The battered commercial property business will likely see a rebound later this year.
That’s the forecast from top analysts at Dallas-based CBRE Group, one of the world’s largest commercial real estate firms.
“We expect 2024 will be decidedly different for real estate investors,” Darin Mellott, head of Americas capital markets research for CBRE, which moved its headquarters to Dallas in 2020. “Activity levels should stabilize and begin to recover later in 2024.”
Commercial property investments in the Dallas-Fort Worth area were down by more than 60% through the first nine months of last year. And nationwide commercial real estate sales were more than 50% below 2022 totals.
“We expect the first couple of quarters this year to be sluggish,” Mellott said Wednesday in a conference call. “But we do expect a recovery to begin forming in the second half of the year and that will leave us with investment volumes up 5% year over year. Investors are keen to deploy capital.”
Commercial real estate activity saw dramatic declines in 2023 with higher interest rates, tighter financing requirements and worries about a possible recession.
But recession fears have eased and interest rates are expected to move down this year.
“The overall cost of capital will remain relatively elevated,” said Mellott, who warned lending for commercial properties will still be constrained. “Banks are likely to remain conservative.
“They are wary of losses in commercial real estate,” he said. “We estimate that those losses could total up to $60 billion over the next several years.”
Building owners with loans that come due will continue to face hurdles to obtaining affordable financing. Several Dallas-area commercial properties have recently been threatened with foreclosure as mortgages came due.
“Although we see lenders working with borrowers, we do expect distress to be a story in 2024 – particularly in the troubled office sector, but also to some extent for multifamily,” Mellott said.
Vacancy rates in Dallas-Fort Worth office buildings have risen to record levels since the pandemic as workers have been slow to return to the office.
Jessica Morin, CBRE’s head of Americas office research, said there’s still pain ahead for office owners.
“We still expect overall leasing levels are going to remain below pre-pandemic averages,” Morin said. “And 2024 will be another year of negative absorption.”
But with office building starts sharply lower, Morin said building owners will eventually benefit from lower vacancies at the best, newer buildings.
“The construction pipeline has been at its lowest point in a decade,” she said. “It’s just about half of its pre-pandemic level. The slowdown that we are seeing in new supply is going to facilitate a more competitive market for top tier space.”
The industrial building market is also seeing a slowdown in development.
In North Texas, the volume of total warehouse space under construction has fallen by more than 40% in the last year.
“We’ve seen a huge decline in construction starts due to difficulties in construction financing,” said James Breeze, CBRE’s global head of industrial and logistics research. “The decline in starts is going to cut completions by more than half in 2024.
“That’s going to give some time for the product built in 2023 – especially in cities with robust completions like Dallas, Phoenix, Indianapolis – to absorb some space.”
Breeze said some cities could see an undersupply of industrial space by 2025 if new building starts continue to decline.
The shopping center market in D-FW and nationwide is already short of available retail space.
“Retail space is at an all-time low in availability,” said Brandon Isner, CBRE’s head of Americas retail research. “New deliveries of retail space have been low since the Great Financial Crises, which has allowed demand to organically catch up.”
But even with a lack of retail space, don’t look for developers to make up the shortage.
“All the elements are there to justify new construction,” Isner said. “But construction costs remain restrictive.”
