Friday, June 19, 2009

Dallas commercial property in for a bad year, survey says

The Dallas area will suffer the sharpest office building value declines in the country over the next year, according to a new survey of investors.

Overall office building prices here could drop 17 percent over the next 12 months, investors surveyed by PricewaterhouseCoopers predicted. That’s much higher than the 11 percent to 12 percent decline predicted nationwide in the report released Thursday.

Investors say they're more pessimistic about the Dallas-area office market because of cutbacks at large corporate employers in the area. They also cite contractions at major high-tech firms in North Texas “due to increased international competition as well as global downsizing.”

Some Dallas-area office properties may see declines of more than 33 percent, the study said.

PricewaterhouseCoopers found that investors expect the U.S. commercial real estate market to continue to decline over the next year as business demand for real estate slumps and rental rates soften.

The property market recession is likely to continue through next year, according the results of this 22nd annual investor survey.

Investors said they expect an overall 10 percent further drop in commercial property values during the coming 12 months, with the biggest price declines in the office and regional shopping mall markets.

By some estimates, commercial real estate values have already fallen more than a quarter since mid-2007.

Prices are falling in part because of the credit crunch.

“The sales market is simply stalled and remains in a state of flux because neither buyers nor sellers know exactly where pricing is right now,” Susan Smith, director, real estate advisory practice at PricewaterhouseCoopers, said in the report. “Investors are concerned that the industry is basing values on distressed sales, which will ultimately reset the market too low.

“It is a very difficult cycle for investors to be in and one of the most challenging cycles for them to get out of.”

Investors surveyed worry that commercial mortgage defaults and distressed property sales will continue to rise, which “some investors fear will lead to a market overcorrection.”

Dropping building rents caused by business consolidations are adding to the commercial property industry’s woes.

The PricewaterhouseCoopers survey shows that building rents have been affected in all but two of the 28 markets surveyed, and most of the investors anticipate further office rental rates declines over the next year.

The forecast calls for a recovery to begin in the nationwide retail and office markets starting in 2011.

By STEVE BROWN / The Dallas Morning News