Could this be the most distressed real estate environment we’ve seen in nearly 40 years? Asset manager PGIM estimates a gap of almost $150 billion between the number of loans coming due and availability of new credit in 2024, Bloomberg reported. And an analysis by OakTree reports that US banks are more at risk now than they were in the 2008 crisis if CRE values were to fall by 20%.
Office values have already fallen 24% and multifamily properties saw an 18% decrease between 2022 and the first quarter of 2024 due to rising rates, according to Moody Analytics. Moody expects valuations of all CRE types to fall 10% by the end of 2025, according to its March 2024 report.
But other experts believe that the commercial real estate market has already hit its bottom and will now stabilize and recover heading into the second half of 2024. Last month, commercial real estate values were up 1% year over year. But if vacancy rates continue to rise, we could see values continue to fall until vacancy hits its peak.
Not all investors are being deterred. Private equity firms are ready to take advantage of the distress in the market as 64% of the estimated $400 billion in dry power is set to be deployed in North America, according to Preqin. Also, $26 billion dollars has already been invested in mortgage-backed securities so far in 2024, up 170% compared with all of 2023, reports Bloomberg.
Lastly, regarding rate cuts, the latest news came from the Federal Reserve Chair, Jerome Powell, during his semi-annual testimony to Congress. During his comments, he said that the commercial property sector is likely to be “stressed for years” and, he said quite plainly, that he “would not be sending any signals regarding the timing of any future actions…”
The Dallas-Fort Worth multifamily market is experiencing a period of adjustment, with rent growth currently at -1.2%. Over the past year, 48,500 units have been delivered, leading to a vacancy rate of 10.7%, an increase of 5% since Q3 2021.
Despite the challenges, demand is on the rise. In the first quarter of 2024 alone, 5,100 units were absorbed, contributing to a total of 22,000 units absorbed over the past year.
The current average price of a multifamily unit in DFW is $196,000, with an average vacancy rate of 10.5% at the time of sale and a cap rate of 5.6%. The market has seen $6 billion in sales over the past year, a significant drop from the peak of $21 billion in 2021.
Continued population growth and barriers to homeownership, such as elevated interest rates and low inventory, are expected to drive demand for rentals. CoStar predicts a 1% year-over-year increase in rents by the end of the year and a 3% increase in asking rents by 2025.
Net absorption is anticipated to exceed 8 million square feet for Q2 2024. Despite Dallas-Fort Worth (DFW) having one of the highest vacancy rates among the 20 largest industrial markets at 9.7%, this may be reaching its peak as the influx of new deliveries slows. Asking rent growth stands at 7.6%.
According to CoStar, “Dallas-Fort Worth’s net absorption should outperform most major U.S. markets in the near term. Even though leasing has moderated from peak 2021-22 levels, it remains comfortably above the historic norm. The first quarter of 2024 shows new leasing is up over 20% compared to the first quarter average during the three years before the pandemic.”
The top industrial leases over the past year include:
Properties in the urban core market, as well as bay industrial and flex properties, command the highest leasing rates. New lease rates for properties under 50,000 square feet have increased, ranging between $10 and $12.50 per square foot. However, for larger industrial sites, new deliveries have caused prices to decrease to between $5 and $6.50 per square foot, depending on location and quality.
CoStar predicts that rent growth will accelerate again between 2025 and 2026, as less supply enters the market and vacancy rates retreat closer to the 10-year average of 7.7%.
New deliveries have been highest in the NE Tarrant County area, which has delivered 11,521,000 square feet over the past 12 months. Other areas with significant deliveries include:
Over the past 12 months, industrial sales have totaled approximately $1 billion, down from the peak of $4 billion in late 2022. Buyers comprised 55% private equity investors and 10% foreign investors, including those from Canada, Singapore, and Europe, who view North Texas favorably for investment. The average price per square foot for these sales was $110, with an average cap rate of 7.2% and average vacancy at sale of 16.4%.
In the Dallas-Fort Worth (DFW) market, retail tenants have absorbed 35.7 million square feet while vacating only 25.8 million square feet. This high demand has driven leasing activity downward due to a lack of available space. New construction is unlikely to alleviate this issue significantly, as most of the new spaces have already been pre-leased. Of the spaces leased in the past year, nearly 70% were under 5,000 square feet. The current vacancy rate stands at a low 4.6%, with asking market rents growing at 4.6% year over year.
