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The commercial real estate market is facing significant challenges with $1.5 trillion in commercial real estate debt expected to mature by the end of 2025, including nearly $1 trillion coming due in 2024. The breakdown for 2024 loan maturities includes:
Market Conditions and Trends
The market has experienced a substantial freeze starting in the second half of 2023 and persisting into the first half of 2024. Rising interest rates and declining asset values have posed considerable obstacles for commercial real estate owners and investors. According to Green Street’s Commercial Property Price Index (CPPI), nationwide commercial property values have now increased 1% year over year as of June 4, 2024, but are still 21% below their peak in March 2022. GreenStreet’s Co-Head of Strategic Research believes commercial property prices have adjusted to increased interest rates and predicts values to now stabilize.
Impact of Interest Rates and Bank Preparedness
There is significant uncertainty regarding the future impact of high or increasing interest rates and falling property values. Some experts predict severe repercussions, while others believe banks are well-prepared. According to Moody’s Analytics, banks are better capitalized than they were in 2008 and have access to various credit facilities designed to address temporary liquidity issues. The Bank Term Funding Program, for example, could help banks better manage current challenges compared to the 2008-2009 period.
Tightening Lending Standards
A July 2023 report by the Federal Reserve indicated that banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories. Despite this, regional banks have increased lending activity over recent years, holding 38% of loans maturing in 2024, followed by Fannie Mae and Freddie Mac at 21%, life insurance companies at 16%, CMBS at 13%, and REITs at 2% 2.
Regional Banks and Distressed Loans
The primary concern lies with smaller, regional banks, whose exposure to CRE loans is nearly double that of larger banks, accounting for 21.6% of their loan portfolios. MSCI reported that distressed loans reached $86 billion by the end of 2023, with defaults hitting a 14-year high as early as March 2023. The Mortgage Bankers Association noted that commercial mortgage delinquencies increased across the board in the first quarter of 2024. According to Attom Data Solutions, commercial foreclosures in Texas have jumped 129% year over year, making it the state with the fourth highest foreclosures now. And again, between February and March, foreclosures spiked another 31% in Texas. Nationally, foreclosures have risen 117%.
Investment Opportunities and Strategies
Despite the challenging environment, not all investors are shying away from commercial real estate loans. LaSalle Investment Management plans to grow its real estate debt investments by 40% over two years, targeting sectors like distribution, hospitality, and student housing. Investors and private equity firms are betting on commercial real estate prices stabilizing.
Experts anticipate an increase in defaults and distressed property sales towards the end of 2024 and continuing through 2026. Some CRE owners and investors have prepared by accumulating cash reserves. According to Preqin, there is approximately $260 billion in capital or “dry powder” waiting for the right opportunities. A CBRE Investor survey found that opportunistic and core-plus strategies are preferred for 2024.
Future Outlook
The future of the commercial real estate market hinges on several factors, including potential Federal Reserve rate cuts, the flexibility of banks with borrowers, and the resilience of banks if prices continue to fall and interest rates remain high, leading to more defaults. The second half of 2024 and beyond remain uncertain, with market conditions largely dependent on these critical elements.
Investment Landscape
Dallas-Fort Worth remains the most attractive market for investment in the U.S., with a particular focus on the multifamily and industrial sectors. Notably, 60% of investors plan to increase their investments in 2024 compared to 2023, indicating strong confidence in the market’s future.
Driving Factors
Several factors contribute to DFW’s prominence in the commercial real estate sector:
Future Outlook
Given the ongoing population growth, job creation, and corporate expansions, DFW is poised to remain a major hub for commercial real estate investors for the foreseeable future. The market’s resilience and attractiveness ensure that it will continue to be a focal point for both national and international investors looking to capitalize on its dynamic growth.
Job Market and Economic Factors
The DFW commercial real estate market is significantly influenced by the area’s robust job market and favorable economic conditions. With a strong presence of Fortune 500 companies, Dallas-Fort Worth has become a magnet for corporate relocations, capitalizing on the region’s economic opportunities and business-friendly climate. This influx of corporations continually fosters a robust job market, with employment trends often indicating growth across diverse industries.
