The Federal Reserve recently announced a significant 50 basis point cut to its benchmark interest rate, surprising many experts who anticipated a smaller 25 basis point reduction. This move, the first of its magnitude since 2008, sets the new target rate between 4.75% and 5%.
Commercial real estate sales peaked in Q4 2021 with a 0.08% federal funds rate. As the Fed raised rates to combat inflation in 2022, multifamily sales declined.Â
Historically, sales grew when rates were below 2.6%. During 2006-2007’s 5%+ rates, sales fell for 10 quarters before recovering. With rates exceeding 5% again in Q2 2023, a similar pattern suggests sales may not rebound until late 2025 or early 2026.
CoStar data shows property prices hit their lowest point 4-5 years after the federal funds rate last exceeded 5%. Prices only began to rise when the Fed started lowering rates again.
Historically, cap rates in real estate began rising about 15 months after the federal funds rate exceeded 5%, based on CoStar data. This upward trend typically lasted two years beyond the rate’s peak.
CoStar data also reveals two trends in distressed sales:
1. Historically: Distressed sales rapidly increased about 3 years after federal funds rates exceeded 2.5%, lasting about 3 years.
2. Recently: The pandemic triggered a faster rise, peaking in 2 years to the highest level since Q3 2011.
The Federal Funds Rate has had the following effect on vacancy rates historically:
Pre-2020, property vacancy rates peaked 3-3.5 years behind federal funds rate peaks and troughs. Post-2020 (during the pandemic era), the federal funds rate dropped to 0.08% in Q2 2020. Office vacancy rates responded more rapidly. They leveled off a year after the rate drop. Then, they rose again within 6 months of the rate increase in Q1 2022.
Short Term Benefits:
Sector-Specific Benefits:
The industrial real estate market in Dallas-Fort Worth is experiencing a unique situation. Current data from CoStar indicates a vacancy rate of 9.5%. Unlike previous periods of high vacancy, the current increase is not due to economic downturns or fluctuations in energy prices. Instead, it’s a result of an abundance of speculative construction.
The buyer profile in the market has undergone a significant transformation:
This shift in investor demographics reflects the evolving dynamics of the Dallas-Fort Worth industrial real estate market, highlighting the impact of economic factors on investment strategies.
The Dallas-Fort Worth (DFW) retail market continues to demonstrate resilience and strength as we move through 2024. The remarkably low 4.8% of inventory (23.3 million square feet) available underscores the robust demand for retail space in the region.
Since 2021, tenant demand has significantly outpaced space relinquishment. Retailers have absorbed 50 million square feet while only vacating 35 million square feet, indicating a net positive absorption of 15 million square feet over the past three years. This trend has intensified competition for well-positioned retail spaces across both suburban and urban areas of the metroplex.
Year-over-year rent growth in the DFW retail market stands at approximately 4.5%, outperforming the national average. Average rents are $24.11 per square foot in the region. Neighborhood and strip centers have been the primary drivers of this growth.
Recent trends show a slight shift in market dynamics. The first half of 2024 saw a 9% year-over-year increase in moveouts, totaling over 6.7 million square feet – the highest since late 2020, according to CoStar. This uptick, coupled with ongoing construction, may lead to rising availability rates in the near term.
Premium rental prices in the region strongly correlate with high-income neighborhoods boasting robust purchasing power. Upscale communities like North Dallas, Uptown, Frisco, and Southlake command average rents ranging from $30 to $45 per square foot, significantly exceeding the market average of $23 per square foot, according to CoStar data.
Current construction activity, while restrained compared to previous cycles, still positions Dallas-Fort Worth at the forefront of national development. Approximately 4.4 million square feet is under construction, representing 0.9% of the market’s total inventory. Denton and Collin Counties account for 65% of ongoing development, while Dallas County comprises 15%.
The retail capital market in the region is diverse, featuring single-tenant triple net investments, grocery-anchored neighborhood centers in high-growth suburban areas, and outdoor power centers anchored by national big-box retailers.
Single-tenant net lease deals, particularly those involving expanding chains like Salad & Go, are popular among private investors, with cap rates in the mid-to-high 5% range in early 2024.
Grocery-anchored neighborhood centers remain attractive to investors, capitalizing on the strong demographic trends in North Texas. This segment of the market continues to draw significant interest from both local and national investment entities.
