Despite headwinds due to continuing supply-chain shortages, inflation and higher interest rates, Fort Worth’s commercial real estate markets are expected to successfully weather the challenges.
“The skies are a little dark, aren’t they?” Ben Loughry, principal at Overwatch Fund, said at the 2023 Tarrant County Commercial Real Estate Forecast hosted by the Real Estate Council of Greater Fort Worth.
“But the basics are the same,” said Loughry, former chairman of the real estate council.
The Fort Worth area, as well as the rest of the state, benefits from continuing population growth, which fuels demand for new construction of housing, retail and warehouse space, said Loughry. Presenters representing those individual market sectors echoed the same sentiment during the Jan. 19 event at the Fort Worth Convention Center.
Higher interest rates make home-buying less affordable but newcomers need a place to live, which increases demand for more apartments, providing a boost to the multi-family market sector, he said.
Population numbers are critically important to the real estate industry, said John Goff, who presides over a Fort Worth a business empire that includes Crescent Real Estate, Goff Capital and Canyon Ranch.
Goff participated in a conversation with Mike Berry, president of Hillwood Properties and Hillwood Urban, as a keynote of the real estate forecast. Goff is a protégé of the late Fort Worth billionaire and philanthropist Richard Rainwater.
“I learned something from Richard that is simple but profound,” Goff said. “Your investment decisions ought to be made off the front page of the paper rather than the business section.”
The front page is where information about population growth, policy decisions and other news affecting the real estate industry would be reported.
The United States experienced historically low population growth of just 0.1 percent between 2020 and 2021, the lowest rate since the founding of the country due to decreased immigration, a drop in births and increased deaths connected to COVID-19.
But Texas led the nation in annual population growth of 1.1 percent and numeric growth of 1.3 percent, attributable mostly to migration from other states and births.
In 2022, the U.S. population increased by 0.4 percent with Florida as the fastest-growing state due to a population increase of 1.9 percent. But Texas was the largest gaining state, added nearly 500,000 people, boosting its population above 30 million to join California as the only two states with populations that large.
With projections for Texas to benefit further from population growth, Goff stated: “It’s going to be profound, it’s going to be a good period to be in that (real estate) business. But you have to be in the right spot.”
To grow the economy and capitalize on the population gains, Texas needs to invest in education to build a skilled workforce, physical infrastructure and continue pro-growth, business-friendly policies, Goff said.
Despite the Fort Worth area and Texas being better positioned for economic growth, there are still challenges in the commercial real estate market that are stymieing progress.
In his presentation on the state of the capital markets and private equity, Loughry, an expert in those sectors, shared that a lender recently told him that private equity lending is nearly muted.
But Loughry said there is money available through banks, particularly local and regional banks, but it is important to form personal relationships with lenders to obtain loans.
In a report on the construction market, Jennifer Siehling, senior preconstruction manager at The Beck Group in Fort Worth, said the outlook for this year is similar to last year with skilled labor market tightening and materials prices rising. While construction activity grew last year it is projected to slow this year.
An architecture industry reports show billings have decreased and confidence among executives in the engineering industry has dropped. Yet, Siehling reported that indicators suggest these are temporary dips and the overall outlook is positive, with many projects moving forward this year, she said.
Headwinds include increasing labor costs in the North Texas region have, which have already risen 5 to 6 percent for various for skilled and hourly workers in the past year. Inflation continues to keep a grip on the prices of materials, especially concrete electrical transformer equipment, but some stabilization is predicted later this year with new concrete manufacturing plants anticipated to open, she said.
“The sticker shock we all feel when we go to buy anything is exponentially worse in the construction industry,” Siehling said.
A bright spot is the new annual Emerging Trends in Real Estate report from PwC and the Urban Land Institute, which ranks Dallas-Fort Worth second nationally for overall real estate prospects, third in the nation for investor demand and first nationally for development/redevelopment opportunities.
The multi-family market was strong throughout 2022 due to population and job growth. The Dallas-Fort Worth area led the nation’s top metro areas with a 6.1 percent increase in job growth, according to Drew Kile, senior managing director for Institutional Property Advisors, a Marcus & Millichap Company.
