When CBRE announced in 2020 it was moving its global headquarters from Los Angeles to Dallas, it merely formalized how the company had been operating for the previous eight years. CBRE has a long history in California, but Dallas had been its de facto HQ for a while. The North Texas city was its largest operating center and home to many senior executives, including CEO Bob Sulentic.
CBRE’s HQ move to Dallas was also part of the rising tide of corporate relocations to the Lone Star State. Texas now leads the nation in the number of Fortune 500 firms headquartered there, with as many as 53 such companies calling the state home. Sixty-two companies relocated their HQs to Texas in 2021, and many came from California (25, to be exact). The biggest California defection in terms of media coverage was Tesla, but CBRE’s move the prior year also gained considerable coverage, at least in the real estate world.
CBRE vowed in 2021 to create about 1,000 new North Texas jobs and invest up to $42 million into its Dallas HQ and a new operations center in nearby Richardson. At the time, money was flowing into commercial real estate, and Texas officials were quick to pat themselves on the back. Governor Greg Abbot said CBRE’s decision to invest more heavily in Texas proved his state’s status as “the national model for economic prosperity.” Other officials pointed to the Dallas-Fort Worth region’s explosive commercial real estate market, which had more commercial deals than any major metro area in 2020.
Part of CBRE planting deeper roots in Texas are plans for a new 27-story, 750,000-square-foot office tower in Uptown Dallas with retail on the ground floor that would serve as their corporate HQ. But times have changed since CBRE announced the plans, and high-interest rates and inflation have construction stalled. Construction of the tower was set to commence in February 2022, but the city of Dallas hasn’t received an update on the status. Triumphant statements from Texas officials about the state’s economic superiority have slowed, and CBRE is mum on details about the new HQ. The lack of progress is emblematic of a commercial real estate market that’s suddenly suffering.
Incentives slipping away
An obvious sign the project is behind schedule is that a restaurant called Truluck’s is still standing. The upscale seafood joint is at 2401 McKinney Avenue, where CBRE’s office tower plans to be, and not only is the restaurant open, the owners say the location has no shutdown date yet. CBRE and Trammell Crow, the company’s development arm, have not commented on the delays, but there are several reasons why it’s likely happening.
For one, construction costs have escalated. Materials costs have tempered somewhat recently, but prices for certain products remain volatile, including cement and diesel fuel. The price volatility makes it challenging for contractors to plan out projects. A continuing labor shortage and rising wages are also plaguing contractors. CBRE is facing its own challenges, too. The brokerage laid off an unknown number of employees last fall and plans to cut $400 million in spending by mid-2023, most of which is associated with workforce reductions.
The proposed new CBRE HQ had an estimated price tag of $200 million when the state permit was filed in July 2021, but that number is likely higher now. Trammell Crow first began collecting construction bids in the summer of 2020. The developer said later that it had the project’s financing in place, but a couple of years later, the financing is likely inadequate because of higher materials and labor costs. Projects like this were getting done circa 2020, but not anymore. Some Dallas developers say it may be at least a couple of years before big deals like this can get done again because of the market uncertainty.
The biggest problem with the HQ construction delays is they could jeopardize economic incentives CBRE was expected to receive. CBRE signed a formal agreement with the city of Dallas in 2021 for the project that would help the brokerage earn an estimated $4 million in incentives for meeting specific targets. One target included CBRE leasing at least 200,000 square feet for the global headquarters at the new office tower. The agreement specified that the project must be completed by the end of 2024, and CBRE must take occupancy of the building no later than the end of 2025. It’s highly questionable if CBRE can meet those goals at this point. The construction hasn’t started yet, and it could take two-and-a-half to three years to finish.
The brokerage could negotiate changes and push back the deadlines to qualify for the incentives or possibly forgo the incentives altogether. The uncertain economic conditions could give CBRE some leverage in re-negotiating the incentives with the city and state. For example, the deal with Dallas has a force majeure clause, and these “act of God” provisions have become more common since the pandemic. Before the pandemic, an act of God was usually tied to war, natural disaster, or another circumstance like that to free landlords or tenants from liability in leases.
CBRE could cite the pandemic and challenging economic conditions in the force majeure clause to extend deadlines with the city. Other companies have done this recently, some right in the Dallas area. The city of Plano, a suburb of Dallas, recently re-negotiated an incentive agreement with JPMorgan dating back to 2016 because of the company’s remote work policy. JPMorgan received about $5 million in incentives from Plano, where it has an office campus of 1.5 million square feet and nearly 4,500 employees.
Failure to launch
CBRE’s incentive agreement with Dallas didn’t specify where it planned to build the new HQ. The company’s current headquarters office is at 2100 McKinney Avenue, and the proposed new development is just one block north of that. The neighborhood (Uptown Dallas) is one of the city’s most coveted places for office space. JLL, Newmark, Avison Young, and Cushman & Wakefield all have offices there. McKinney Avenue is known to have the city’s most expensive office rent per square foot.
Dallas maintained its position as one of the best U.S. real estate markets in 2022, but the economic headwinds have affected it like everywhere else. Last year saw a slower pace of corporate headquarter relocations and an increase in flexible office space leasing. Office-to-residential conversions in the Dallas central business district led to the city recording a negative net office absorption rate of 1.9 million square feet last year and a year-over-year increase in total vacancy by 3.5 percent. JLL reports that the construction pipeline has been strong in Dallas, but development is expected to slow because of capital constraints and rising construction costs.
The softening of the office market in Dallas is one reason why CBRE’s planned HQ is failing to launch, but not all projects are being shelved. Wells Fargo’s office campus in the Dallas area broke ground in January 2023, and Goldman Sachs’ three-building office project in Uptown was expected to start in February. Wells Fargo’s 22-acre campus will cost $400 million and will receive $31 million in incentives from the city of Irving. Goldman Sachs’ $480 million office hub is expected to be completed in 2026, housing 5,000 employees. Goldman may receive $18 million in incentives for the project. The Wells Fargo and Goldman Sachs projects seem on track for now, but they could always face the same fate as CBRE’s HQ as the toll of higher interest rates continues.
CBRE appears more than willing to ramp up its presence in North Texas despite the delays in the new HQ construction. The brokerage had more than 3,000 North Texas employees in 2021, a 70 percent increase over the past decade. CBRE is like many companies that have relocated to the Lone Star State recently for its favorable business environment. But even a business landscape as favorable as Texas isn’t immune to the shocks the economy has faced. The fact that the world’s biggest commercial real estate brokerage is facing difficulties building a new corporate headquarters isn’t good news for the industry. It’s emblematic of the struggles many developers are facing now, and it’s a further omen that 2023 could be a lean year for the commercial real estate industry.