Don't Buy The DFW Market Stability Hype. CRE Is On Shifting Ground

Nine months after the coronavirus shutdown in Dallas-Fort Worth, many market analysts still envision a rosy future where companies and residents running away from high-tax states keep North Texas commercial real estate healthy or even frothy. 

But those predictions, while true in some individual realities, could be glossing over pending financial stress in the commercial and residential real estate markets, experts say. 

"The data points that we have, which are a few very large international investors, [show] they have confidence in the long-term stability of U.S. commercial real estate," Walker & Dunlop Investment Partners President Sam Isaacson told Bisnow in an interview. 

"But they do believe in the short term there is going to be more pain in the broader economy, which is going to impact U.S. commercial real estate," Isaacson added. "We are looking at it more opportunistically, trying to decide when the right time is to deploy aggressively into U.S. commercial real estate." 

Right now, the actions of international investors, many of whom have been major players in DFW over the past decade, suggest they predict more stress in the markets to come, which is why they are holding back on deploying their dry powder, Isaacson said. Those investors have grown concerned about outbreaks of violence in U.S. cities and in leaders' ability to stave off those periods of civil unrest, he said. 

And it isn't just the activity levels of international investors that DFW and the U.S. as a whole should be worried about. 

The DFW real estate economy faces more headwinds in the coming months with the pandemic spiking again — the 22,661 new cases reported in the past seven days in the 33 North Texas counties is the heaviest week since the pandemic began — and worries of a political stalemate in Congress that could make it difficult for tenants, landlords and CRE as an industry to obtain needed economic relief.

"While the metroplex has fared better than other parts of the country, The CARES Act, along with other policies, has provided much-needed assistance, particularly to those in hard-hit service sectors, while helping prop up consumer spending," CoStar Group Director of Market Analytics Paul Hendershot said in a statement to Bisnow. "These actions have served to stabilize the multifamily market as well. While job gains have been made, it is imperative Congress pass another round of stimulus or the recovery is at risk."

Hendershot said DFW faces other global market risks going forward, including a slowdown in global economic activity, particularly in regards to the U.S. and China, both of which were already showing signs of a slowdown in the first quarter before the outbreak.

On the local level, Hendershot also warns of impending state and city government budget shortfalls that could be revealed by next year.

The Federal Reserve Bank of Dallas issued a similar warning, blaming the pandemic for the state comptroller's estimation of a $4.6B budget shortfall in 2020-2021. The report warned of budgetary pressures at the municipal level as well. 

There has been a surge in the number of DFW and Texas home loans backed by the federal government entering into some stage of delinquency in August and September, the Dallas Morning News reported. More than 19% of Federal Housing Administration-backed home loans in DFW were behind in payments in August, the seventh-highest delinquency rate in the U.S. Across all types of home mortgages, 8% of DFW homeowners had missed at least one payment by then, the DMN said.

Another pressure point for DFW markets is softness in the once-booming office market. There has been just shy of 5M SF of negative net absorption in DFW office space year-to-date, CoStar found. It's the first time since 2009 that the market is going to finish at negative net absorption levels, Hendershot said. 

Unemployment also remains a drain on the real estate economy, with the Bureau of Labor Statistics reporting that 488,800 people across three DFW employment markets were unemployed in October, up from 252,000 a year prior. 

The impact of these job losses is not going away, Isaacson said. That's particularly true if Congress is unable to reach a stimulus deal with more unemployment support and rent protections for the multifamily segment. 

"I think what a lot of real estate investors are maybe looking at is what happens next year if there isn't the additional stimulus or it's not as meaningful," Isaacson said. 

Investors are worried a gridlocked Congress will result in the Fed stepping in with lower interest rates and stimulus, a formula that is only temporary, but disruptive long-term when it comes to CRE and home asset values, he said. 

"The longer they are keeping interest rates low, we are continuing to inflate asset values," Isaacson said. "And, it just makes the reset potentially worse, or you end up with a decade of no appreciation or even longer with no appreciation once investors start to realize there is a complete disconnect between the asset value and the [net operating income] that these assets are delivering. That is the one thing we have to be very cautious about is what is the new NOI going forward."