Somebody’s got to be first, but that doesn’t make it easy to be that somebody.
Transwestern Development Co. in June 2016 ended a nearly 15-year drought in Richardson by breaking ground on the city’s first speculative office building since the telecommunications bust.
Dubbed 3400 at CityLine, the 310,000-square-foot, five-story structure will seek to catch some overflow from the adjacent CityLine project, which has revolutionized Richardson’s 5.5-mile section of North Central Expressway.
“We felt demand drivers in this submarket supported new construction if located, conceived, and priced properly,” says Carleton Riser, president of Transwestern Development, an arm of the Houston real estate company.
On paper at least, it seems like a sensible gamble.
Office vacancy rates in the Dallas suburb are 15.9 percent, compared with 25.9 percent at the trough of the bust in the third quarter of 2003, according to the Richardson Economic Development Partnership, or REDP.
Some 111,200 people work in Richardson, according to JobsEQ, 85.3 percent more than in 2004 (after the bust bottomed out) and 39 percent more than in 2001, before the carnage began.
Real estate along Central is alluring for companies that need engineering talent, especially businesses in high technology, finance, and insurance.
Transwestern is giving 3400 at CityLine features that talented young professionals increasingly demand, such as amenities both indoor (on-site fitness center and deli) and outdoor (one-acre event lawn, with access to a jogging trail).
“It has floor-to-ceiling glass around the entire exterior, high-quality common area finishes, and options for exterior gatherings and exercise,” Riser says.
Why spec? Why not?
Investors may now be willing to accept risks like speculative real estate because safer vehicles, such as U.S. treasury bonds or a bank’s certificates of deposit, provide abysmal returns.
That’s according to Randall Guttery, director of real estate programs at the Jindal School of Management at the University of Texas at Dallas.
Lenders for real estate projects, in turn, have higher standards than they once did. Borrowers must show preleasing of 50 percent-plus to quality tenants, make larger down payments, and retain a greater portion of cash flow available to make loan payments, Guttery says.
“Being adjacent to CityLine reduces these investors’ risks, all things being equal,” he says.
The insurance giant State Farm in October sold its CityLine towers for about $800 million to a pair of investors, South Korea’s Mirae Asset Global Investments and Transwestern’s investment arm.
State Farm then signed a lengthy leaseback deal on the properties.
“It's no secret that CityLine is a success by nearly every measure, especially taking the State Farm transaction into account,” Guttery says.
With CityLine serving as a catalyst, Richardson real estate could be one of the next markets to “pop” like Frisco and Plano have in recent years, according to Joseph Cahoon, director of the Folsom Institute for Real Estate at the Cox School of Business at Southern Methodist University.
“CityLine really does inspire confidence in the market,” he says. “And most buildings along Central are high quality. It’s much more attractive to me as a growing company when I look at my employee base.”