Commercial Real Estate Woes Persist

real estate
Skyscrapers | Image by kody_king

The commercial real estate market may be facing a severe downturn amid rising interest rates, declining property values, and falling tenant demand.

The current combination of cyclical market forces and changes brought on by remote work and e-commerce is unprecedented, per The Wall Street Journal.

As The Dallas Express reported, the first quarter of 2023 saw more than 18% of office space in Dallas-Fort Worth empty. With low demand and high inventory, potential tenants are likely to opt for modernized office campuses.

This is fueling investment into renovation projects to lure tenants in across the region by offering world-class amenities, per The Dallas Express.

The slump in demand for office space was witnessed nationwide earlier this year, with office vacancy rates hitting a historic high of 12.9%, per the WSJ.

The effects of the commercial real estate downturn are multifold.

Cities might be negatively impacted by falling building values, as they depend on property tax dollars.

Texas has some of the highest property taxes in the country, both for commercial lots and personal homes, per The Dallas Express.

Banks and asset managers are at risk, as they are among the largest owners and loan holders of commercial real estate properties.

As The Dallas Express reported, in the Dallas metro alone, there are more than 1,100 commercial property loans backed by nearly $23 billion in commercial mortgage-backed securities that have raised flags among lenders amid looming economic uncertainties.

Nationwide, KBW Research claimed that around 38% of the median U.S. bank’s loan holdings are commercial mortgages, per the WSJ.

Pension funds are also tied up in this sector, as many invested a few years ago when commercial real estate prices had just reached a historical high, quadrupling between late 1993 and mid-2022.

“You literally have trillions of dollars of investment that are suddenly just massively impaired,” Arena Investors Chief Executive Dan Zwirn told the WSJ.

Due in large part to the changes in the way people work and shop, there is no telling whether the commercial real estate sector will bounce back to its former glory.

During previous economic downturns in the 1970s, the early 1990s, and 2008, the commercial real estate market was able to rebound due to a steady stream of workers filling office towers and customers frequenting shops and restaurants.

With the popularity of online shopping and some companies opting to remain remote, the question remains as to how severe the commercial property downturn will ultimately become.

Still, the current commercial property recession may not be as serious as the previous downturns, analysts suggested to the WSJ, which noted that warehouses and data centers have benefited from the recent changes.

Additionally, apartment rental prices are exceeding pre-pandemic levels.

As The Dallas Express previously reported, rent in Dallas-Fort Worth is up 21% from the start of the pandemic. This increase has outpaced the national average, where year-over-year rent growth decelerated to 2.6%

It’s possible that rent prices will continue to increase, as both the country’s ongoing housing shortage and the rising costs of homeownership will fuel high rental demand, per the WSJ.

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