Cresa Connection: Tollway Corridor - October 2020
Please find October's edition of my monthly update on the North Dallas/Plano/Frisco office market detailing lease transactions recently signed, tenants searching for office space in the market and the latest office building news.
Lease Transaction Comps
1. Tenant: Autodesk
Building: 7160 Dallas Parkway / Legacy Town Center I
Size: 6,008 SF
Term: 36 months
Free Rent: 0 months
Start Rate: $30.50/NNN
2. Tenant: HITRUST
Building: 6175 Main Street / Frisco Square
Size: 15,590 SF
Term: 60 months
Free Rent: 0 months
Start Rate: $33.50 +E
TI: As Is
3. Tenant: VitalTech Affiliates
Building: 6652 Pinecrest Drive / Lincoln R&D at Legacy IV
Type: New Lease
Size: 12,363 SF
Term: 26 months
Free Rent: 2 months
Start Rate: $16.32/NNN
TI: As Is
4. Building: 7600 Windrose Avenue / Legacy West
Tenant: World Wide Technology
Size: 6,150 SF
Term: 86 months
Free Rent: 2 months
Start Rate: $35.46/NNN
5. Tenant: Digital Matrix Systems
Building: 4975 Preston Park Boulevard / Preston Park Towers West
Type: New Lease
Size: 22,540 SF
Term: 130 months
Free Rent: 10 months
Start Rate: $28.31 +E
6. Tenant: Prudential Financial
Building: 5001 Spring Valley Road / Providence Towers
Size: 6,519 SF
Term: 37 months
Free Rent: 1 month
Start Rate: $25.09/NNN
Nationwide, 2nd Quarter commercial real estate investment volume decreased by 69.9% year-over-year to $40.2 billion as both limited property touring and market uncertainty from the pandemic hampered investment activity. The hotel sector had the largest percentage decrease year-over-year (-91.2%) while the industrial sector has the least percentage decrease year-over-year (-49.8%) and multi-family had the largest absolute decrease (-$34.1 billion). Leading indicators suggest that the global recovery will gain momentum in the second half of 2020 and deliver strong rates of growth in 2021. The expected pick-up in real estate demand will lag the improvement in economic growth by between six and nine months.
A new report predicts that the U.S. office sector will lose 145 million square feet of office occupancy in 2020 and 2021 as a result of the economy losing a net 1.7 million office jobs due to the COVID-19 pandemic. As of the 2nd Quarter 2020, the office sector had already lost 23.1 million square feet of occupied space nationwide, with negative absorption forecast to continue for at least another 18 months. The hit to office space demand is projected to be 20% more severe than what occurred during the global financial crisis period of 2008 and 2009. Office leasing fundamentals will be significantly damaged in the near term. Nationwide net office leasing won’t return to pre-pandemic levels until 2023, per the forecast, and building rents aren’t expected to fully recover until 2024 or later. The report also forecasts that over the 2022-2030 period under the “baseline scenario,” office demand is expected to be 15.8% lower than it otherwise would be due to a structural increase in the work-from-home trend, despite holding office density at pre-COVID-19 levels.
Currently, about 40% of DFW office workers have returned to the workplace and local office leasing has slowed dramatically this year as the pandemic took hold. Net office leasing in the DFW market has fallen by 1.8 million square feet during the first half of 2020, which represents the largest decline in the market since the Great Recession. At mid-year, almost 5 million square feet of additional office space was under construction in the area. Local office rents are forecast to decline in the year ahead and landlords are already beginning to offer larger tenant concession packages.
The DFW office market currently has just under 8 million square feet of active sublease office space for lease, which is at an historic level in terms of gross square footage. The sublease market started rising sharply at the end of June. We had 1.3 million square feet listed in August alone. The Far North Dallas areas of West Plano, Legacy and Frisco have been ground zero for sublease activity, with the abundance of corporate headquarters. One of the largest blocks of sublease space is the 500,000 square feet Liberty Mutual Insurance is offering at its new Legacy West office campus. More than 40% of the sublease listings have lease terms of at least three years.
Despite some companies pausing projects due to the pandemic and the resulting economic meltdown, Texas has more potential corporate relocations and expansions in the pipeline than before COVID-19 hit, according to a top state economic development official. The state’s Economic Development and Tourism office said the office has 196 active relocation or expansion projects in its pipeline right now. The executive director of the office said in a business summit, “We started getting calls from CEO’s on the east coast and west coast saying, ‘We’re shut down. We really like the common sense approach that Governor Abbott and Texas are taking. It seems to make a lot of sense. We’re questioning why we’re located where we are.’”
The state has had several major corporate relocation/expansion announcements this year despite the pandemic, with the biggest being Tesla’s Austin gigafactory that will bring 5,000 workers to the Austin, which would make Tesla the largest tech employer in the city. In another potential deal, video streaming app company TikTok is said to be honing in on DFW or Austin for a U.S. headquarters that would employ 25,000 workers.