CoStar’s forecast anticipates a slight pullback in absorption due to slower consumption patterns. However, the construction pipeline remains manageable, which is expected to help maintain balanced vacancy rates. The retail segment is positioned relatively well to weather potential economic headwinds.
Most experts agree that the DFW retail market should remain insulated from any significant downturns.
The region’s strong economic fundamentals, including a booming population and pro-business policies, contribute to its resilience. Its low vacancy rates, steady demand, and strategic expansions by major retailers underscore the market’s enduring appeal and adaptability in the face of evolving economic conditions.
Multifamily demand in Dallas-Fort Worth is rebounding. The region had net absorption of 15,200 units (outpacing pre-pandemic levels) in the first half of 2024. This reflects increased household confidence in lease signing.
Supply/demand imbalance persists with 21,900 new units added in 2024. As a result, the vacancy rate stands at 10.7% (up 110 basis points year-over-year, near 20-year high), according to CoStar data.
The current rent growth is at -1.2% due to heavy supply. However, market rents are also 17% higher than 2020 rents, which has been driven by strong demand.
Fast-growing suburban submarkets driving demand include Frisco/Prosper, Allen/McKinney, North Fort Worth, which account for 1/3 of market demand in the past year. This is a result of population growth in Collin and Denton Counties equating to 50% since 2010.
The 3 Star segment shows the most improvement currently, with net absorption of 1,820 units in first half of 2024. But, the vacancy rate remains high at 11%.
Developers have been pulling back on construction starts, but there were 31,000 units added over the previous year, according to CoStar. Some of the heaviest completions were in Collin and Denton counties, and Fort Worth area. Â Rockwall also added 2,000 units, accounting for 20% inventory growth in one year. As a result, rent growth in Rockwall is down 1.7%.
Higher-end properties have experienced the most decline. Additionally, 40% of properties are now offering concessions.
The vacancy rate is expected to stabilize, then tighten to ~10% in the next year. This will lead rent growth to recover. CoStar is predicting rent growth to be flat by year end, and then increase to 3% in 2025.
The other good news is that Dallas-Fort Worth’s net absorption is expected to outperform most major U.S. markets in near term and is expected to rebound much faster than other supply-heavy markets like Austin and Phoenix, reports CoStar.
Rent Growth in the Dallas-Fort Worth Metroplex is at 1.4% year over year, outpacing the U.S. average of .9%.
However, with a 17.8% vacancy rate, TI allowances have doubled compared to pre-pandemic levels, and concessions may include 1-2 months free rent per year for longer leases.
The newest, high-end buildings are pushing rent thresholds in premier areas (e.g., Uptown/Park Cities). The average market rent is around $31.00 per SF, compared to coastal markets that are at $40 to nearly $60 per SF, making Dallas-Fort Worth more attractive for national/regional corporate users.
There are currently 76.6 million square feet available, and 45% of that vacant space is in buildings built before 1980s. Vacancy is expected to reach nearly 20% by 2026 (the highest since late 1980s S&L crisis), according to CoStar, before then recovering in 2026 and subsequent years.
Challenges continue to be the softening of office-using employment. Additionally, with 40% of pre-pandemic leases still set to expire, vacancy will continue to be an issue.
Advantages still of the DFW metroplex are that rents are at $31 per square foot vs the U.S. average of $36 per square foot.
For the foreseeable and near future, pricing power favors tenants. Rent growth is expected to remain muted for the next year, but a recovery is projected from 2026 onward.
This overview reflects the complex interplay between monetary policy, investor sentiment, and real estate market dynamics, highlighting both opportunities and challenges in the current commercial real estate landscape.
The impact of the Federal Reserve’s actions reverberates through various sectors of the market, influencing everything from construction loans to property valuations and investor behavior.
As the situation continues to evolve, market participants will need to stay attuned to both macroeconomic trends and local market conditions to navigate the changing landscape effectively.
Discover DFW’s 2024 housing market recap and 2025 forecast. Learn about inventory changes, price trends, and expert advice for buyers and sellers in this comprehensive update.
This comprehensive update provides insights into the current state of the office, industrial, retail, and multifamily markets, along with relevant regulatory changes affecting the region.
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