New Headquarters of World's Largest Brokerage Stalls Amid Financing, Office Demand Concerns
CBRE's Recent Cost-Cutting Measures Could Change Development Plans and Millions of Dollars in Incentives
By: Candace Carlisle
A rendering of CBRE's proposed 27-story office and retail tower at 2401 McKinney Ave. in Dallas. (Oak Lawn Committee, Pickard Chilton-HKS)
Truluck's, an upscale seafood restaurant known for its oysters and crabs, is staying busy at its two-story McKinney Avenue location in Uptown Dallas on one of the city's most prominent streets. And that may signal trouble for some local commercial real estate.
Bustling activity at the standalone restaurant is a surprise to some property executives because the building was supposed to be demolished by now to make way for a 27-story tower that would serve as the new corporate home of CBRE Group, the world's largest commercial real estate brokerage by revenue. Multiple real estate sources have told CoStar News the proposed project at 2401 McKinney Ave. appears stalled amid rising interest rates and inflation.
The lack of progress is a rare hiccup for a metropolitan area that has been the national leader in luring companies that promise to invest millions of dollars and create thousands of jobs. Goldman Sachs, for example, is expected to employ at least 5,000 workers at its new $500 million office campus in Uptown Dallas that is scheduled to break ground early next year.
"Right now, to get something completed from start to finish, you need a proven development team with a sophisticated lender with more equity than usual and it has to be a strong deal," said Jack Matthews, a developer experienced in working with the city of Dallas on projects and familiar with area development but not affiliated with the CBRE project. "In the past, other deals were getting done, but I think it's going to be two to five years before we get back to those deals. There's a lot of uncertainty in the market right now."
Construction was supposed to being on CBRE's proposed 750,000-square-foot office tower this past February, according to a state permit. Not only has construction not begun, but Truluck's is still taking reservations well into next year. At this rate, the project might not meet the construction timeline spelled out in an incentive agreement between CBRE and the city of Dallas, and that could imperil the brokerage's access to some public funds, real estate professionals say.
Truluck's, a two-story, 14,063-square-foot upscale restaurant in Uptown Dallas, is known for its business lunches. (CoStar)
The brokerage signed a formal agreement with the city of Dallas one year ago for the proposed tower, helping the brokerage secure about $4 million in state and local economic incentives in exchange for meeting certain guidelines. Some of those guidelines include CBRE leasing at least 200,000 square feet for its global headquarters at the new office tower that would be developed by Dallas-based Trammell Crow Co., CBRE's U.S. development arm.
The agreement specifies that the new tower must be constructed by the end of 2024, with CBRE taking occupancy no later than the end of 2025. With a little more than two years to complete a project that general contractors say would take 2 1/2, maybe even three, years to develop, real estate professionals say it seems unlikely CBRE will meet the construction milestones laid out in the incentive package.
CBRE declined to comment to CoStar News on the status of the project. A Trammell Crow spokeswoman also declined to comment. The city of Dallas has not received an update from CBRE on the project since the formal agreement was signed Dec. 1, 2021, a city official told CoStar News.
Even so, the deadline is still years away, and there's no certainty that the firm won't either complete the project on time, seek to negotiate changes to push back deadlines to qualify for the incentives, or forgo the incentives if it should miss the deadline for construction.
A lot has changed in the past year since Dallas-based CBRE signed the agreement, with construction costs escalating and upending capital markets, leading the brokerage to take significant cost-cutting measures, including laying off an unknown number of employees. The firm plans to cut $400 million of spending, much of that tied to trimming its workforce, by mid-2023.
CBRE's proposed new tower had an initial $200 million estimated cost, at least at the time a state permit was filed in July 2021. Trammell Crow first started collecting construction bids for the project in August 2020, according to construction documents obtained by CoStar News at the time.
Trammell Crow told a neighborhood watchdog group in September 2020 it had the tower's financing in place. But fast forward more than two years later, and those construction bids and financing are probably inadequate with what is required to develop the same skyscraper today because of increased construction materials and labor costs, industry professionals say.
If the project is on hold, it may be difficult for CBRE to move forward with its agreed-upon incentives with the city of Dallas, said Larry Hamilton, chairman and CEO of Hamilton Properties Corp. Hamilton, who has worked through incentive agreements with the city on various projects but is not affiliated with the CBRE project, said "the city will require them to get an extension and go through a bunch of hoops. It won't be the simplest thing in the world to get the extension."
