Editor’s note: This story is part of our Mixed Signals: 2024 Economic Forecast for Texas, featuring stories about labor, inflation, housing, migration, rising utility costs and other factors propelling the North Texas economy.
Commercial real estate investors and developers are hoping for a decline in interest rates next year to improve prospects for their business.
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commercials real estate properties.
2023 was the worst year for the commercial property industry since the Great Recession, with debt costs doubling and lenders slamming the window on loans for many purchases and new construction.
“The tone in July was pretty optimistic,” said Andrew Alperstein, a real estate partner with PwC. “By the time we got to September it had turned pretty pessimistic.
“I think it’s going to be an interesting early 2024,” Alperstein said. “Putting aside office, the fundamentals for retail, industrial and multifamily real estate are still pretty good.”
Since the pandemic, office leasing in Dallas-Fort Worth and across the country has plunged as fewer workers returned from home than expected.
Vacancy rates in the North Texas office market have soared to near-record levels. And construction — except for a few notable corporate office projects — has all but stopped.
At the same time, new starts of apartments and warehouses have slowed because of the tougher borrowing environment, even though demand for those buildings remains strong.
Commercial building starts in D-FW were down about 17% in the first half of the year. But North Texas was still second in the country for new construction behind only New York City.
The D-FW area led the country in commercial property sales during the first nine months of 2023, even with a more than 60% decline in purchases from 2022.
Alperstein said many investors are waiting for a sign interest rates are moderating before getting back in the buying market.
“Once we start to see activity it could accelerate quickly because folks won’t want to miss out” on potential bargains, he said. “Folks look at 2024 and say they think we are going to see some deals.
“There is plenty of capital available. They are sitting waiting patiently ready to go.”
John Goff, Crescent Real Estate’s chairman, is hoping the commercial property market will rebound quicker than in previous down cycles.
“It’s going to be relatively short-lived with the exception of office,” Goff said. “Office has a lot of things to work through.
“We’ve got some interesting deals in the hopper,” he said. “We are not stealing them like we were in the ’90s,” following the savings and loan and banking sector collapse. “But we can buy full buildings at interesting pricing.”
The biggest price declines so far have been for D-FW office buildings.
“We expect asset prices to continue to slide into 2024 due to repricing due to the fastest rate hike in 40 years,” said Bill Kitchens, director of market analytics at CoStar Group. “Office assets will lead price declines in Dallas-Fort Worth.
“We expect pricing to be down 13% from today to the end of 2024,” he said. “From peak pricing in 2022 to the expected trough, we expect pricing to be down 24%.”
Commercial real estate execs are optimistic that the U.S. economy will avoid a recession in 2024 and that the Federal Reserve will begin to lower interest rates from their highest level in almost two decades.
“Property prices are gradually declining and we believe this process won’t complete and transaction activity won’t rebound materially until investors are confident that interest rates have peaked and credit becomes readily available.” Bob Sulentic, CEO of Dallas-based CBRE Group, said in his most recent conference call with investors. “We now believe this rebound is unlikely to occur until the second half of next year at the earliest.
“And we do think prices are going to come down a bit more, maybe as much as 10%.”
Sulentic said he doesn’t expect commercial property borrowing costs to come down quickly, even if the Fed backs off interest rate pressures.
“It’s going to take longer for debt, in particular, to become available for commercial real estate transactions,” he said. “And as a result, transactions are not going to return until the back half of next year, where we thought they were going to return late this year, early next year.”