Since March 15, the number of DFW office properties that have been flagged on a commercial mortgage-backed securities (CMBS) watchlist has nearly doubled. As of September 15, 44 office properties (up from 24 properties on March 15 just days before a statewide shelter-in-place order went into effect in Texas) were on the watchlist, representing $619 million worth of loans. The CMBS special servicing watchlist is filed monthly by loan servicers on properties with issues that might prevent the owner from staying current on their loan. The largest local office property on the watchlist is The Colonnade in Addison. The three-tower, 1.08 million square foot office complex was last valued at $348 million and was added to the watchlist in May after owner Fortis Property Group requested relief due to COVID-19. The property owes $223 million in mortgage debt. Since 2091, base rent at The Colonnade has decreased by 13.9% and net cash flow has decreased by 46.5%. The property’s loan matures in February 2024.
Regus Corporation, the co-working operator which operates more than a dozen DFW locations, has filed for voluntary Chapter 11 bankruptcy protection. Petitions for relief include Regus locations in Dallas, Addison, Fort Worth and Frisco. Regus has experienced significant challenges during the 2nd and 3rd quarters as a direct result of the COVID-19 pandemic, which has severely disrupted business plans and operations for certain locations within the company’s U.S. portfolio. Talks began between various Regus entities and its landlords to modify leases, but some of these talks reached an impasse.
Co-working giant WeWork is suing KBS Realty, owner of 6900 Dallas Parkway (Legacy Town Center) in Plano, as part of an effort the shared office company is making in multiple markets to obtain millions in funds. WeWork has filed suit against KBS for reportedly refusing to reimburse WeWork almost $2.2 million in tenant improvement funds. KBS reportedly made several payments earlier in the year and then halted payments in June. WeWork signed a 53,776 square foot lease in the building in mid-2019.
The construction firm RPMx Construction, which is currently at 5208 Tennyson Parkway in Plano, has decided to build its own corporate headquarters in McKinney’s Craig Ranch development. RPMx plans to begin construction in early 2021 on a 3-story, 90,000 square foot building to house 750 corporate and field employees upon its completion in early 2022. As part of the decision to relocate its corporate headquarters to McKinney Corporate Center, RPMx received economic incentives for the deal. RPMx’s two most well-known projects completed recently are the Texas Rangers’ Globe Life Field in Arlington and Toyota’s North American headquarters at Legacy West.
Dallas developer KDC is partnering with landowner JBP Properties on the third phase of the Parkside on Legacy project in the Legacy Business Park. KDC, which has developed over 7.8 million square feet of corporate office product in Legacy Business Park and large office projects for JPMorgan Chase, Toyota North America and State Farm, is pitching the 16-acre property to businesses looking for a new office campus in the 200,000 to 500,000 square foot range. Dallas-based architect Corgan has designed the proposed buildings for the site.
Coca-Cola Southwest Beverages, one of the nation’s largest Coca-Cola bottlers, is relocating its Dallas headquarters from 14185 Dallas Parkway (Centura Tower) to Two Lincoln Centre. Coca-Cola is building out its 31,000 square foot space on the 8th floor and plans to move into the tower by the end of the 1st Quarter 2021. Coca-Cola Southwest Beverages distributes Coca-Cola products for Texas, Oklahoma, New Mexico and Arkansas through its 37 sales and distribution centers and 7 bottling plants.
A 159-acre north Frisco land site at the southwest corner of U.S. Highway 380 and the Dallas North Tollway is on the market for sale at an asking price of $60 million or $377,000 per acre. The property owner has owned the site since 2016. The tract of land, which is adjacent to the PGA of America’s new headquarters development, wraps around the existing Cinemark movie theater and is zoned for mixed-use development, which will allow for construction of apartment, townhome, senior living, office, retail and hotel uses.
Florida-based data center company Cyxtera Technologies has placed its 61,826 square foot space at One Addison Circle on the market for sublease. The full 6th and 7th floors are leased through January 31, 2030 and are being marketed at $23.75/NNN. The space comprises 47 private offices, 271 workstations and 20 conference rooms.
New York-based cable television provider Altice has placed its 53,274 square foot space at Granite Park Five on the market for sublease. The full 4th and 5th floors are leased through March 31, 2028 and are being marketed at $42.84/SF, Full Service.
Local developer Cawley Partners is in the planning phase for a 1.5 million square foot office project within The Colony’s Grandscape (Nebraska Furniture Mart) development that will feature a 16-story, 523,200 square foot tower in phase one. The building will have 32,700 square foot floorplates and feature 4:1,000 SF structured parking.
The PGA of America has begun construction on its new headquarters office building in Frisco that will house 150 PGA corporate employees. The 4-story, 106,622 square foot building with feature a glass and limestone exterior with an outdoor terrace overlooking the driving range and one of the golf courses. Construction was delayed due to the pandemic, but is now underway and is scheduled to be completed in early 2022. According to permits, the PGA headquarters, along with a parking garage, is expected to cost $33.2 million. While construction on the golf courses is underway, construction of the Omni hotel has been delayed by one year, with work scheduled to begin in early 2021. The PGA is expected to receive more than $160 million in economic incentives from government entities for the relocation and capital investment.
