If you just count all the construction cranes, Dallas-Fort Worth is headed into 2023 with a booming commercial real estate market.
But headwinds of higher borrowing costs and the threat of recession are putting the brakes on many property deals going into the new year.
Dramatic interest rate increases during the last six months have changed the dynamics for most commercial property transactions. While North Texas’ real estate is expected to outperform the nation next year, industry leaders say there will be fewer sales and project starts.
“There is a slowdown in the pipeline,” said Byron Carlock, who heads PricewaterhouseCoopers’ U.S. real estate practice. “People are only moving forward with the projects they believe higher rents will support. There is still pretty healthy demand on the street for a lot of product.”
With thousands of people moving to Dallas-Fort Worth and the area seeing near-record employment growth, demand for most types of commercial real estate remains strong.
That’s why the D-FW area was ranked second in the country for property prospects in 2023 in the just-released annual Emerging Trends in Real Estate report. D-FW was highlighted in the report for its ability to draw funding for investment and building and to attract new business.
North Texas led the country in commercial property trades in the first nine months of 2022 with more than $30 billion in properties sold. In mid-December, one of Uptown Dallas’ most successful office and retail properties — the high-rise McKinney & Olive project — changed hands for a record price of nearly $400 million.
D-FW is also this year’s top sales market for apartments and industrial buildings, and it’s second to New York City in commercial construction, with more than $8 billion in project starts in just the first half of 2022.
Several big developments are poised to start in early 2023, including Wells Fargo’s new regional campus in Irving and Goldman Sachs’ new office center just north of downtown Dallas.
Unlike in previous economic slowdowns, there are still billions of investment dollars looking at North Texas for real estate.
“When we think back about all the cycles in commercial real estate, this is unique because we didn’t cause it,” said Mark Gibson, chief executive of Jones Lang LaSalle’s Americas capital markets division. “This is not a supply issue. It’s not necessarily a demand issue right now.
“This is a cost of capital issue,” Gibson said. “There is plenty of capital. You might not like the price at least right now.”
The cost of borrowing has more than doubled since a year ago.
Higher commercial mortgage rates are already causing a decline in property values and causing buyers to hit the pause button on new deals until they can better gauge pricing. Some real estate service firms have begun staff and spending cuts in anticipation of a decline in business next year.
“Whether it’s residential or on the commercial side and the capital markets and lending for new projects, everything is tied to interest rates,” said Jeff Ellerman, vice chairman in the Dallas office of CBRE Group. “We are in territory we have not been through in decades. That is creating a lot of uncertainty. That’s causing people to change plans.”
Ellerman and other top D-FW property execs expect that Texas will weather next year’s economic changes better than most parts of the country. That was the case in the Great Recession, when D-FW bounced back with record commercial real estate activity.
A recession in 2023 isn’t expected to have the impact of the latest downturn.
“It doesn’t feel like 2008 and 2009 for sure,” Ellerman said. “Businesses here are still growing and are doing well. The increase in population we are seeing makes this economy hum whether it’s housing or warehouse space or apartments.”
