High Material Costs
Cause Project Delays

The 1.1-million-square-foot Hall Office Park in a Dallas suburb is only about 10% vacant, but the construction of more space has been delayed by high material costs.

Hall Financial Group, which has built up the office park in Frisco, Texas, over the past seven years, has leased 200,000 square feet of space so far this year. It struck a deal yesterday to lease 39,000 square feet of space and is in discussions to lease another 26,000 square feet at a 120,000-square-foot building at the complex that's slated for completion in a few weeks.

That activity comes even as downtown Dallas grapples with a 32% office vacancy rate and the Dallas suburban markets face a 25% vacancy rate.

Given all the leasing activity, Craig Hall, chairman of the company that bears his name, had plans to start construction on two more office buildings at the park. But construction has been delayed by the current high prices of steel and cement.

Mr. Hall says the two buildings -- totaling more than 270,000 square feet of office space -- would cost $20 a square foot more to build than the last office building Hall Financial broke ground on nearly a year ago. The higher construction costs would mean Hall Financial would have to charge tenants about $3 a square foot more a year in rent in the two buildings if they were built now.

While leasing activity has been somewhat brisk at Hall Office Park, "we're not convinced we can get that [rental rate] in this market," says Mr. Hall. The average rental rate in the area is about $23 a square foot, according to Colliers International Inc.

Mr. Hall plans on getting another round of construction bids in about a month in hopes that the price of steel and cement will drop enough "to make a difference."

New Fund

Real-estate developer J. Brian O'Neill and three former fund managers at Prudential Real Estate Investors have teamed up to start a new firm and investment fund.

Arsenal Real Estate Funds LLC will focus on buying obsolete manufacturing or retail facilities, properties in bankruptcy, brownfield sites and other problem properties in the Northeast, California and Florida on which to build for-sale and for-rent residential units.

Arsenal, based in Morristown, N.J., is in the process of raising $350 million, which it plans to leverage to invest as much as $1.4 billion in acquiring sites and redeveloping them, says John Maurer, a partner in the new investment firm and a former principal at Prudential Real Estate Investors. Arsenal is looking for deals that will generate annual returns in excess of 20% for investors, says Mr. Maurer. The four Arsenal partners will invest $10 million of their own money in the fund.

The fund's first investment will be a joint effort with O'Neill Properties Group, a King of Prussia, Pa., development firm of which Mr. O'Neill is chairman. Last year, O'Neill Properties purchased out of bankruptcy court a vacant textile mill along the Brandywine River in Wilmington, Del., which will be redeveloped into about 1,000 luxury condominiums and some retail space.

Rounding out the Arsenal team are former Prudential fund managers Gary Picone and Joe Margolis.

Outsourcing

Corporations continue to look for savings by farming out their real-estate functions -- such as managing their facilities, leases, construction, and growth and consolidation strategies -- to real-estate services firms.

During the first half of the year, more than 90 corporations have contracted out all or a portion of their real-estate functions, according to a survey of the four top real-estate services firms conducted by Thomas Bogle, a partner at Ernst & Young LLP's real-estate advisory practice.

The four firms -- CB Richard Ellis Group Inc., Cushman & Wakefield Inc., Jones Lang LaSalle Inc. and Trammell Crow Co. -- have each experienced revenue growth of 15% to 30% in such services in the past year.

Of the outsourcing business absorbed by the four firms, 23% came from the financial-services industry, 13% from the technology sector, and 7% from academic institutions.

Mr. Bogle says outsourcing real-estate functions is "more difficult" for some industries, such as pharmaceutical companies, whose manufacturing facilities are regulated by the government, and entertainment companies, which have specialized facilities, such as soundstages or movie studios.

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