Both banks and alternative lenders increasingly see the Dallas/Fort Worth market as an attractive place to deploy capital in the commercial real estate sector and remain generally bullish on the region, said panelists speaking at a ULI North Texas event focused on capital markets.
When national investors came into Dallas in the past, they often looked at the region as a momentum play and made an effort to get in and out quickly, said Paul Geyer, principal with PGIM Real Estate Finance, a commercial lender with $88 billion in assets under management.
“They used to come in, put the lipstick on it, and sell it,” he says. “Now, you are finding the money is a lot stickier,” he says. “Investors are saying, ‘I’m going to buy this office building and put another $60 million into it and turn it into a first-class bright and shiny property.’ ”
Dallas/Fort Worth International Airport has proved to be a big economic engine for the region, attracting job and population growth along with large-scale investors who want to be here for the long term, Geyer said. DFW Airport has a $37 billion annual impact on north Texas, according to the Perryman Group, an economic and financial analysis firm.
Jamie Fox, with Bank of America Merrill Lynch, says Dallas has an influx of companies and people relocating to the metro area from other states. Most recently, in one of the biggest economic coups in the United States, north Texas attracted Toyota’s North American headquarters, which will open midyear and could eventually employ as many as 6,500 people.
Despite the strengths, he suggested the real estate cycle may be turning from a green light to a yellow light.
“For us, we like DFW, we just need to be cautious when we look at a transaction to make sure it is the right deal,” he said. Fox oversees Bank of America’s Southwest commercial real estate market, which lends to real estate development companies, real estate investment trusts (REITs), and others.
The third panelist, Catherine Tatlock, managing director at Prime Finance’s Chicago office, says that Prime views DFW “very favorably.” Prime originates mortgage, mezzanine, and preferred-equity financing and acquires performing, subperforming, and distressed debt.
“We are drawn to the very diverse economy, the relatively low cost of living, and the [low] cost of doing business,” Tatlock said. She said Prime Finance has done a significant number of deals here recently. “Dallas will continue to be a place that we are very interested in,” she said.
Tatlock said that her firm is being more cautious with hotels, and that they are very busy in the “value-add” space.
Geyer said his firm likes grocery-anchored retail and premier regional malls that are being repositioned as destination attractions. He said the best stores in the best locations will continue to see foot traffic, but retail centers will need to add a service component with things such as spas, massage centers, and medical offices in order to avoid being replaced by shoppers simply going to the internet.
Interest Rate Uncertainty
Rising short-term interest rates could have an impact on business going forward, panelists said, but noted that they have not seen much impact yet.
“Rising interest rates [are] a sign the economy is doing well and, right now, [they have not] had too much of an impact on our business,” Tatlock said. Rising interest rates become problematic when the yield curve becomes flat or inverted, but that has not happened, she said.
Fox said short-term value-add plays are not seeking interest-rate protection at this time from Bank of America Merrill Lynch but said that it is conceivable that longer-hold deals of five years or more may begin to do so. Much of it depends on an investor’s strategy in buying and trading an asset, he said.
The rise in short-term interest rates may result in some added scrutiny from lenders, Geyer said. It may also affect what buyers are willing to pay. “I think in some ways we’ve been spoiled on the short-term rates for a while,” he said. The long-term low-interest-rate environment has “propped up valuations,” he said. “The question [of rising rates] is how much it takes our foot off the gas.”
Future Real Estate Outlook
While the commercial real estate market still looks strong and healthy, participants noted some cautious behavior on the part of market participants due to post-election uncertainty as the sector waits to see what will happen with financial deregulation and other federal regulation coming out of the new Trump administration.
“Someone said to me, and I think it fits: ‘It feels like we are in the seventh-inning stretch, but possibly it’s game one of a doubleheader,’ ” Tatlock said. “This is certainly unprecedented, the run that we’ve had. Cap rates are at historically low levels and there’s a lot of pressure on the purchase price because people are being cautious. We’ve seen buyers and sellers being very fickle because there is uncertainty,” she said. “I feel like the fundamentals are sound and we still have some runway.”
Fox said that capital flows coming into commercial real estate remain strong, with foreign investors still very bullish on the U.S. market. Geyer, however, said it could be time to chuck the boom/bust cycle that people always expect in commercial real estate.
“What we are seeing this time is a market with a lot less volatility,” Geyer said. The reasons are varied, including the interest rate environment and private-equity shops with cash to spend. “To me, there’s not going to be an end to the game; you just change your tactics depending on the supply and demand,” he said. “The buildings that are getting built are well justified and are leasing up pretty quickly. So, I think it will be an extended game.”