Thursday, December 01, 2005

Downtown Dallas' residential revival, and how it compares to Houston

The Wall Street Journal ran a page one story on Monday on Dallas' attempts to bring more residents downtown (the link should work for nonsubscribers until Dec 4th or so). They have substories about some individual families and developers, but here are the "big picture" excerpts:
Beset with one of the nation's most forlorn downtowns, Dallas is seeking salvation in a radical cure: a plan to convert most of the glass-and-steel business district into an upscale residential neighborhood.

Lots of cities are trying to piggyback on the nation's new taste for condominiums and urban living. Atlanta, Denver, Los Angeles and others have encouraged developers to recycle old downtown buildings into chic residences while continuing to promote themselves as prime office locations. These areas mainly draw childless couples, couples with grown children, gays and wealthy, single professionals. But no city comes close to Dallas in residential zeal. Dallas, a city of 1.2 million, has given out some $160 million in grants and tax abatements with the goal of creating a residential haven for those seeking to escape the hundreds of square miles of sprawl that surround it.

The city's goal is to attract a critical mass of 10,000 downtown residences, which its consultants say will be sufficient to reel in a stable, tax-paying base of neighborhood boutiques and restaurants, ultimately launching a self-propelling economy. The plans don't call for swallowing up downtown's best office towers. But planners hope these buildings, which are still largely filled with office workers, will become islands in a sea of lofts, condominiums, apartments and shops.

Across the country, Americans are embracing urban living, particularly in places where they can live, work and shop all within a few city blocks. Many seek urban excitement in projects that promise clean streets and protection from urban crime. So-called mixed-use development is all the rage. According to real-estate research firms Property & Portfolio Research and Reed Construction Data, 21.6% of all new construction this year will be mixed use, compared with 17.5% in 2002.

One of Dallas's biggest challenges is competition. Just across a freeway from downtown, Ross Perot Jr., son of the computer entrepreneur and former presidential candidate, is building Victory, a $1 billion project of upscale condominiums, apartments and hotels. Even 40 miles up the road, developers are expanding Legacy Town Center, a successful urban project with $300,000 duplexes in the suburb of Plano. Both those rivals are also using the same strategy as Dallas -- set themselves apart by attracting unique shops selling brands and products unavailable almost anywhere else in the region.

If Dallas's gambit fails, its downtown may be consigned to long-term blight, as city residents, already saddled with debt for the current set of incentives, may be reluctant to take on more taxes to try anew. Instead, developers, retailers and homebuyers may turn even more aggressively to Dallas's outlying areas.

Today, the streets of Dallas's 1.3-square-mile downtown are largely deserted apart from homeless people toting backpacks and commuters darting between their cars and their offices. There are almost no stores, and some 20 vacant high-rises. About 160 acres of surface parking lots sit across downtown, many of them covering the ground where buildings once stood.

Signs of an apparent reawakening have buoyed downtown advocates. Cranes carrying out residential conversions dot the skyline. Hard-hatted construction crews interfere with foot and vehicle traffic on almost every street. Developers lured by grants, free rent and long tax holidays have already carved some 2,400 mostly upscale apartments, lofts and condominiums from old downtown offices and hotels, and another 2,040 or so are on the drawing board. Many of the converted buildings are almost full, and sales and rentals are brisk in many of the unfinished towers.

"It's not department stores and big office buildings so much as it is people magnets, walkability, density and diversity that will bring downtown Dallas back," says William Hudnut, an authority on municipal revitalization at the Washington-based Urban Land Institute.

Dallas faces competition from developers who have long been creating a cleaner, more convenient downtown experience throughout Dallas's suburbs. Plano's Legacy Town Center, for example, offers plums that were previously the sole preserve of big cities, such as a walking promenade, ritzy restaurants, cool boutiques and a busy nightlife. Farther north on the very fringes of the Dallas suburbs, the town of Frisco is doing the same thing, even subsidizing rent on Main Street's pizza joint to tide the owner over until a critical mass of people move in.

Against these forces, Dallas's original downtown needs to find another 5,500 or so people seeking a hard-core urban life. The city is pushing ahead, confident that it can. Recently, it agreed to its largest payout ever -- $70 million toward a more than $200 million refurbishment of nine blighted downtown structures by Cleveland-based Forest City Enterprises. The company plans to build about 840 apartments and condominiums.

Housing prices are working in Dallas's favor. While the condo boom has pushed up prices in many cities and raised concerns about a possible bust, the boom has passed Dallas by. A two-bedroom condo can go for about $260,000. Karl Zavitkovsky, director of Dallas's Office of Economic Development, says that downtown Dallas won't be much affected by a market reversal because "you haven't had anything close to a condominium bubble here."

I'm going to have to disagree with that last paragraph about low condo and housing prices working in their favor. As Steve pointed out earlier in this blog, low housing prices create compelling competition for high-rise residential, and low condo prices make it harder for a developer to make a profit on a project. High condo prices stimulate development, not low ones. Witness Miami.