New construction is highest in Denton and Collin Counties, with developers focusing on population growth in towns like Prosper, Frisco, Allen, and McKinney. DFW leads in new construction with 4.9 million square feet of inventory underway, which is about 1% of the current inventory. The top submarkets for new construction include:
Capital markets have slowed, with just $65 million in sales in the last quarter, according to CoStar. Among these sales, 54% were fully leased properties. The DFW area has seen only $438 million in sales over the past 12 months, marking the lowest figures reported since 2010. Over 60% of these transactions involved private investors. This year, investors have shown a preference for single-tenant triple-net investments, grocery-anchored neighborhood centers, and outdoor power centers. The average sales price over the past year was $2.5 million or $263 per square foot, with an average cap rate of 6.3%. At the time of sale, the vacancy rate was 4.8%.
The Dallas-Fort Worth (DFW) office market is currently experiencing its highest vacancy rate in 20 years, standing at 18.3%, which marks a 25% increase since the end of 2019. Demand for office space is highly dependent on the building’s location and age. Newer buildings, those less than three years old, have seen positive net absorption of 13.5 million square feet. In contrast, older buildings, those ten years or older, have experienced a negative net absorption of 15 million square feet.
Currently, there are 7.6 million square feet of office space under construction in the Uptown/Turtle Creek and Frisco/The Colony areas. The average market rent in DFW is $31.00 per square foot, making it a more attractive option compared to more expensive coastal markets where rents range from $40 to nearly $60 per square foot.
In the past year, transaction volume in the DFW office market was $3.1 billion. This trend is characterized by office-to-residential conversions and end-users capitalizing on favorable deals. Despite high vacancy rates, DFW has ranked among the highest for return-to-office initiatives, although downtown vacancies still hover around 25%.
While office rent growth in Dallas-Fort Worth has slowed to 1.7%, the market still outpaces the national average and Texas peers in Houston and Austin over the past three years. Dallas maintains a competitive advantage with average rents at $31 per square foot, significantly lower than cities like New York or Los Angeles where rents are double that amount.
The highest rents in the DFW area are found in the Turtle Creek/Uptown area, with rents ranging from $60 to $70 per square foot. The Denton County submarket has seen the most significant growth in asking rents over the past 12 months, with a 3.6% increase, followed by Lewisville at 3.5% and Hood County at 3.4%.
The Dallas-Fort Worth (DFW) market is on the brink of significant growth in the hospitality sector, driven by group travel, conferences, and business relocations. Midweek demand is anticipated to return to pre-2019 levels this year.
This past year saw $97 million in hotel investment activity. Notable transactions include:
CMBS Loans: Approximately 40 hotels have maturing CMBS loans this year, with 31 showing signs of potential distress. This could present investment opportunities, especially if interest rates decrease.
The DFW hospitality market is well-positioned for growth, with significant developments and investment opportunities on the horizon.
DFW consistently continues to attract talent and businesses, thereby drawing capital to pursue deals in the city.
Recently, a study identified Dallas as the leading major metro for adding new small business jobs.
According to WFAA, “The index score of 102.62 for DFW showcased robust hiring; the index is scaled to 100, which would represent no year-over-year growth. The reading was 101.51 a year ago, indicating job gains are accelerating in 2024.”
DFW also added 154,000 jobs last year, the most of any metro area in the United States.
Regarding spending, DFW retail sales tax collections climbed 14.8 percent as of March 2024 to $260 million. Sales tax collections were up 15.0 percent in Dallas, 7.9 percent in Fort Worth, and 4.2 percent in Texas in March. Year over year, the metroplex’s retail sales tax collections rose 4.6 percent, and Texas’ collections increased by 4.0 percent, as reported in the Dallas Fed’s DFW Economic Indicators from April 2024.
Population growth remains strong, with a new report showing the population in Forney/Kaufman County, east of Dallas, grew by 51% between 2020 and 2023. Additionally, the population in Prosper (Collin/Denton Counties area) ranked No. 6 nationwide with 38.1% growth between 2020 and 2023. The latest U.S. Census Bureau report indicates that four Collin-County cities are among the 10 fastest-growing in the nation.
Overall, Dallas-Fort Worth remains and will remain attractive to commercial real estate investors as population, jobs, and spending in the area continue to increase at a rapid pace.
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