The metroplex had the highest net employment growth as well in 2023, adding 134,000 jobs. The growth hasn’t slowed down either. The latest numbers reveal that DFW has added an additional 2% more jobs in April 2024 than it did in even April 2023. Education and healthcare services lead this increase, with a growth rate of 18.2% year over year. Furthermore, wages and salaries also increased 3.8% in DFW for the 12-month period ending March 2024.
Population Growth and Migration Patterns
Dallas-Fort Worth leads population growth among all top metro areas, with an average of 418 people moving to the area every single day. This population influx, driven by factors such as job opportunities, relatively affordable living costs, and a strong economy, has a direct impact on the real estate market. The millennial generation, in particular, plays a significant role in this movement, contributing to the population growth and altering the real estate landscape with their preferences for housing and amenities.
Business and Investment Climate
DFW’s commercial real estate market benefits from a pro-business state environment, attracting companies and investors to the region. The area’s strategic investments in infrastructure and community development enhance its attractiveness to new residents and investors alike, further driving growth in the commercial real estate sector.
Moreover, Dallas-Fort Worth’s central location and lack of corporate and personal income taxes make it an appealing long-term investment destination. These factors, combined with the region’s diversified economy, contribute to its ranking as the top market for commercial real estate investment in the United States.
As in other areas, the DFW commercial real estate market is currently dealing with the impact of higher interest rates, tighter lending requirements, and difference of expectations between buyers and sellers. This has caused the market to halt significantly since the second half of 2023 and into the first half of 2024.
Interest Rates
One of the most significant challenges currently facing the DFW commercial real estate market is the impact of interest rate hikes. These hikes have led to increased financing costs, making it more expensive for developers and investors to fund new projects or purchase properties. The rise in interest rates has also shifted investor sentiment, causing some to reassess the risk and return profiles of their investments in commercial real estate.
This reassessment could lead to decreased demand and lower property values still, as higher cap rates may result in reduced property valuations. Worries about the future of interest rates, economic growth, and demand also means worries about investment costs, anticipated rental growth, and price appreciation.Â
Supply Chain Issues
The commercial real estate sector is also grappling with supply chain issues, which have been exacerbated by global economic pressures and conflicts. These disruptions affect the availability and cost of construction materials, leading to delays and increased costs for building projects.
Environmental and Sustainability Concerns
Environmental concerns and the push for sustainability are increasingly influencing commercial real estate decisions. The recent classification of PFAS as hazardous substances requires their consideration in environmental assessments, which can affect property transactions and development plans. Moreover, the construction industry is moving towards using healthier, sustainable building materials, which can change the cost structures and marketability of new commercial properties.
But, while there are challenges, there are also opportunities…
Multifamily Report
Renter demand was up the first quarter of 2024, but an increase in supply still has vacancy rates hovering around 10.5%. In the past year, developers have added about 36,000 units, equivalent to 4.3% of inventory. As a result, rent growth is -1.5%. As properties look to fill units, about 40% are now offering concessions, the most since 2020, reports CoStar. But experts predict that demand will continue to rise in the region and construction will stabilize, which should bring rent growth back to the positive digits by 2025.
Industrial Report
Our previous reports highlighted the significant addition of industrial properties in the Dallas-Fort Worth (DFW) area, which has led to an increase in vacancy rates, approaching nearly 10%. Consequently, this has resulted in rent growth slowing down for seven consecutive quarters, with a potential for further deceleration in the near term.
However, the long-term outlook remains positive. Major new tenants such as Google, BestBuy, Flexport, ITS Logistics, Raytheon, and Assurant are occupying spaces exceeding 300,000 square feet, which should help improve vacancy rates as we move through the rest of 2024. Despite the current challenges, rent growth has still managed to maintain a robust 8.1% year-over-year increase.
CoStar projects that if construction activity continues to slow and net absorption maintains its average pace of the past five years, vacancy rates are expected to revert to pre-pandemic levels within approximately two years. Since January 2024, only 7 million square feet of new space has commenced construction, indicating a clear easing off by developers.
Retail Report
According to CoStar’s latest Retail Market Insights Report, a robust demand for retail space and minimal move-outs have positioned Dallas-Fort Worth (DFW) as the leading market for retail demand in the United States. The region’s retail sector is performing exceptionally well, with a vacancy rate of just 4.5% and a remarkable 5.3% year-over-year rent growth.
