Is commercial real estate next?
First came the housing bust. Then financial services, commodities and the job market went south. Now its commercial real estate in trouble overbuilt, overleveraged and on the verge of a shakeout.
The Urban Land Institute, a Washington think tank, says the sector "faces its worst year since the wrenching 1991-92 industry depression."
A recent report says, "Values will drop substantially, foreclosures and delinquency rates will increase sharply, and a limping economy likely will crimp property cash flows."
Other than apartments, experts are forecasting almost no new commercial construction starts this year. Companies are cutting workers, not adding them. Retailers are closing stores and demanding concessions. And lenders and investors are leery of new projects, insisting on higher equity stakes on all of them.
North Texas and Fort Worth, in particular, appear to be less vulnerable than much of the country, and for familiar reasons. Jobs and population continue to grow here, while much of the country is seeing declines in both.
In a forecast of top growth markets by Integra Realty Resources, a commercial real estate consulting company, Dallas-Fort Worth is ranked No. 2 for 2009.
"There are still a lot of positive feelings about Texas," says Ben Loughry, managing partner for Integra. "If things are bad in the real estate business, and you ask investors where they want to go, Texas always ranks high. And Dallas-Fort Worth is one of the best markets in the state."
But theres no dodging reality. Some properties are operating just as they have in the past, and thats no longer good enough. The Overton Centre office complex in southwest Fort Worth is 88 percent leased and says its current on debt payments, yet the property was posted for foreclosure. The owners are trying to get new financing to cover a $25 million note thats due.
Loughry says that financial issues are his biggest concern, because its so difficult to get money today. Thats a new wrinkle in a boom-bust cycle that has dominated commercial real estate in Texas.
"We overbuild and then we catch up, and thats been going on in Dallas-Fort Worth for about 100 years," says Jim Gaines, a regional economist at the Texas A&M Real Estate Center. "Some of the poorest stuff never recovers. But if the project is solid and in a decent location, itll work. It just might take three or four owners before someone can make a profit on it."
Job growth is the single biggest factor that justifies more commercial development, and Gaines worries that the strong job numbers reported last year for Houston and North Texas may be too good to be true. If theyre revised downward, as many expect, property owners are likely to face a much tougher time more akin to the squeeze seen in most other cities.
Four large developments are under way along West Seventh Street near the Cultural District, just west of downtown Fort Worth. Much of the property will come online in 2009, well before the industry is expected to be strong again.
Museum Place, across from the Kimbell, says its taking longer to land tenants because of the weak economy, and retailers are especially nervous. But demand for office space is strong, and a spokeswoman says there are still plans to break ground on the projects next block in about a month.
Loughry is optimistic about the area, because its in a prime spot, between the museums and downtown. He says that Montgomery Plaza has done a good job of generating traffic, but its proving more difficult to sell its high-end housing units. The Omni in Fort Worth is seeing a similar slowdown for its condos.
"The market has to recover or the owners will have to make some adjustments," Loughry says.
Commercial developers dont face the double-digit price cuts that some home builders experienced, he says. But they may have to lower prices, buy down financing or offer other amenities, because a turnaround is not imminent.
The most troubled part of the commercial market? Neighborhood shopping centers where anchors have gone out of business and stores are threatening to relocate unless their lease rates are cut.
Integra projects that the value of retail projects in Fort Worth will fall 10 percent in the next two years, more than double the average decline forecast for the nations metros. Thats partly because Fort Worth had beefed up on retail since 2005, growing much faster than the national average.
A separate analysis by Reis, a real estate research firm, found that Fort Worths vacancy rate in neighborhood shopping centers spiked in the fourth quarter. It rose to 13 percent, thanks to the largest quarterly increase in the nation (up 170 basis points).
The good news is that rents are holding up, says Victor Calanog, Reis director of research. They rose slightly in Fort Worth while the average rent declined a bit for everyone else.
"Its a sinking ship for a bunch of metros," Calanog says, "and even the strongest cities wont be spared."