Friday, June 19, 2009

Investors say Dallas office building prices may drop 17% in next year

Investors predict that the Dallas area will suffer the sharpest office building value declines in the country over the next year.

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

Investors say they are 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 warns.

A few years ago, North Texas was one of property investors' favorite markets.

But the turnabout shouldn't come as a surprise, said Susan Smith, director of the real estate advisory practice at PricewaterhouseCoopers.

"Typically in your market, investors get a little better return" when times are good, Smith said. "The problem is, when the market turns down, you guys tend to feel it a little bit harder than the rest of the country because of oversupply."

Still, Smith said, she "never really likes to give Dallas a bad rap. Even though you tend to build a lot, you have good job growth and industries that keep investors coming back."

PricewaterhouseCoopers found that investors expect the U.S. commercial real estate market 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 to the 22nd annual investor survey.

Investors say they are likely to see an overall 10 percent further drop in commercial property values nationwide during the coming 12 months.

The biggest declines are forecast in the office and regional shopping mall markets.

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

Prices are falling in part because few investment transactions are taking place 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," Smith said in the report. "Investors are concerned that the industry is basing values on distressed sales which will ultimately reset the market too low."

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 it covers.

And most of the investors anticipate office rental rates to decline further over the next year.

The forecast calls for a recovery to begin in the nationwide retail and office markets starting in 2011. But the investors surveyed said that "it will not dominate these sectors until 2012."

By STEVE BROWN / The Dallas Morning News