Archives for January 2024

What will the commercial real estate market look like in 2024? Real estate leaders expect it to be different from the past two years.

In 2022 and 2023, the commercial real estate market felt the impact of higher interest rates, inflation and energy issues related to conflicts around the globe. With interest rates stabilized, inflation fears subsiding and the impacts of various conflicts abating, 2024 looks a little brighter, according to several commercial real estate leaders.

That’s particularly true in Fort Worth, where the downtown office market has fared better than in most cities, not just nationally but around the state as well, according to Todd Burnette, managing director at JLL in Fort Worth.

“People that are not in the real estate business think that we can’t give office space away, but that’s really not accurate in Fort Worth,” he said.

Leasing is down and the number of companies looking for space is down, but the office market remains tight. Downtown Fort Worth ended the year with a 12.3% vacancy rate, according to an end-of-year report from JLL.

“When you compare that with Dallas, San Antonio, Austin and Houston, where downtown office vacancy ranges from 21% to 35%, it looks pretty good,” Burnette said.

In fact, companies looking for contiguous space downtown may be out of luck.

“If a company needs a full floor in downtown Fort Worth, there are only 11 available, which is not very many at all,” he said.

Companies are continuing to make a flight to quality and so Class A space is disappearing fast, Burnette said. In the Class B market, many buildings are being repurposed as either hotels or residential projects.

“You saw that with several of the former XTO buildings downtown, and there are several residential conversion projects that will begin this year,” he said.

There are also new residential projects being built from the ground up in downtown Fort Worth, such as the 27-story Deco 969 project, expected to open soon.

As a result of this tighter office market, rents are actually increasing. JLL projects that the current Fort Worth office rent of $30.58 per square foot will increase in 2024.

“Landlords realize there are not a lot of options out there,” he said.

Burnette said companies are continuing to push for a return-to-office and in many cases it is working, he said.

Office-using employment in Fort Worth peaked this year in October at 260,500 jobs, an increase of 5.6% from the prior year, according to JLL. Companies continue to seek more amenities to attract workers back to the office, Burnette said.

The West 7th/Cultural District corridor will continue to see increased demand in the next year, with the Crescent office project leading the way, he said.

“The Crescent was 90% leased before it opened,” he said.

New projects are set to begin taking shape in the West 7th/Cultural District area in 2024, including two projects from Goldenrod. Nearby, a mixed-use development is expected to begin at the former location of the Fort Worth ISD headquarters site at University Drive and White Settlement Road.

The Dallas-Fort Worth area was a leader in the industrial real estate market with 41.4 million square feet of industrial projects currently under development, according to an industrial report from CommercialEdge. 

Jon Pharris, president of CapRock Partners, a developer of industrial properties that has opened a Fort Worth office, said they expect 2024 to be a big year for industrial development.

“This may be the year institutional investors return to investing in quality industrial properties as interest rates stabilize or even go lower,” he said.

Additionally, even as other areas of real estate, such as retail and office have been reacting to changes in their markets, industrial space has continued to see growth.

“It’s one of the only asset classes to experience rental rate growth pretty much across the country,” he said.

Pharris is particularly bullish on Texas and Dallas-Fort Worth in particular.

“Because of all these corporate relocations that are happening, the jobs that are being brought here and that ultimately impacts the industrial market,” he said.

The “reshoring” or “near-shoring” of manufacturing is also making an impact on the industrial market here.

“We see that continuing to be strong here,” he said. “That doesn’t seem to be a trend that is going away.”

Pharris said the pandemic emphasized to businesses the importance of keeping their supply chain partners as close as possible to their business operations.

“It really demonstrated the importance of having that industrial base that you can rely on,” he said. “You can’t do much business if you can’t either get or manufacture your products. It was kind of a wake-up call and it really impacted the industrial market.”

Source: “The year ahead: Will commercial real estate see lower interest rates and lower inflation in 2024?”

Doom and office are words that have been known to accompany each other these days. In terms of office properties selling for a loss more frequently, one analysis recently stated, “The doom loop for office properties appears to be a nationwide phenomenon.” And there’s been plenty of speculation that the combination of outmigration and fall in office use, along with the drop in property taxes, could mean a doom loop for cities.

But a new report from Integra Realty Resources suggests that despite serious issues facing the property type, the terms “urban doom loop” and “office apocalypse” bandied about may indicate too dour and certain a future.

“You don’t have to accept that vision to acknowledge that the office sector has taken a serious blow since 2020,” the report said. Office properties have experienced “double-digit negative appreciation returns” over the last year nationwide. Austin, Boston, Chicago, Denver, Houston, Los Angeles, San Francisco, Seattle, and Washington DC have all seen more than 20% declines. Transaction volumes are down 68.6% to 90.3%. Only 20% of markets are in recovery or expansion, while 63% of office markets are in recession and 18% in hyper supply.

But they also argue that two factors might bring a change in the direction office markets have been going. The first is a bet that Covid-19’s affects are now spent and the negative effect that work from home had on tenant occupancy has largely dissipated, while there are many parties — companies, landlords and their lenders, and municipalities — that would benefit from a return to the office. There isn’t an active coalition yet, but “previous crises over the past half-century have shown that downtowns left for dead have rebounded when mutual interests assert themselves collaboratively. All it takes is leadership.”

Second is the chance that additional increased interest rate hikes are probably over. “Cap rates for Class A office properties are nearing 8% on average, with 8.5% the norm for Class B assets,” they said. “Discount rates are above 9% across the property sector. The evident risks for office buildings may already be priced into rates. If so, further downward pressure on value could ease.”

Market rents are rising, they say. There’s some improvement in Class-B properties. “In sum, this is not a time to be a Pollyanna,” they added. “But neither is it a moment for despair.”

Source: “Here’s Some Optimism for Office“