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Why One Office Building Got a Second Makeover

January 2004
Why One Office Building Got a Second Makeover

RealEstateJournal

These days, converting properties from one use to another is popular in tough real-estate markets.

Take the five-story building in downtown Dallas that is now called Southwest Plaza. The 268,000-square-foot building has undergone more makeovers in the past four years than most buildings get in a lifetime.

During the height of the telecom boom four years ago, a joint venture purchased the office building, which was formerly the home of Southwestern Life Insurance Co., for about $12 million and spent another $16 million converting it into a telecommunications facility. Telecom operator Global Crossing Ltd. leased about 100,000 square feet in the building, but never moved in before filing for Chapter 11 bankruptcy protection in early 2002. Teleglobe, which at the time was a unit of BCE Inc.'s Bell Canada, spent only a few months in the 40,000 square feet it leased in the building before following in Global Crossing's footsteps.

After the ill-fated telecom effort, Brook Partners Inc., an equity investor in the building that also manages the property, decided to shift the building back to office use despite the sluggish office-leasing market. Last year, Beck Group, a design-and-construction firm, moved into Southwest Plaza's top floor.

Now, Dallas-based Brook Partners is transforming the building's first two floors into showroom space for manufacturers and wholesalers of high-end women's and men's contemporary apparel and accessories called the Fashion Industry Gallery. About six months after the $5 million transformation of the building began, 38 tenants that represent about 800 fashion lines have leased the first floor, which is under construction and is expected to open next week for the first of seven annual apparel trade shows planned at the property. John Sughrue, Brook Partners' chief executive, expects the second floor will lease quickly once construction begins, given that there are already 30 companies that are interested in the space.

Converting the building into a hybrid of office and showroom space to generate revenue has "gotten us back in the game," says Mr. Sughrue.

Luckily for Mr. Sughrue and his partners, Dallas is one of five cities in the U.S. -- the others are New York, Los Angeles, Atlanta and Chicago -- where most buyers shop for next season's apparel collections for department stores and fashion boutiques. And Mr. Sughrue's latest effort in downtown Dallas is one of a growing number of projects in which old office buildings in downtown areas are being converted into everything from apartments to hotels to wholesale-showroom space.

Despite the strong demand for the showroom space and the rental rate such space can command, which is a $5 to $6 per square foot premium to office rent, Mr. Sughrue plans on holding out for office tenants for the remaining two vacant floors in the building. He says a financial-services company is interested in leasing the fourth floor of the building. Moreover, when it comes to showroom space, "we want to make sure people are bidding to get into the space, rather than us begging for people to move into the space," he says. Having a full-showroom venue with a waiting list gives the building owner the leverage to pursue the next fashion line "that should be in our building."

Mr. Sughrue's decision to develop showroom space comes nearly eight months after nearly a dozen apparel and accessories wholesalers who were tenants at the International Apparel Mart less than three miles away asked him to make space for their showrooms at Southwest Plaza. The International Apparel Mart is a six-story, 1.8 million-square-foot building, and it's one of five buildings that make up the 6.9 million-square-foot Dallas Market Center, the world's largest complex of wholesale-merchandise showrooms of gifts, lighting, gourmet food, furniture, jewelry, linens, silk flowers and toys, among other goods. The center is about three times the size of the Empire State Building.

About a year ago, the owner of the Dallas Market Center announced a $21 million plan to renovate about one million square feet of space in another building in the complex, the 15-story, 3.1 million-square-foot World Trade Center building, which houses gift-and-home-furnishings showrooms, and consolidate the 600 or so tenants of the International Apparel Mart into the space in March. About two dozen of those tenants have decided to jump to the showroom space at the new Fashion Industry Gallery in Southwest Plaza.

Peter Rauch, Southwest regional sales manager for the Tommy Bahama fashion line, is one of them. He had a 1,200 square-foot showroom at the International Apparel Mart for eight years and says traffic there has significantly diminished in recent years. Mr. Rauch, who is opening a 2,000 square-foot showroom in the Fashion Industry Gallery, says Dallas Market Center "had a monopoly" on showroom space. The competition from a new apparel venue "is positive" for the industry, he says.

Bill Winsor, president and chief executive of the Dallas Market Center, doesn't agree. "Our view of that is industry is stronger if it's together," he says. "The fragmentation is not beneficial." Buyers have "a limited amount of time" to look at merchandise, he says. "For a buyer to not have to leave the building or get on a bus or car to see other merchandise, that's clearly a benefit."

Making the shopping trip for retail buyers more efficient was one of the main reasons the decision was made to consolidate the apparel wholesalers with gift and home furnishings under one roof, Mr. Winsor says. These days, "retailers need to offer a wide breadth of products to be successful," he says. In apparel boutiques, for instance, "you see candles and picture frames and a lot of gift products."

That's what's keeping Brad Hughes, a wholesaler that sells about 40 labels including Tay Unger, Tadashi and Joan Vass USA, at the Dallas Market Center, even though he says that the International Apparel Mart has lost some of its luster in recent years. "The biggest commodity for buyers is time," says Mr. Hughes, who has had an 8,500 square-foot showroom for 12 years at the mart. "Many of our buyers are cross-merchandising their buys. If I can help speed their trip since their travel budgets are getting leaner and leaner" by being near other gift wholesalers, "then that's what I do."

Cynthia O'Connor, a New York-based apparel and accessories wholesaler who helped build the Kate Spade brand, is after the same thing. She has had a 2,000 square-foot showroom in the International Apparel Mart in Dallas to supplement her 6,000 square-foot showroom in New York since 1992, but has decided to make the move downtown to the new fashion gallery in part because of the synergy of being in a more intimate venue with other high-end apparel and accessories wholesalers. "This is a focused group of wholesalers," she says. That focus "will help buyers be more efficient."

-- Ms. Muto is a national real-estate writer for The Wall Street Journal. Her "Bricks & Mortar" column appears each Wednesday exclusively on RealEstateJournal. She is based in the Journal's San Francisco bureau