Plano-based Tyler Technologies, a major U.S. provider of software services to state and local governments, acknowledged that it was hit by a ransomware attack two days after telling clients an unknown intruder had compromised its phone and information technology systems. The company brought in outside IT experts and informed law enforcement, but did not indicate whether it had paid the hacker to have its systems unlocked.
Stonebrook Office 1, the first phase of the Stonebrook Business Park in Frisco along the Dallas North Tollway just north of Stonebrook Parkway, has hit the market for sale. The three-story, 90,000 square foot office building is currently 70% leased, with Taylor Morrison Homes and co-working operator Venture X serving as the anchor tenants. In 2019, lender Money360 made a $21.4 bridge loan on the building, which is owned by California-based Goveia Commercial Real Estate.
Aimbridge Hospitality, North America’s largest independent hotel management firm, is expanding its lease at a yet-to-be completed office building in Plano to house its growing business after acquiring rival Interstate Hotels & Resorts last year. Initially, when Aimbridge decided to relocate its corporate headquarters last year, they signed a lease for 51,471 square feet at 5301 Headquarters Drive. Upon signing the lease, developer Cawley Partners decided to expand the building’s footprint by another 50,000 square feet to 248,662 square feet. Aimbridge then acquired Interstate Hotels, creating a global third-party hotel management company that manages a 1,400-property global portfolio. Not long after the merger was completed, Aimbridge decided to expand their lease by taking the entirety of the building, provided Cawley would sublease its initial space. The five-story building is scheduled to deliver in March 2021 at the corner of Headquarters Drive and Belleview Drive just west of Preston Road.
Plano-based digital banking software firm Alkami Technology is getting a $140 million infusion in a funding round led by Wall Street hedge fund D1 Capital Partners. Fidelity Management, Franklin Templeton and Stockbridge Investors joined D1 in Alkami’s funding round. The new investment follows Alkami hitting several key growth milestones, including nearly 10 million digital banking platform users and $130 million in annual recurring revenue. Since its founding in 2009, Alkami had previously raised $238.5 million from investors. Alkami also announced that they will be acquiring Tennessee-based ACH Alert, which specializes in electronic payments fraud prevention technology. ACH Alert’s 20 employees will continue to work from the company’s Chattanooga office.
Frisco-based financial technology firm Payrix will expand its workforce and push into global markets with new funding from its initial investors. Jerry Jones’ Blue Star Innovation Partners and Providence Strategic Growth are upping their investment in the company to $50 million after initially putting $22 million into the company last year. Payrix, which is headquartered at The Star, intends to use the investment to add to its 55-person workforce and accelerate its global growth. The company’s software lets businesses accept and send digital payments.
Plano-based J.C. Penney is seeking approval from its bankruptcy judge to hire a real estate firm to assist in a cost-effective strategy to downsize its corporate headquarters office at The Campus at Legacy West. J.C. Penney will be weighing subleasing, downsizing and other relocation options in order to trim overhead. Penney currently leases 1.1 million square feet with 1,800 corporate employees at the campus. The company laid off more than 700 employees at the Plano office in September.
The 9-story, 149,238 square foot Addison Tower has been placed on the market for sale. The property is currently 74% leased with a 3.2-year weighted average lease term and features a 3.8/1,000 SF parking ratio within a five-level parking garage. Dallas-based private investor Quadrant Capital Partners, which acquired Addison Tower in 2007 at $90 per square foot, is the seller.
The two-building Heritage One & Two office complex, which is located near the northwest corner of the Dallas North Tollway and LBJ Freeway, has hit the market for sale. Built in the 1970s and 1980s, the 370,000 square foot complex has recently seen more than $17 million in capital improvements. The 10-story and 11-story office towers are 79% leased with a 3.7-year weighted average lease term and Maxim Healthcare Services serving as the anchor tenant (34,502 SF). The property, which has been owned by New England-based private equity investor Brookwood since 2014, includes a vacant tract for future development and offers investors an attractive mark-to-market opportunity with in-place rents 40% below competitive properties.
Dallas-based energy company Denbury, which recently emerged from bankruptcy in September and was able to eliminate $2.1 billion in bond debt and restructure its balance sheet, is in the process of relocating its Plano headquarters, which comprises 300 corporate employees, one and one-half miles away. Denbury will vacate 373,000 square feet at 5320 Legacy Drive (The Campus at Legacy, which is the former EDS campus) and lease 104,841 square feet at 5851 Legacy Circle (Legacy Union One). Legacy Union One, which was originally constructed for Encana Oil & Gas’ headquarters, involved a rare sublease swap with two other tenants. Denbury subleased 78,705 square feet from Prosperity Bank and another 26,136 square feet from Aimbridge Hospitality. Prosperity Bank then subleased 26,253 square feet from Aimbridge on the 4th floor at Legacy Union One that the bank will move into during the 2nd Quarter 2021.
I specialize in representing office tenants in the North Dallas/Plano/Frisco market. Please let me know if I can be of service with your real estate needs (relocation search, expansion, lease renewal negotiations, building/condo purchase, sublease, portfolio management).
Tor Erickson | Senior Vice President
5005 Lyndon B. Johnson Freeway, Suite 800
Dallas, TX 75244