Office Space/R1 Tower: Market Analysis

R1 Tower Office Buliding

DFW METROPLEX

The DFW Metroplex is located in North Central Texas, roughly equidistant from the four largest Metropolitan areas in North America: New York, Los Angeles, Chicago and Mexico City. The Metroplex is served by a vast air and land transportation infrastructure that makes travel quick and easy and is accessible from either coast due to its location in the Central Time Zone. Dallas/Fort Worth is home to more than 48 colleges and universities, contributing to a highly educated workforce. The DFW Metroplex has evolved into a world-class cultural district, offering a wide range of cultural and academic events. With more shopping centers per capita than any other U.S. city, Dallas retail is a major contributor to the city’s economy. The DFW Metroplex has become one of the most economically diverse cities in the world. Growth in trade, manufacturing, telecommunication, medical/biotechnology and travel has broadened its economic base from the traditionally strong oil and gas and financial services industries. The area is home to 17 Fortune 500 public companies, making DFW the economic hub of the Southwest. Dallas, the eighth most populous city in the United States, and Fort Worth, the twenty-seventh most populous city in the United States, comprise the DFW Metroplex, the largest metropolitan area in the south and southwest regions of the United States. Combined, DFW is the 4th largest MSA in the United States.

During the 1980s, Dallas/Ft. Worth became the largest financial and insurance center in the Southwest. The economy is built around diverse industries, including oil and gas, insurance, banking, technology, transportation and retail. The service industry currently comprises 31 percent, the largest segment, of the DFW employment composition, followed by trade (26 percent) and manufacturing (12 percent).

CITY OVERVIEW - ECONOMY

DFW has taken a leading role in the biotechnology and medical fields. Up-start biotechnology companies are attracted to the DFW Metroplex by the area's historically pro-business attitude and concentration of medical facilities. One of the area’s largest healthcare providers, The University of Texas Southwestern, estimates that its expenditures alone create more than $1 billion in annual business for the North Texas economy and support 15,000 jobs in the region. The North American Free Trade Agreement (NAFTA) coupled with a sophisticated transportation infrastructure have added to the area’s stature as a major hub for companies conducting business throughout North America. Trade from the DFW Metroplex to Mexico and Canada has
exceeded $2.5 billion, more than doubling since 1993. Corporations with national and international operations continue to be attracted to the Metroplex by the diverse business culture, pro business government policies and the area's international distribution capabilities.


■ Employment grew 1.9 percent over the past year with the addition of 54,200 jobs,
including 21,000 posts in office-using sectors. h is marks a deceleration from the
prior 12-month period, when overall payrolls rose by 59,500 jobs.

■  The most substantial growth in the first half occurred in the education and health
services, and professional and business services sectors, which added a combined
total of 24,000 jobs. While the former is not included in office-using employment
aggregates, healthcare firms have become a strong source of new space demand.

■  The hard-hit trade, transportation and utilities industry has recovered nearly two-thirds of the jobs lost in the recession. Construction maintains a greater shortfall,
but renewed development is driving job creation in the sector. Government cutbacks, on the other hand, remain a drag on metrowide growth.

■ Outlook: Employment will rise 2.8 percent with the addition of 82,000 jobs,
while office-using sectors will grow 3.3 percent. h e trade, transportation and utilities, education and health services and professional and business services sectors
will lead, though strong energy markets will also  boost job creation.

Rents

■ Year over year, asking rents rose 1.3 percent to $19.54 per foot, while effective rents increased 1.5 percent to $15.22 per square foot. Asking rents fall just 2 percent shy of the previous peak level, though effective rents remain 8.5 percent lower.

■ Class A asking rents advanced 1.2 percent over the past 12 months to $22.22 per square foot. In the Dallas area, assets in the tight Preston Center sub-market posted the strongest growth of 3.3 percent. In Fort Worth, the Southwest and CBD sub-markets recorded the most sizable gains of 1.3 percent.

■ Class B/C rents increased 1.5 percent over the past year to $15.93 per square foot. In Dallas, the Las Colinas sub-market posted the strongest uptick, while, in Fort Worth, the Northeast led growth.