The area also led the country in occupied apartments at 7.9 percent between the first quarter of 2020 and the third quarter of 2022. Despite a drop in values during 2022, Kile predicted that values would grow 10 percent this year as rising home prices continue to keep home ownership out of reach for many.
With more than 63,000 apartment units in a three-year pipeline, the Dallas-Fort Worth market will be able to absorb them due to the demands from continuing population growth. Also, the gap between a monthly mortgage payment and the average rent payment has grown to $1,606 a month even though rents continue to climb across the area. Among major U.S. markets, the Dallas-Fort Worth area ranks 29th with rent costs accounting for 22.7 percent of income. The national average is 30 percent.
In the greater Fort Worth area, about 1,600 apartments will be completed this year, up from about 900 in 2022. Average rent growth in the Fort Worth area was 14.9 percent through the third quarter of 2022, slightly below the increase of 15.5 percent in the Dallas area. Average Fort Worth area rent was $1,409 in the third quarter last year.
The industrial market in DFW continues to be second largest in the United States, accounting for 1.07 billion square feet of the nation’s total 18 billion-square-foot market, according to Reid Goetz, a senior vice president for Hillwood.
The Dallas-Fort Worth area leads the nation with 84.9 million square feet under construction. The area also ranks first in net absorption at 35.2 million square feet and has a vacancy rate of 5.3 percent.
The greater Tarrant County industrial market has 400 square feet with 31 million square feet under construction. AllianceTexas is the largest sub-market in the DFW area with 71.7 million square feet and 15.6 million square feet under construction.
The office market continues to undergo changes that began to emerge in the post-pandemic environment of 2022, according to Cannon Camp, a senior vice president with JLL in Fort Worth.
Activity is picking up with new construction and transactions taking place. In November of last year, there were 221,700 office jobs in the Fort Worth-Arlington area, an increase of 7 percent from 2019 and a 3.2 percent increase in office-using jobs in the past 12 months.
However, the number of office sector jobs in 2022 peaked at 223.1 in June in the Fort Worth area and then fell 0.6 percent to 221,700 in November.
The Fort Worth area “lags behind” Texas’ other major area in the number of office jobs, Camp said. Office jobs account for 18.8 percent of the total Fort Worth area job market compared to Dallas’s office job market at 33.2 percent, Austin’s at 30.6 percent, Houston’s at 22.6 percent and San Antonio’s at 24.3 percent.
In downtown Fort Worth, parking garages are 65 to 75 percent full on most weekdays but drop off on Fridays to about 40 to 45 percent.
Hybrid arrangements combining in-office and remote work continue to have a significant impact on the work environment with some major Fort Worth companies, including GM Financial, yet to return to the office, Camp said.
In-office work experiences continue to emphasize a “flight to quality” for employees, with cafes, workout facilities, wellness centers and lounges and other amenities that appeal to workers, Camp said.
Last year, the Bob R. Simpson building, the Oncor building and the Oil & Gas building were sold to developers who plan to repurpose them to other uses. The Simpson building was sold to a hotel developer and the other two were sold to multi-family developers.
Goff, who co-chairs Fort Worth Now, has taken on a key role in helping bring investment to the Texas A&M-Fort Worth project, which will create a research campus around the Texas A&M School of Law. Goff said he anticipates major corporate relocations as a result of the new institution, which would be transformative for the downtown real estate market, including the office market sector.
U.S. Rep. Roger Williams, a Republican representing the recently redrawn 25th Congressional District that stretches west from Arlington and Fort Worth to a number of rural counties east of Abilene, presented an update on his priorities in the 118th Congress. Williams, who owns a car dealership business, was recently selected as chairman of the House Small Business Committee.
The Small Business Committee oversees the U.S. Small Business Administration.
“We want to see the SBA become more aggressive and more customer-friendly,” Williams said. He also said he would like to address regulations on lending to make it easier for businesses and individuals to borrow money.
“More people are leasing because they can’t afford to buy homes,” he said. “I see the same thing in my business because people can’t afford to finance $100,000 over five years.”
As for accomplishments this congressional session, “We’ve got to do something about the debt, cut expenses and create more income,” he said.
With only a slim majority of four Republicans in the House, bipartisanship will be necessary to accomplish these goals, Williams said.
“In my business, I hit you up here, you hit me down there and we settle somewhere in the middle,” he said. “I don’t see why we can’t do America the same way.”