Even More Bad News
For Dallas Landlords

For the first time since 2000, businesses in the Dallas-Fort Worth market lassoed more office space than they gave up last year. But that is just about the only bright spot in the market.

The harsh truth is that the vacancy rate in the Dallas area was 26% at the end of last year, the worst in the country, according to Reis Inc., a real-estate research company in New York. What's more, the average annual effective rent in the area last year dropped nearly 23% to $14.58 a square foot from its high of $18.89 in 2000, when the area was humming with demand from telecom tenants. Effective rent is the total rent less operating expenses, concessions to tenants and broker commissions.

There is more bad news in store for Dallas landlords. Many leases signed five years ago are expiring, and if renewed, tenants will be paying a much lower rate. Because of that, "I expect to see more delinquent office loans in Dallas," says Larry Kay, a director at Standard & Poor's Corp.

In a sign of things to come, the bond-rating agency recently downgraded a commercial-mortgage-backed security that includes a loan on four office properties in Dallas owned by RM Crowe Co., a Dallas real-estate firm. The cash flow generated from rents at the four RM Crowe properties has dropped 75% since the loan was securitized in 2000, says Mr. Kay. And the cash flow may fall even further as leases for about 57,500 square feet of the office space expire this year. One of the properties, Midway Atriums, is 55% vacant. R. Maurice Crowe Jr., chief executive officer of the company that bears his name, didn't return phone calls.

Hillside Development

California Gov. Arnold Schwarzenegger declared a state of emergency last week in seven Southern California counties hit by rainstorms that prompted flooding and deadly mudslides. Several homes were "red-tagged" as unsafe, prompting calls for more-stringent regulations governing development on the area's steep hillsides.

But that hasn't stopped people from looking to build on the slopes. Shant Minas plans to go ahead with the 1,650-square-foot home he is building for himself on an 8,000-square-foot hillside lot, a few miles from where two homes were red-tagged last week by officials in Glendale in Los Angeles County. Last year, Mr. Minas, 26 years old, received city approval for his home after agreeing to reduce the size of the building by nearly 30%. His project must also receive approval from a design-review panel.

Mr. Minas, who works as an accountant and project manager at his father's structural-engineering firm, is "not worried" about living in a hillside home. He says the homes that were red-tagged are on a much steeper slope than his lot, which has a 32° incline.

Even before the rainstorms, the Glendale City Council planned to discuss provisions to "fine tune" its hillside ordinance, which was created in 1993 in part to stem the construction of big houses on small, steep lots, says Elaine Wilkerson, Glendale's planning director. Last year, the council reduced the maximum height permitted for a hillside home to 35 feet from 40 feet and reduced the allowable size of a hillside home based on the lot's pitch. The council will likely take up the issue this spring of whether to further reduce height limits to 28 feet and add other restrictions to hillside development, she says.

Better Late Than Never?

High prices for commercial properties in the U.S. are forcing big tax-exempt investors including pension funds, endowments and foundations to boost their investments in real-estate investment trusts. A survey says the investors plan to devote 5.8% of their new funds to REITs, up from a planned 3.3% in 2004. That would boost new capital going to REITs to $2.98 billion from $1.44 billion last year.

They also plan to boost the amount they allocate to commercial property abroad to 8.4% from 3% for similar reasons, according to the survey, conducted by San Francisco-based strategic consulting firm Kingsley Associates and Institutional Real Estate Inc., a Walnut Creek, Calif., publishing and consulting company focused on institutional and private real-estate investors. Meanwhile, they plan to increase slightly the percentage of new capital they devote to actual property in the U.S.

Individual investors already have ridden the REIT rally. The stocks of REITs, companies owning real estate or mortgages that must pay out at least 90% of their taxable income in the form of dividends, have been on a tear since 2000, outperforming the market every year since. They delivered total returns (stock-price appreciation plus dividends) of 32.1% in 2004, down slightly from nearly 37% in 2003.

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