When CBRE Group released its latest quarterly financial performance, senior executives at the Dallas-based commercial real estate company had plenty to brag about.
Second-quarter revenue was up more than 20% from a year ago, and the global real estate company had a record $19 billion in its development pipeline.
Despite all the good news, CBRE executives expect business to slow.
“Our baseline assumes we are entering a recession in the fourth quarter, and we have some slowdown in the third quarter,” CBRE Chief Financial Officer Emma Giamartino told financial analysts last week. “Our baseline for next year is that we will be in a mild recession.”
The commercial real estate sector in North Texas is still setting records, but industry leaders are increasingly looking over their shoulders and worrying about a coming downturn.
Even if fears of a recession are exaggerated, the impact of rising borrowing costs is putting downward pressure on the company.
“Some weak signals suggest a modest slowdown as debt is so much more expensive with interest rate increases, and fewer bidders are showing up on some deals,” said PricewaterhouseCoopers partner and leader R. Byron Carlock Jr. national real estate. “The good news is that demand appears to be holding steady despite the business environment being pressured by inflation and talent shortages.”
So far, there are no signs of a downturn in the Dallas-Fort Worth commercial real estate market.
D-FW commercial building starts soared 70% in the first half of 2022. The metro area was second in the nation after New York and had $8.1 billion in housing starts.
The D-FW area was the top US commercial real estate investment market in the country in the first half of the year, with nearly $23 billion in reported sales.
North Texas leads the nation in apartments, hotels, and industrial buildings.
And D-FW has led the country in new office building construction this year, with 3.8 million square feet of office projects launched so far.
Real estate industry veterans hope these trends carry the real estate market through this year and into 2023. But they are watching for signs of a stumbling block.
“We’re lucky to be in Texas because of the growth in employment and relocation activity,” said Gary Carr, vice president of commercial real estate firm Newmark Group. “Everyone thinks Dallas is one of the best markets in the country.”
Carr’s team has handled a number of major D-FW commercial real estate transactions this year and has more transactions pending. “We are very busy with work and we are going to have opportunities to sell properties,” he said.
But Carr acknowledges that higher interest charges affect the investment market. “It’s not equity we’re worried about, it’s really debt,” he said. “We don’t know what the second half of the year will look like.”
Commercial real estate brokers say investors are already adjusting their purchase price expectations to account for higher borrowing costs as the Federal Reserve hikes interest rates to tackle the worst inflation in four decades .
“Trading volume will decline significantly until volatility sets in and the market adjusts to the new pricing paradigm,” said Jonathan Napper, executive managing director of Cushman & Wakefield. “We are still getting deals, they just set different prices.
“There is more pressure on turnover revenue than ever given rising debt servicing costs, and investors in both debt and equity are extremely selective about where where they deploy capital.”
More than half of real estate managers nationwide say rising mortgage costs and weakening economic conditions will negatively affect their business, according to a new poll by New York-based analysts Trepp LLC.
“Unsurprisingly, inflation, higher interest rates and supply chain constraints were the top macro concerns in the survey,” Trepp analysts wrote. “More than half of respondents believe that general economic conditions will negatively impact their business by the end of 2022.”
Still, most commercial real estate executives said they expect the industry to avoid the worst of any recession.
“There is no doubt that the interest rate environment has a significant impact on financing,” said Dallas real estate developer and investor Jonas Woods. “You certainly see lenders becoming more conservative.
“But the fundamentals here are as strong as ever,” Woods said. “The net migration to D-FW is real. I don’t see it slowing down anytime soon.
Woods said the D-FW region has been gaining business after the country’s last two economic downturns.
“If we end up in a national recession, I think you’ll see even more companies decide to move their operations to Dallas given our cost of living advantages and ease of doing business,” he said. he declared. “Dallas could be the best commercial real estate market in the county for the foreseeable future.”
Kip Sowden, chairman and CEO of Dallas-based RREAF Holdings, is counting on Texas to outperform other markets.
“Businesses and individuals continue to move to the area in search of a more affordable cost of living, quality of life and business-friendly environment,” Sowden said. “With the national economy showing volatility in recent months, we expect net migration to only increase as families and businesses continue to move to North Texas.
“The metroplex’s sustained and continued growth should insulate the area’s property values from more macro-economic trends.”