Dallas tower headed back on block

Real Estate Alert, June 23, 2004

A Dallas office tower that was unsuccessfully shopped in 2000 is back on the block, following a substantial renovation.

The 1.3 million-square-foot building, at 1700 Pacific Avenue, is owned by a joint venture led by Credit Suisse First Boston, via its DLJ Real Estate Capital Partners I fund.

The property is valued at $100 million, or $75/sf. At that price, the buyer's initial annual yield would be 6.6%. But a lead tenant, Bank One, will pay $8 million next summer to terminate its lease. That would hike the average yield to about 8.8% for the first two years.

Broker Trammell Crow is pushing the 49-story property as one that, upon lease stabilization, will provide a double-digit annual yield. At the same time, a buyer could consider the lease-termination fee as a cushion against any difficulty in quickly increasing the occupancy rate, which will fall to just over 50% from 63% when Bank One leaves. The Class-A occupancy rate in downtown Dallas is 81%.

When the building was offered in 2000, the occupancy rate was 87%, with new leases being signed at $18/sf, plus electricity costs. At that time, the building was thought to be worth up to $100/sf, or $134 million.

First Boston and its partner, an affiliate of Atlanta-based Cousins Properties, plowed some $6 million into the building over the past three years, including a lobby renovation and improvements to the 34,000-sf retail concourse. The retail tenant base has been completely overturned, replacing local retailers with credit tenants. Charles Schwab has a pending lease for 10,000 sf, which will bring the retail occupancy to about 90%. Retail leases are being signed at triple-net rents of $17/sf.

The office space is primarily occupied by three companies: law firms Thompson & Knight (188,000 sf through 2009) and Akin Gump (134,000 sf through 2013), as well as Bank One, which occupies 175,000 through next June. Two office leases are pending, encompassing 30,000 sf.

The building, which is one block from a Dallas Area Rapid Transit station, also may benefit from efforts to redevelop the city's Main Street Corridor through retail and residential conversions. One example is the $40 million conversion of one of the three office buildings in the 741,000-sf Republic Center into 225 luxury apartments. The 36-story building is located at 300 North Ervay Street, across from 1700 Pacific. The conversion is scheduled to be completed by next fall by Gables Residential of Boca Raton, Fla., and Four Point Star of New York.

Canadian player Cadillac Fairview developed the building at 1700 Pacific in 1983. First Boston and local player Faison-Stone acquired the note on the property in late 1996 from Teachers Insurance for $90 million, after Teachers foreclosed on a joint venture backed by Prentiss Properties. Cousins Properties acquired Faison-Stone in stages from 1999 to 2001, buying out stakes held by advisory firm Faison Associates and two other players.

The owners tried to market the property in 2000, via the Jones Lang LaSalle team headed by Jack Minter. Late that year, RS Investment Management of San Francisco agreed to pay about $121 million, or $90/sf, for the tower, before falling out of contract in early 2001. Then Cousins sought to buy out the stake held by the DLI fund in a deal that valued the building at $114 million, or $85/sf. But that deal also fell apart. Much of Minter's team resurfaced at Trammell Crow last November. Among them was John Alvarad0, who is handling the current listing. For more information, call him at 214979-6131.