
DFW REAL ESTATE: IT IS TIME TO STOP THE PAUSE AND HIT THE PLAY BUTTON
01/24/25 | Thought Leadership
The main issue impacting commercial real estate over the past few years has been volatility. The economy has been unpredictable, interest rates, inflation and capital costs have increased, and politics has been fickle (not to mention divisive).
Uncertainty breeds caution. The instability of the past few years has led many in the CRE industry to take a strategic pause to determine the next steps.
It’s time for that pause to end for the following reasons.
Dwindling COVID Impacts
We’re approaching five years since the pandemic drove office employees to work-from-home arrangements. But COVID—and the work-from-home necessity—is firmly in the past.
Back-to-office mandates are increasing daily with 33% of U.S. employers requiring five days a week of in-office work. Meanwhile, Placer.ai reported in October 2024 that office staff visits to buildings nationwide were 66% higher than in February 2020.
A recent Cushman & Wakefield report quoting metrics from Kastle Systems’ Back to Work Barometer stated that Texas markets—and Dallas, specifically—have been the quickest with their return-to-office strategies. The report indicated that Dallas’s office foot traffic is 67.8% of pre-pandemic levels.
In some instances, it is true that a standoff continues between workers who want to remain remote and the CEOs who want them back in the office. But look for more BTO (back to office) Amazon-style mandates, which would mean growth in space use and possible office occupancy increases.
Moderating Inflation
Inflation has come a long way since its 9.1% high in June 2022. The most recent Bureau of Labor Statistics figures put the Consumer Price Index at 2.7%.
Inflation has also been a trial for commercial real estate developers and operators. One piece of good news is that construction input costs stabilized in 2024, partly due to a reduction in oil prices. According to data company RLB, the year-over-year Q3 2024 construction cost was 4.91%. Still, the overall cost growth is at its lowest in three years at 1.09%. To summarize, construction costs aren’t hitting rock bottom. Nor are they ballooning at the same rate as the last few years.
Slowly Declining Interest Rates
The Federal Reserve’s massive boost of the Effective Federal Funds Rate (EFFR) since March 2022 placed a higher price tag on the cost of capital.
But here’s what’s been happening in recent months:
- The Fed cut the EFFR from 5.25%-5.50% to 4.50%-4.75% beginning in September 2024.
- According to CoStar, CRE lending increased in Q3 2024 due to a brief drop in long-term interest rates.
The recent boost in jobs (256,000 in December 2024) and GDP increase (3.1% as of Q3 2024) has generated questions about the Fed’s next moves. Some economic experts believe that 2025 rate cuts could be shallower and smaller. Yet lenders that previously ignored financing real estate deals are demonstrating a cautious curiosity.
No one is anticipating a sudden—and huge—interest rate drop. However, even small benchmark rate cuts and more realistic real estate pricing could lead to more deals.
We Know Who’s President
Commercial real estate activities tend to pause in the months before a general election. A CBRE analysis has another viewpoint, noting that few changes in CRE activities take place before and during election time. However, the perception (and at times the media) kept the real estate industry somewhat stagnant. Assumptions aside, the election is done and Donald Trump is now president.
With many of the stagnation causes in the rearview mirror, here are some thoughts on how the CRE arena can move on.
Office: Ignore the “Doom Loop” Drumbeat
The “doom loop” has loomed large regarding office properties, even as more people return to work. While some media stories suggest the office sector is still in dire trouble, BTO mandates are being put in place. Employees still working at home have jobs that are ideal for remote access.
Furthermore, quality assets continue to attract tenants. For example, Bank of America signed a 238,000-square-foot lease at the Class A, 500,000-square-foot Bank of America Tower at Parkside. KDC and Pacific Elm Properties are developing the downtown Dallas property, which is scheduled for completion in 2027.
Some companies are opting for build-to-suit facilities. In this case, KDC is working with Corgan and Austin Commercial to complete the Wells Fargo headquarters in Irving, Texas. Construction on the 850,000-square-foot campus is underway, with completion slated for mid-2025. Wells Fargo and Bank of America are examples of companies thinking ahead regarding business growth and their real estate requirements. Others are doing the same.
Corporate Relocations: The DFW Market is Hot!
From 2020 through August 2024, close to 40 companies relocated to DFW. More recently, a survey conducted by Site Selection Magazine ranked Dallas No. 1 on its “Best Cities for Headquarters” list. To the west, Fort Worth was second on Coworking Cafe’s “America’s Boomtowns: Top Cities for Economic Growth.”
Companies come to North Texas for many reasons, including reasonable cost of living, educated talent and business-friendly policies. So, let’s continue our welcoming Texas “howdy” and find the perfect office space for these relocations.
Moving Onward and Upward
The CRE industry has been on pause over the past several years. That was then. Now, it’s time to prepare for the coming year as activities potentially increase along with optimism.
You can take advantage of this by incorporating forward-thinking strategies into your planning. Take the time to prepare and incorporate creativity and flexibility in your tenant relationships. Doing so will help get more deals to the closing table in 2025 and beyond.
