Millions of square feet of office space are available to rent in Dallas as a large number of renters prepare for commercial mortgage-backed securities (CMBS) loans to be due within the next two years.
There are currently an estimated 7.6 million square feet worth of sublease space available across Dallas, in addition to the 47 million square feet worth of direct vacancies, according to The Real Deal.
Vacancy rates in Dallas are roughly 17.2% for office space and 5.5% for industrial space, per CandysDirt.com. Roughly 20% of CMBS loans will mature over the next two years.
Expectations are that the value of these spaces will not go up, making these majority-vacant buildings much harder to sell.
“The problem is you’re trying to catch a falling knife right now because values are dropping,” Steve Triolet, vice president of research and market forecasting for Partners Real Estate, told The Real Deal.
“Nobody’s anticipating that values are going to increase anytime soon. The Fed is posturing like they’re going to raise interest rates potentially two more times this year. That means more expensive debt. When you combine that with less demand for space, the result is we are going to see more distress.”
Properties such as Fountain Place, located at 1445 Ross Ave., have large amounts of space available for sublease on top of even more vacant space. Roughly 235,000 square feet are available for sublease in the building, with another 755,000 square feet of directly vacant space available, according to The Real Deal.
“This property is in deep trouble. Because even if you have a tenant that likes the building, and you’re using a broker that’s knowledgeable … you’re going to get beat down on the sublease rate. You’re competing with other tenants putting up competing space in the same building,” said Triolet.
Triolet said subleasing would normally result in a 15-20% discount off the original rent, but some spaces may be forced to offer discounts as high as 50%.
“You are going to have to almost give away the space,” he said.
Paul Fiorilla, director of research at Yardi, said there is hope for the metroplex despite concerns elsewhere in the country.
“The criteria we set out is that the amount of distress will be based on asset type, market/submarket, loan seasoning, and strategy of borrowers and lenders. Some of those criteria are market specific and some are an issue everywhere. Using that criterion relative to the rest of the country Dallas-Fort Worth is in good shape. Population and job growth consistently are among the best in the nation so demand in most property segments should remain strong,” Fiorilla told CandysDirt.com.
Changes in commercial real estate are likely to be seen across the metroplex for the next two years as loans continue to mature.
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