In addition to yesterday's post, I've previously given my own thoughts about downtown office-to-residential conversions in Houston here, and Steve did a comprehensive guest post here on the dynamics playing out downtown. The bottom line is that most of the "easy" residential conversions have been done downtown, but office building owners are holding out for new commercial tenants, and the costs are making the economics uninteresting for new residential buildings. So the good news is that we have a healthier downtown than most cities, but the bad news downside is that that inhibits further residential development. Residential only happens when people basically give up on commercial growth (as they have in Dallas, where the jobs have fled to the northwestern suburban towns).

I personally think there's another factor, though, that I haven't read much about. A big part of high-rise residential living is having a balcony with a view (or, if no balcony, at least the view). That's what people pay for, and it's why higher-up units sell for a whole lot more. But this is hard to get downtown, because there are so many other tall buildings blocking the views. I think this is why you see our condo towers being built in the Museum District, River Oaks, and Uptown - all spaced far enough apart that all four sides of each building get nice views. For commercial tenants, a view is a relatively low priority - so downtown is fine - but for residential ones, I think it's near the top of the list - which is a big strike against downtown. Not sure how to overcome that, other than pursue that niche market that is willing to give up a view for street life, stadiums, and the theater district.


At 8:46 AM, December 02, 2005, Anonymous Anonymous said...

I just want to elaborate on a reference Tory made in his post. It's not just low housing prices that discourage condo construction at the currently high construction costs. In Houston, the lack of zoning has allowed a remarkable proliferation of townhome construction that provides an urban core housing option with greater square footage. Combine those two factors, and it's hard to get top dollar for high-rise condos. In Dallas from what I understand (haven't pulled any statistics on this), you just don't have nearly the same level of townhome construction. Probably not coincidentally, Dallas has zoning, which likely limits opportunities for townhome infill in single family areas.

Several Dallas condominium projects are actually getting very high prices per square foot (for Texas) in trendy locations like Uptown and Turtle Creek.

At 11:28 AM, December 02, 2005, Anonymous Anonymous said...

There are greater issues at hand than just the ones you have mentioned. Houston, Dallas, and Texas for that matter have a limited appetite for high-rise living. There is a demand, but not a large demand. I would put hard money down that Dallas is going to go through tough times soon on high-rise inventory. They have way more than the market is interested in buying. You cannot compare Houston or Dallas to Miami, because they have the ATLANTIC OCEAN as an amenity. We've got cool stuff, but nothing quite that cool. Texas is not New York, or Boston; we're just not that urban. We are becoming more urbanized, but not to that extent. One of the most successful new retail centers in Dallas is the West Village area, which is a live above lifestyle center. The retail did great, the apartments did so-so. You are correct in that Houston's townhome market is much more signficant that Dallas'. Houston does approximately 3 times as many townhomes per year as Dallas. Subsequently, the dirt prices here are higher. I ran a successful townhome division for a large public builder in Dallas, and I'm currently doing the same in Houston, so I'm fairly up to speed with the issues.


At 3:23 PM, December 02, 2005, Blogger Max Concrete said...

Although the core of downtown Dallas has been moribund (and is the focus of the revitalization effort), areas along the periphery of downtown have done well. This is in contrast to Houston, where there really isn't much going on immediately adjacent to downtown (OK, midtown may be an exception).

Uptown/McKinney for the upscale crowd (just north of downtown) is active and the focus of condo construction. Lower Greenville northeast of downtown is still a strong area for the middle-tier crowd. Deep Ellum immediately east of downtown for the alternative crowd has been hurting due to a perception of crime. The gay Oak Lawn area is holding its own, as far as I know.

The district closest to downtown, the West End, has been hurting. It is generally shunned by locals and two bars that had decent patronage closed down recently (Have a Nice Day Cafe, Ron's Tiki bar).

Coming soon is the Victory development just northwest of downtown. There is talk of another new development on the southwest side of downtown if Reunion arena is redeveloped.

So here's my concern: there is a limited demand for all this downtown bar life and entertainment. If a lot of incentives are used to revitalize the core, it may just move activity from strong places like McKinney and Greenville, and those areas could decline. My view is that there already is enough bar/entertainment opportunity around downtown. If you disperse the patrons for this scene among all these venues, then none may really be the happening spot.

My conern is that all these taxpayer-funded incentives are going to downtown's core. They may or may not succeed. In the meantime, currently successful areas (Uptown, Greenville) could suffer, and marginal areas (West End, Deep Ellum) could be hit harder.

At 5:20 PM, December 02, 2005, Anonymous Anonymous said...

I too, wonder if Dallas homebuyers will absorb all of the highrise construction being undertaken. There are only so many highrise afficianados in Houston and Dallas. Where Houston developers will scuttle a project that does not pre-sell well, I suspect Dallas developers are being a bit more aggressive.

And, one must ask, what is wrong with townhome development? It may not create the density that a 30 story condo project does, but a 2500 square foot footprint still makes for a cozy and busy neighborhood. Add in some midrises, which seem to have a more devoted following in Houston, and you have a nice pedestrian environment.

As for Downtown, the east side is Houston's best hope for residential development, allowing for views of the skyline, a park for quality of life, two stadiums within easy walking distance, and a very short cab ride to the arts. As the park takes shape, we'll see if the dreams become a reality.

