D-FW commercial property sales slump with higher interest rates

North Texas commercial property sales are plunging under the pressure of soaring interest rates and tighter lending standards.

During the first quarter of this year, commercial property investment in Dallas-Fort Worth plummeted by more than 70% from the same period in 2022, according to the latest estimates by MSCI Inc.

About $3.5 billion in investment property sales were tracked in D-FW during the first three months of the year. The drop in D-FW transactions mirrors dramatic decreases in other major U.S. metro areas.

“Across all geographies, deal volume has been challenged by rising mortgage costs and more conservative credit terms for newly issued debt,” said Alexis Maltin, MSCI’s Americas head of real assets research. “Despite recent price declines, MSCI Real Assets research indicates that buyers and sellers still disagree on pricing, with buyers more apt to walk away than to overpay.”

Office building sales and prices have been the hardest hit by the surge in finance costs and tighter credit. Even so, about a half billion in D-FW office sales were recorded in the first quarter.

Almost two-thirds of the investment property transactions in D-FW in the first quarter were apartment purchases.

Even with the slowdown, North Texas ranked second for commercial real estate deals behind Los Angeles’ $6.3 billion first-quarter volume. Atlanta was third with $2.3 billion in transactions.

Both Houston and Austin also were among the top 15 commercial property investment markets in the early months of the year.

In 2022, D-FW led the nation in commercial real estate transactions with more than $42.5 billion in sales. It was the third year in a row that North Texas was the top investment market, according to MSCI.

Nationwide, commercial real estate activity still remains relatively strong by historical standards, Maltin said.

“Compared to the average first quarter in the 10-year period between 2010 and 2019, 10 of the top 25 markets recorded higher deal activity in the current period,” she said. “Dallas was one such market, with investment levels for first quarter 2023 more than 10% higher than its long-term average.”

The cool down in commercial real estate activity is in stark contrast to a D-FW market that shook off the impact of the pandemic. During the last two years, North Texas saw record property purchases with trophy real estate sales, including The Crescent and McKinney & Olive in Uptown and downtown’s Trammell Crow Center skyscraper.

But the cost of borrowing money to finance property deals has more than doubled in the last year as the Federal Reserve hiked interest rates to fight inflation.

“The market as measured by real estate transaction volume is down 60%,” said Mark Gibson, chief executive officer of capital markets for commercial real estate firm Jones Lang LaSalle. “This is what happens when you get a rapid change in the cost of capital. Your interest costs have doubled, which is not helpful.”

Gibson said most major institutional real estate buyers have reset their pricing expectations and don’t expect the market to return to previous levels. But unlike in previous periods of financial strain, he doesn’t anticipate a flood of distressed property sales in the year ahead.

“So far, with the exception of office, you really have had good performance still in virtually every property type,” Gibson said. “The market is a lot healthier. In general, we do not have an oversupply issue as was the case in 2008-2009 along with much higher leverage. I don’t think you are going to see widespread distress, except the bottom 50% of the office inventory.”

Even so, investors are raising billions of dollars to snap up troubled properties that wind up in the hands of lenders or must be sold at a loss to pay debts coming due. Many building owners have low-interest loans that are maturing over the next year or floating-rate financing that has already risen.

Office owners in some coastal metro areas have already surrendered properties to mortgage holders.

Several North Texas companies have recently announced new funds to look for opportunities.

Paul Smith, partner with Dallas-based property investor Velocis, said it’s too early for many potential buyers to be comfortable with values.

“My sense is we will start to see that capital free up when the needle stops moving on interest rates,” Smith said. “It doesn’t have to go down, just stop moving up. Then the equity can underwrite and deals can be priced when it knows where debt can be priced.”

Investors are poised to make building buys when the market shows more stability, Smith said.

“There are massive walls of capital out there available to make core investments,” he said.