■ Outlook: In 2012, asking rents will rise 1.5 percent to $19.73 per square foot, while effective rents gain 1.6 percent to $15.38 per square foot. Overall, owners will likely need to wait for greater vacancy reductions to regain pricing power.

CITY OVERVIEW - EMPLOYMENT

Local transportation is primarily dependent upon private vehicles. 79% of the population drives alone to work. The principal thoroughfares serving the DFW Metroplex include U.S. Highway 75 (Central Expressway), the Dallas North Tollway, I-635 (LBJ Freeway), Interstate 30, Interstate 35, Highway 190, Loop 12, Highway 183 and Loop 820.


CITY OVERVIEW - TRANSPORTATION

While automotive transportation increases as the Metroplex expands, commute times remain less than those of other major metropolitan areas. Of all DFW commuters, 65 percent travel to work in less than 30 minutes and 13 percent commute to work in less than 10 minutes. The Dallas/Ft. Worth Metroplex is easily accessible from around the world, ranking third in the world for takeoffs and landings, averaging 2,300 flights a day including nonstop service to over 160 cities worldwide. The DFW International Airport is an economic hub for the Metroplex, generating $11.2 billion annually for the North Texas economy and supporting 21,000 area jobs. Additionally, Love Field is the home of Southwest Airlines, the nation’s most profitable airline, serves the area on a regional basis, offering up to 673 flights daily to regional destinations.

SOME KEY BUSINESS FACTORS INCLUDE:

• Internationally-diversified economic and business center.
• Low cost of living according to the Greater Dallas Chamber of Commerce.
• DFW Metroplex ranks as the 5th most affordable area, over 2 million residents.
• A large, highly-educated workforce fueled by local schools and institutions of higher education: 56 percent of the population has had at least some education past 12 years; 27 percent of residents have 16 years or more, which is 5 percent higher than the national average.
• City-wide pro-business attitude.
• Low tax rates; no state income tax.

The DFW Metroplex has a complex rail transportation network to meet increasing commuter requirements in the expanding Metroplex. The Trinity River Express was created in 1991connecting Dallas, the Mid-Cities and Fort Worth. In addition to the Trinity River Express, DART (Dallas Area Rapid Transit) eases traffic throughout Dallas with a light-rail mass transit system. The system connects Dallas' CBD with the Central Expressway, LBJ Freeway, Uptown/Turtle Creek, Richardson/Plano and the Southwest Dallas submarkets. The multi-billion dollar expansion of the DART light rail system will eventually connect Irving, East Dallas, and Carrollton/Farmer's Branch with the existing infrastructure. Light-rail ridership surpassed 12 million passengers in 2003, helping to alleviate traffic for Metroplex commuters. As well, the Metroplex rail system includes shuttle buses from its Mid-Cities terminal to the DFW International Airport.

Dallas/Fort Worth’s office

Dallas/Fort Worth’s office market will post moderate occupancy gains over the next year as new supply falls below historical norms and job creation accelerates. Performance, however, will vary significantly by asset quality and location, as most of the metro’s net absorption can be attributed to large firms. As a result, Class A/B+ assets in desirable sub-markets, such Uptown and Quorum/Bent Tree in Dallas, along with Northwest Fort Worth, stand to outperform. Financial companies, such as American Home Mortgage and Wingspan, accounted for a sizable share of net absorption year to date, while a handful of major healthcare related firms also signed large leases in recent quarters. h e Class B-/C segment of the market, on the other hand, will lag. Many small businesses remain hesitant to hire amid uncertainty — both in terms of the U.S. economy and the potential for higher taxes and business costs stemming from healthcare reform. Mid- to lower-tier properties along I-635 between the North Central Expressway and Stemmons Freeway (I-35) will remain particularly weak due to road construction, which will span four-plus years.

In conclusion R1 Tower would be a good purchase for the current and future office market in East Dallas. With solid tenants and a purchasing price to support it's NOI of $401,183, the financial analysis demonstrates a 13% CAP Rate and an IRR of 17.75%. To add the building's asking price is $60.00, which is below replacement cost.