fbpx

Commercial Real Estate Lenders Are Worried

Commercial Real Estate
Commercial For Lease Sign | Image by Douglas Cliff/Shutterstock

Reports this week suggest that real estate lenders are keeping a very close eye on commercial properties in the Dallas area.

Their concerns lie in more than 1,100 commercial property loans, backed by nearly $23 billion in commercial mortgage-backed securities, a report published on March 23 by Morningstar Credit Information & Analytics LLC showed.

The commercial real estate market in the Dallas metro area has been experiencing turbulence, despite the state having the strongest showing in the country last year, as The Dallas Express previously reported.

Inflation headwinds, decreasing property values, and higher interest rates are all amplifying ongoing economic uncertainty.

The Dallas Express recently reported that this has also affected home equity losses. While the number of “underwater mortgages” hasn’t risen as much as in other parts of the country, the share nonetheless increased to 1.4% in Dallas in Q4 2022.

Commercial properties located in the central business district of Dallas are a major concern, per Morningstar’s report. The area already has a vacancy rate of 31%. If a major tenant chose not to renew its lease, there wouldn’t be enough demand to replace that absence of revenue.

Office buildings appear to be the most vulnerable. The report pointed out data indicating that the local office vacancy rate rose from 18.3% to 22.4% between 2017 and 2022, while the average rent has barely changed at all in that same time frame.

With the onset of remote work during the pandemic, the demand for office space decelerated in the Dallas area and has remained sluggish ever since, per The Dallas Morning News.

According to Morningstar analysts, six office properties — representing 10% overall — are currently on their watchlist, and two office properties worth $100.8 million are with the special servicer.

The most substantial Dallas property it is currently monitoring, financed with a debt of $465 million, is the Crescent complex in Uptown.

The Crescent is a mixed-use development that boasts some of the highest office rents in the region. It is nearly fully leased to a list of reputable financial firms, per the DMN.

Things look less bright for the 2100 Ross office tower located in downtown Dallas, another large property under scrutiny, per the report. The 2100 Ross has over $86 million in loans and its occupancy rate dropped below 60% last November.

Another troublesome property type identified by Morningstar analysts was hotels.

Last year, still suffering pandemic woes, hotels logged a divergence of 41% below issuance underwriting.

Since 2020, a dozen loans — most of them involving hotels and retail properties — with a balance of $295.9 million have been liquidated, incurring $75.3 million in losses, per the report.

As previously reported by The Dallas Express, both Galleria Dallas and the Westin Galleria Hotel were taken over by their mortgage holder last December. MetLife Investment Management held $315 million in loans against Galleria Dallas, dating back to 2014.

Industrial properties seem to have escaped this trend. Rents increased by almost 49% over the last five years, Morningstar analysts noted.

Aaron Jodka, director of research for U.S. capital markets at commercial property firm Colliers International, told the DMN that he wasn’t surprised by the findings of Morningstar’s report. But he urged against jumping to the conclusion that lenders are in some sort of panic.

“The general sentiment in markets like Dallas is one of watching, rather than meaningful concern,” Jodka explained. “There will always be assets that face challenges and, in turn, default. That happens in up markets, though certainly more likely in a down market.”

Support our non-profit journalism

Submit a Comment

Your email address will not be published. Required fields are marked *

Continue reading on the app
Expand article