Moreover, nearly 70% of newly constructed retail space in DFW is already leased, reflecting strong market confidence and demand. Impressively, the sector has experienced consistent rent growth over the past eight consecutive quarters. If this trend continues, with new spaces being leased as soon as they are built, the sector is expected to maintain its positive trajectory.
DFW’s significant population growth, coupled with a 3.8% increase in wages, further bolsters the retail sector’s outlook, ensuring a steady and prosperous future for the region.
Office Report
The Dallas-Fort Worth (DFW) office market is currently navigating a vacancy rate of 18.3%, as noted in CoStar’s Office Market Insights Report. The available office space in the region has increased by 25% since 2019. However, newer buildings, particularly those closer to amenities, are performing better, with 85% of vacancies found in offices constructed in the early 2000s or earlier.
Over the past year, the deal volume for the office sector reached $3.1 billion, marking the slowest year since 2011. Despite this, significant transactions involve buyers with greater access to equity and groups focused on office-to-residential conversions in downtown Dallas, alongside owner-users looking to purchase buildings at a lower basis.
And on a more positive note, the average rent in DFW stands at $31 per square foot, compared to the national average of $35. This provides the region with a competitive edge in attracting corporate relocations. Additionally, brand-new construction spaces like “The Star”—home to Dr. Pepper Keurig and the Dallas Cowboys practice facility—are already 90% leased, with rates 45% higher than other triple nets in the area, reports CoStar.
In summary, while the DFW office market faces challenges with rising vacancy rates and slower deal volumes, its competitive rental rates and successful leasing of new, amenity-rich buildings highlight its potential for growth and attractiveness.
High Profile Transactions
Amazon has been aggressively expanding its industrial footprint this year. Recently, they signed a lease for 225,000 square feet in Seattle. Additionally, within the first five months of 2024, Amazon secured six leases, each exceeding 1 million square feet, all located in the western half of the United States. Similarly, Google has leased over 1 million square feet of warehouse space in a Dallas-area distribution center to support its data center operations. This shift aligns with Amazon’s strategy of vacating smaller spaces in favor of larger facilities that better accommodate robotic operations.
Impact on the Market
Significant transactions like Amazon’s 1 million square foot lease underscores the attractiveness of the Dallas-Fort Worth industrial market to major companies. Despite the area experiencing record-high deliveries over the past 12 months, these large-scale leases are expected to help reduce vacancy rates in the near term.
Investors who acquired property in 2009 experienced substantial returns by 2013, as the market surged from its lowest point to its peak. Over the past 20 years, commercial real estate has  also delivered an average annual return of 9.5%, outperforming the S&P 500’s average annual return by about 1%. As we progress through the remainder of 2024, our outlook on the commercial real estate market remains optimistic.
Investment Preferences and Sector Performance
Opportunities in Distressed Properties
The current market conditions present unique opportunities to acquire distressed and troubled properties at favorable terms. Savvy investors can leverage these opportunities by strategically investing in these assets, aiming for significant returns through effective redevelopment or repositioning.
By focusing on these areas of opportunity, investors can navigate the commercial real estate market with confidence, potentially achieving substantial returns in the evolving landscape of 2024.
By navigating the challenges and leveraging the emerging opportunities, you can position yourself effectively in the DFW commercial real estate market. Strategic planning and a thorough understanding of both the obstacles and potential rewards are essential for success in this dynamic environment.
Throughout this comprehensive exploration of the commercial real estate market overall and the Dallas-Fort Worth commercial real estate market, we’ve identified the current trends and insights that highlight the market’s dynamic and resilient nature. This analysis has underscored Dallas-Fort Worth’s standing as a vibrant hub for commercial real estate, buoyed by strong investment activity, population growth, and a favorable business climate.
As we look ahead, the prospects for the DFW commercial real estate market remain promising, with significant opportunities for growth and investment across different sectors. If you’re ready to take advantage of the opportunities within this dynamic market, call DFW’s experts at M&D Commercial Group. With careful planning and the right expertise, the potential for rewarding investments in the DFW area continues to hold strong.
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