing.
“By the late ’90s, downtown had more than 40 vacant buildings. All the department stores had closed with the exception of Neiman Marcus. Theater Row was shuttered. Then came the city’s first TIF (Tax Increment Financing District, a publicly funded subsidy for redevelopment, infrastructure and other community improvement projects), and it was a pivotal point in the city’s move to revamp downtown,” Garrett says.
The City Center TIF, launched in 1996 with updates added years later, created a little spark of interest from a couple of out-of-market developers who saw the potential, she says.
“That’s when we saw the introduction of residential into the picture. There’s no single thing you can point to for the decline and the revitalization of downtown,” Garrett says. “But, if you pare the success down, it was because of the introduction of residential, which drives demand for retail, public space, and more services. Those initial TIF investments turned some of those vacant buildings into apartments.”
The inspiration to make big changes downtown followed the disappointing loss of the Boeing Corp.’s decision to pick Chicago over Dallas for its new headquarters, Good says.
“They told us we lost that opportunity because we had dead downtown streets, vacant retail, no street life, and that downtown was not appealing. That lit a fire under the mayor and City Council and Downtown Dallas Inc.,” Good recalls. “Everyone pulled together to address creating green space, getting people out of the tunnels and back on the street, and becoming more dedicated to converting some of those old office buildings to residential use. In addition to the City Center TIF was the creation of the Downtown Connection TIF.
“Those supplied some gap money to help make some of the conversions possible at the Davis, Dallas Power and Light building, Lone Star Gas Lofts, and the Mercantile Building. That era of buildings became converted for residential instead of office and very importantly took that vacancy off the books and replaced with new residential occupancy,” Good says.
The early 2000s was the turnaround time when city leaders “really got our act together, made plans, had public sector support and began to see the reinvestment downtown,” Good adds.
Until residential developers started rehabbing downtown towers in the early 2000s, there was only one downtown high-rise condo and it struggled, Grunnah says. It has since been remodeled and is doing well today, he says. During the RTC days, Grunnah had three offers on a pool of RTC-marketed buildings, but many of the offers requested that the Davis Building be removed from the offering. Ultimately, a buyer took the title for no cost and, after another pair of trades, the Davis Building is now a highly successful residential building, he says.
The market for residential properties increased, and many buildings have now been converted to multifamily because the buildings had low ceiling heights and inefficient office floor plates or they needed new HVAC, which all prevented the office buildings from leasing at competitive rates, Grunnah says.
RESIDENTIAL AND REVIVAL
Smart developers have taken empty office buildings and converted them to residential apartments or condominiums with views and other amenities, Biggs says.
“It’s cooler and closer to the heartbeat of the inner city, and that’s a huge comeback from the 1980s and the ’90s with all of the giant vacancy numbers. Empty buildings found a purpose, and their vacancy was taken off the office market,” Biggs adds.
The demand for urban residential that began around 2000 hasn’t slacked. Today, downtown residential properties hover around 94 percent occupancy on average, Garrett says. With no overbuilding in the market, that occupancy rate is usually attained within six months of opening.
The historic Wilson building and the Davis Building were among the first office-to-residential conversions, and the Magnolia Oil building was transformed into the hotel we know today, she adds. The second wave included the Davis, Dallas Power & Light, and Mosaic projects, Good says.
The residential population has jumped dramatically since the mid-1990s. In 1996, downtown had about 200 residents. Today, more than 11,000 people live downtown. Add in the Cedars, Deep Ellum, and other neighborhoods around the urban core, and that number increases to around 50,000 residents.
After the explosion in residential, next came the parks, including Main Street Garden, Belo Garden and ultimately Klyde Warren Park. Walkability became the buzz word, Garrett says.
“A trend we started seeing around five years ago with Bryan Tower and 2100 Ross (the old San Jacinto tower) among others along the Ross Avenue corridor—which is congruent with the new construction trajectory going on in Uptown—is building owners realizing that the older office stock needs to be competitive with places like Uptown or Legacy,” she says. “They have to be stepping up to meet the demands from the recruitment and retention standpoints.”
There is much more renovation and adaptive reuse occurring in downtown office buildings, such as the conversion of One Main Place to a Westin Hotel and residential tower.
“It’s a recent phenomenon, but I believe we will continue to see buildings do that,” Garrett says. “I think creative office is also huge trend; I believe we will see a lot more creative and innovation industry coming into downtown.”
AT STREET LEVEL
Garrett expects more in-fill development: “We are entering an era of new construction; we will see parking lots absorbed with mixed-use, and they’ll all better connect our vibrant nodes like the Farmers Market, Main Street, the West End, and the Arts District.”
At the top of the Downtown Dallas Inc. priority list is more attention to the street level. It’s been done very intentionally with plans for traffic calming , bike lanes, and more complete streets. Traffic calming uses physical design and other measures to improve safety for motorists, pedestrians, and cyclists. It aims to encourage safer, more responsible driving and potentially reduce traffic flow.
“Livability is a word that comes into play significantly here,” Garrett says. “Infill development will be complemented by more services, schools, grocery stores, and the elements that create a true livable place.”
“We now have enough population downtown that retail is practical again,” Good says. “We have the daytime office population and the full-time residents and nighttime population, along with visitors for sports and cultural events. Retail makes sense again. We are seeing the storefronts reactivated, and we’re already seeing grocery stores nibbling around edge of downtown.”
Grunnah believes the biggest problem for downtown—unlike Frisco, Plano or Legacy—is providing affordable housing for back-office employees, who now fight traffic on commutes and face expensive parking. “I see downtown becoming a place for Class A corporate locations that do not require high-density employment,” Grunnah says.
Dallas has one advantage over many of its suburban competitors—the DART mass transit system. As fuel prices increase, more people will turn to mass transit, Biggs says.
“Dallas is in a great position to continue its diversified growth,” he says. “Downtown Dallas has a number of influential supporters who are going to continue to do what they can to improve the attractiveness of downtown.”
Long-term, Good sees a rosy picture.
“The millennials absolutely love the center city. They want to be in the heart of a metropolitan area where you can walk. And they’re becoming the decision-makers and the leaders of their companies. They’re making the decisions of where they office and live,” Good says.
Tonie Auer is communications manager at Younger Partners.