The city of Dallas approved a $250,000 economic incentive in exchange for CBRE building and leasing space at the new tower, creating hundreds of jobs and forming internship programs with local colleges and universities. In addition, CBRE was eligible to receive $3.45 million from the Texas Enterprise Fund to invest more than $29 million in its Dallas headquarters and create 460 new jobs. The deal, which also included additional funds for CBRE to expand its operations center in Richardson, Texas, marked the first time the state's deal-closing fund offered economic incentives to a real estate brokerage.
The agreement with the state did not specify the address of where CBRE planned to invest in its Dallas headquarters. CBRE's headquarters has been at 2100 McKinney Ave. in Uptown Dallas since 2020, when it relocated its main corporate home from Los Angeles. The proposed development site of CBRE's new headquarters is located one block north of the brokerage's existing headquarters.
Uptown Dallas is one of the city's most sought-after neighborhoods for office space in proximity to luxury property, such as The Ritz-Carlton hotel and residences, and the occasional streetcar tooting its presence to pedestrians. CBRE rivals including JLL, Cushman & Wakefield, Newmark, and Avison Young have offices in the walkable, upscale neighborhood. McKinney Avenue is known for having the city's priciest office rents per square foot. Uptown has a vacancy rate of 15.6%, slightly lower than the city's average of 17.4%, according to CoStar data.
But Uptown faces headwinds as office tenants reevaluate leases because of work-from-home trends, having an uncertain effect on future office demand. The uncertainty of the future of office space has likely played a role in slowing progress on CBRE's proposed new tower, industry professionals say.
The proposed office and retail tower at 2401 McKinney Ave. is planned about a block away from where CBRE's existing headquarters is located. (CoStar)
CBRE is expected to lease about 25% of the office space at the proposed new tower, leaving about a half-million square feet without a tenant and on the balance sheet at a time when the company is scaling back. Lending has tightened since early September, causing CBRE's sales and loan originations to fall sharply in the third quarter and cloud the brokerage's earnings. CBRE is planning to cut $300 million in costs related to reducing its headcount, the company said in its third-quarter earnings report.
Other major new office projects are underway in Uptown, including two being developed by Dallas-area developers. Granite Properties broke ground on 23Springs in June, and Dallas-based Harwood International broke ground on Harwood No. 14 in 2021.
King White, president and CEO of Dallas-based Site Selection Group, said the uncertain economic climate hitting companies throughout the United States would probably give CBRE some traction in renegotiating its performance-driven economic incentive agreement with the city and state.
The agreement between the city of Dallas and CBRE has a force majeure clause, an “act of God” provision that became a bigger part of real estate negotiations during the pandemic.
Prior to the pandemic, a so-called act of God was typically tied to a war, natural disaster or other uncontrollable circumstances to free landlords or tenants from being held liable to lease terms. It is not clear if the force majeure clause in CBRE's agreement, in which the city is allowed to extend deadlines in certain circumstances, could come into play, possibly as a negotiating tactic with the brokerage's new headquarters.
A view of the construction of 23Springs in Uptown Dallas. (CoStar)
White, who isn't involved in CBRE's economic incentives, said the firm wouldn't be the only company seeking to renegotiate its economic incentive agreement with shifts to remote work causing some issues with compliance with full-time employees often tied to working in a specific place or city in order to receive incentives.
For example, the city of Plano, a suburb north of Dallas, redid its incentive agreement last year to accommodate for JPMorgan's remote work policy. JPMorgan received nearly $5 million in incentives from the city of Plano, where it has a 1.5 million-plus-square-foot campus and 4,500 employees, in an agreement stemming from 2016.
In addition, the rise in construction costs and tight labor conditions have also upended compliance of incentives agreed to years ago, King said.
"The office sector is not very stable right now with financing being difficult to secure," King added. "We are expecting interest rates to remain high and continue to escalate for another year at least."
Meanwhile, national seafood chain Truluck's is still doing business in its existing 14,063-square-foot restaurant on McKinney Avenue, where it has operated since 2015. Truluck's was expected to anchor the ground-floor retail portion of CBRE's new office tower once built. An executive for the corporate chain declined to comment on the proposed new tower or if the restaurant has plans to move to an interim location during construction.
"We have no comment at this time out of respect for" the 75 employees who work at the McKinney Avenue location, said Riley Hutton, director of hospitality and managing partner of Truluck's. "We still have a very successful operation that we need to protect, and this location has no shutdown date."