At 10:32 PM, December 02, 2005, Anonymous Anonymous said...

Not just on this topic, but others in this blog, Houston's commercial downtown has been mischaracterized as rather destitute. As recently as 1999 Houston's downtown Class A vacancy rate was 2%, spurring construction of 4m sq. ft. of office space. While the Enron debacle caused some damage it doesn't negate the long-term need for energy traders to be in Houston. It's health is derived from modest growth in areas inside the loop, and the fact that it is for the most part, the geographic center of the city.

Dallas' downtown has no raison d'etre. It moves daily towards the geographic periphery of the DFW area, making it less convenient and thus a more costly commute. The comments above about low-rise condominium construction also dictate there is very little hope of economic feasibility.

Houston's core development is irritatingly slow. The pattern I have seen is a ripple effect from the near west side. Low land prices, development surges, prices surge, development slows and moves to an adjacent area.

The key to long term downtown health and urban density is to increase the costs of commuting from far flung areas through road tolls, which seems to be happening out of economic necessity. Even adding $2/day 250 days/yr pays for a slightly better mortgage in the city.

An amusing note. The Economist magazine, out of London and NY, listed their top business trip cities. Houston didn't fair great, but we did beat NYC and tied San Francisco. However, the Economist didn't even consider Dallas an international destination.

At 10:54 PM, December 02, 2005, Blogger Tory Gattis said...

Thanks for the heads up on the Economist report, although that is one weird report. Pittsburgh and Cleveland near the top for the US? Dallas is not on the list, but Lexington, Kentucky is? Bizarre. Still, 34 out of 127 is not bad for Houston.

At 10:59 PM, December 02, 2005, Blogger Andrew said...

Since I am currently living in central Florida and I make frequent trips to Miami for business, I have to say that Miami's high and mid rise housing development is much more active than in Houston or Dallas.
But, a concern that I have read in the trade magazines is that Miami is running out of good locations quickly.
So development is some premier areas are already built out. This is a problem that Houston will not have for sometime to come since Downtown and surround areas are still rather empty and blighted.

At 9:46 PM, December 04, 2005, Anonymous Anonymous said...

In response to Redscare, I wasn't criticizing townhomes; I agree that townhomes and the occasional mid-rise can go a long way toward creating good street life in Houston, provided that other actors (retail developers, public agencies, etc.) do their part as well.

Here's a link to a very recent Dallas Business Journal story on the condo craze:

I have also heard from a contact in the condo business in Dallas that there is a feeling that it's only good for another two years or so before demand taps out. Still, as the article indicates, folks are quite surprised at how well it's done so far and how much folks are willing to pay.

Regarding West Village - the last I checked, occupancies in the apartments were quite high (over 95%) and rents were a little above market, but there was a fair amount of tenant turnover. Apparently renters who lived above the restaurants and bars that stay open late didn't realize that these establishments generate NOISE at night, so they move to a quieter unit or to another location. Ah, urban life...

At 12:10 PM, December 05, 2005, Anonymous Anonymous said...

For downtown business development, it is critical that there be apartments available for rent, since people are constantly moving in and out as they are transferred by the national tenants who still have major business offices downtown. Many of these transferees may be from urban areas that actually have transit systems, and thus not have cars to move with them.

Rentals downtown give them a place to park their people for the first 6 months or so, giving the transferees the opportunity to decide where in the larger area they want to live. Up until now, there have simply been no such apartments, so people transferring have been forced to commute from Uptown or further out, meaning they have to have a car and parking expenses (as well as tolls, etc.), which may have made Dallas a less attractive transfer post. If downtown can hang onto a substantial number of the transferred-in, there is hope that the owned market may develop and continue to grow over time.

As the southern part of Dallas County finally builds out, driven by escalating costs in the northern suburbs (and nearby Oak Cliff continues to redevelop), downtown Dallas becomes a more central business location, and just might, over the next ten years, become a popular headquarters location again. At that point, the office building vacancy rate (itself reduced by the conversion of obsolete buildings to residential) will start to fall.

Of course, we have to absorb the vacancies caused by the recent single-use projects approved for the Arts District, one of which will pull a major tenant out of Downtown, and the other out of Uptown.

At 11:38 AM, April 03, 2006, Anonymous Anonymous said...

I'm working on a project in Houston's Hyde Park, but this is the first time I've heard with interest of eastside development. The eastside is rough and tumble, not along the lines of newly developed midtown or near downtown montrose....Are any developers planning work in this area?

At 2:22 PM, April 03, 2006, Blogger Tory Gattis said...

> Are any developers planning work in this area?

Evidently, in fits and starts.

At 11:46 PM, August 08, 2006, Anonymous Anonymous said...

As a resident of downtown Dallas, I can say that I have a keen interest in the success of the revitalisation of the city centre. I know that sales in my building has been quite brisk (SoCo) as well as in the Metropolitan. I am not surprised so much because the prices are quite reasonable. The fast absorption rates in the Victory area. The W and Azure are virtually sold out- How deep is the market for condos in dallas that start at $500/SF? I don't know but they are still building them.


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