Background on the Commercial Real Estate Crisis

Foreclosures on commercial properties in Texas have more than doubled in the last year. And it’s not just Texas. It’s happening all over the world.

I want you to go and try and buy a commercial building right now. Get online and start looking at different listings of office buildings that cost hundreds of millions of dollars. Now, see if you can find how much those properties were worth just a few years ago. It will blow your mind. 

Blackstone currently has a building in Manhattan that is marketed at a 50% discount. And the third tallest building in Los Angeles sold for a 45% discount compared to just a decade earlier. 

The United States is feeling it. China is feeling it. The whole world is feeling it. 

But, commercial real estate is, of course, an umbrella term, with different categories and sub-categories. So, while one area may be suffering, it doesn’t mean that commercial real estate as a whole is getting hit. 

What’s suffering the most?

Office buildings. 

Let’s look at Texas.

The challenges facing the commercial real estate sector are particularly acute in major Texas metros like Houston, Dallas, and Austin. These three cities currently have the highest office vacancy rates among the 50 largest metro areas nationwide. 

Despite all of the empty office space, a development frenzy has continued across the state driven by steady population and job growth. Texas has maintained a relentless "build, build, build" mentality even as office utilization craters from the rise of remote work. 

However, some experts warn that Texas may eventually need to hit the brakes on new office construction to allow vacancy rates to recover, illustrating the disconnect between supply and demand in the state's commercial real estate market. 

With no immediate end in sight to the hybrid/remote working trend, the path ahead for Texas' office markets appears increasingly tenuous despite the region's pro-business stance and sunny economic outlook.

What Is Going On In Commercial Real Estate… Specifically?

In the 12 months ending January 2024, Texas had 463 commercial foreclosure filings, ranking 3rd nationally. Just in January 2024, there was a 143% year-over-year increase with 56 filings of properties red-flagged for foreclosure by lenders.

While delinquency rates for commercial mortgage-backed securities are still below crisis levels seen after 2008, Jerome Powell stated there will likely be failures among smaller and medium-sized banks with significant commercial real estate loan exposure as they work through these issues over years.

And this is happening in Dallas as well. Just last year, lenders foreclosed on the Princeton office and One Hanover Park office buildings and last month, a high rise in downtown Dallas was foreclosed. 

What Caused All of This?

So, why is all of this happening? Why are foreclosures up in commercial real estate? 

To answer that question, let’s go back to 2020. 

2020 was an unprecedented year as you likely remember. Interest rates were at historic lows and businesses were booming. 

Then COVID shuts the world down in March, and everyone is stuck in their house... which means they are not working in the office. But businesses were still booming, like I said, providing opportunities to expand, construct, and hire. 

But it turns out, people like working from home. And although office return rates in Texas outperform the US as a whole, 13% of employees work from home full time with 27% working a hybrid model. And while that may not seem like a huge number, remote work is still three to four times as prevalent as it was in 2019, before the COVID lockdown. 

And that means demand for office buildings is waning. Couple that with the rapid expansion of Texas’s (and more specifically, Dallas) population, and you have too many offices with not enough tenants. 

Without enough tenants to pay rent, owners can’t pay their mortgage and hence, default, leading to foreclosure. 

What Is Next For Commercial Real Estate in Texas?

As we’ve mentioned, office buildings are taking a toll because of the rise of WFH. E Commerce is also on the rise, propelled by the pandemic, and this has led to investors taking an increased interest in logistics and manufacturing commercial properties. 

There has also been a rise in mixed-use developments combining commercial and residential zones. 

As office space becomes more of a risk, the conversion of these properties into apartments or data centers is also a popular idea especially as older class b and class c offices become obsolete. 

What Does This Mean for Homebuyers in Texas?

So, what does this mean for you specifically? 

Because office building owners and their lenders are feeling the brunt of this crisis, there is really only one simple solution. Interest rates have to come down. 

The FED has indicated that rate cuts could come later in 2024. 

But what does this mean for renters and buyers? 

Well, don’t worry about being thrown out of your apartment because if the property is foreclosed upon, there are laws in place to make sure you don’t end up homeless. The tenant may stay in the home until their lease expires unless a new owner plans to move into the home. If that is the case, they are given 90 days to vacate. 

But because of the opportunity of offices converting to apartments, more options may become available in city centers.

Now, who knows? If you are an investor or looking to purchase a commercial property, you may be able to find some good deals sprinkled around due to the foreclosures. 

But another thing to think about is how this remote work will also affect urban planning and commercial construction. 

For example, as highly trained employees start taking their higher salaries to the suburbs and no longer have to commute to big city centers, we could see different strategies for providing services, entertainment, and other miscellaneous activities in smaller cities and towns.

As work becomes more decentralized, urban planners see an opportunity to revitalize outer neighborhoods. 

The Living in Dallas Texas Team Can Help

So, there you have it. And if you are working from home or working in the office in Dallas, Texas and looking for a place to live, then make sure you reach out to the Living in Dallas Texas Team. We help people every single day move to the DFW and we would love to help you find your dream home. Make sure you give us a call, shoot us a text, or hop on a zoom so we can help you make that smooth move to Dallas!