More than 20 properties in the Dallas-Fort Worth area tied to commercial mortgage-backed securities are considered to be financially stressed as property values decline or vacancy rises, reflecting the nationwide fallout from reduced demand.
Notably, six office properties in the region are now on a watch list compiled by Morningstar Credit Information & Analytics, ranging from a high-rise tower in downtown Dallas to a mid-rise building in a suburb known for luring Fortune 500 headquarters. The buildings landed on the watch list at a time when remote work and increased layoffs across the country are diminishing demand for this type of work space.
Morningstar puts a property on the watch list when it could be affected by market conditions, the loans exceed its potential value or if a big tenant makes an exit. The U.S. office market has about 330 million square feet of older space that may be entirely obsolete by the end of the decade, which could further heighten vacancy rates unless it is reinvigorated or repurposed somehow, according to a new analysis by Cushman & Wakefield.
And that could mean the chance for a deal for some investors willing to face the current reduced demand for offices. When the Association of Foreign Investors in Real Estate polled its global members in December and January about 70% of the respondents anticipated “meaningful distressed acquisition opportunities in the next six months.”
At the top of the Morningstar area list, with loans totaling $86.1 million, is a 33-story, 843,728-square-foot office tower at 2100 Ross Ave. in downtown Dallas. Occupancy in the building declined to 60% in September 2022 from 80% in December 2021. The tower recently lost its largest tenant, the brokerage CBRE, which decided to depart after its lease expired in March 2022. The brokerage is expanding elsewhere in the Dallas area.
The 1980s-era tower, owned by Dallas-based private investment firm Dundon Capital Partners, has faced a decline in revenue and net cash flow, Morningstar said.
Those challenges add to the high vacancy rate of 31% in Dallas' central business district, which would make re-leasing the building "challenging if any major tenant fails to renew its lease," Morningstar said. Dundon Capital Partners didn't immediately respond to a request to comment.
Not all commercial properties are struggling. Among property types, global investors in the survey ranked office as the least attractive for U.S. investment, and the most difficult property type when it comes to securing financing. Multifamily and industrial properties, on the other hand, were investor favorites.
Some 94% of the respondents said they planned to increase U.S. multifamily holdings, according to AFIRE, which is made up of 175 institutional investors, pension funds, asset managers and other leading global firms from nearly two dozen countries. The organization's membership roster has a combined worth of roughly $3 trillion in assets under management.
Dallas Watch List
But some multifamily properties can also struggle. Out of the 22 Dallas-area loans on Morningstar's watch list released March 23, 12 of the listings are tied to multifamily properties, while two are connected with hotels and two are backed by retail properties.
After 2100 Ross Ave., the other two largest loans rounding out the top three on Morningstar's watch list are multifamily properties:
- Mercantile Place on Main in downtown Dallas with a loan of nearly $45.3 million and a value of nearly $38.2 million, according to estimates by Morningstar analysts. The 213-unit property is owned by Brookfield, which declined to comment on the loan.
- Vantage at CityView, an assisted living center in Fort Worth, with a loan of $45 million and an estimated value of nearly $42.4 million, according to Morningstar. The property is owned by Focus Healthcare Partners, which didn't immediately return requests to comment.
Morningstar expects "sluggish growth" in the office market in Dallas-Fort Worth primarily because of the increase in remote working, and it sees the number of office properties on its watch list growing. The largest specially serviced Dallas property is Harwood Center, an office building in downtown Dallas that became owned by its lender UBS in November 2021, according to Morningstar. UBS didn't immediately respond to an emailed request to comment.
Harwood Center, which has a current loan of about $81.7 million, has also been dealing with falling occupancy. Morningstar analysts say they have calculated a potential loss of $30.1 million on the entirety of the loan for the 36-story, 734,443-square-foot office tower at 1999 Bryan St. in downtown Dallas.
Walter Bialas, a research director in Avison Young's Dallas office, said high vacancy rates in office properties are weighing heavily on financial fundamentals, such as loans. Bialas is not involved with any of the properties mentioned in Morningstar's report.
"The risk that we have is with the high vacancy and the hybrid-remote work challenge still playing out, losing a large tenant to another building or a major downsizing within the building could change that formula and tip the balance negatively," Bialas told CoStar News.
He added that "although all of us in commercial real estate are tracking that, no one is really sure where it will end up at a macro level and speculating on individual assets is risky at best."