Two years ago, when the COVID-19 pandemic took hold, the prospects for commercial real estate quickly turned for the worse.
With office workers sent home, hotels standing empty, and storefronts gathering dust while shoppers stayed away, building owners and lenders were vulnerable.
No wonder real estate analysts expected a stream of defaults and foreclosures on commercial real estate loans.
As it turns out, this fear was exaggerated. While some commercial properties in North Texas ended up with foreclosure, the number of such trades was far below expectations.
“We really avoided a bullet,” said Evan Stone of Dallas’ Goodwin Advisors. “Yes, there were many people who suffered the loss of jobs and the closure.
“But by and large, the vast majority of people kept paying off their mortgages, and that was ultimately a hiccup,” Stone said. “Lenders were more accommodating because they did not want to take back a wave of properties, and in hindsight, that was the right approach.”
The Dallas-Fort Worth properties that have had the most problem loans have been hotels and retail centers.
But a couple of large skyscrapers in the center also ended up in the hands of lenders.
The 40-story Bryan Tower changed hands when lenders with $ 70 million in debt declared the loan defaulted and moved to foreclosure on the property. Dallas-based Woods Capital bought the Bryan Street tower out of foreclosure and is working to rebuild the high-rise.
And the 36-story office tower in Harwood Center across the street in 1999 Bryan St. is now controlled by lenders who have more than $ 80 million in debt on the skyscraper.
The Harwood Center is the largest property on a list of Dallas-Fort Worth commercial properties with the largest problem financing, according to analysts at New York-based Trepp Inc.
The Le Méridien Hotel in Far North Dallas with $ 41.2 million in loans and Arlington’s Copeland Tower office building with $ 19.5 million in debt are also included in Trepp’s roundup of problem properties.
Dozens of other North Texas commercial real estate properties that were on lenders’ watch lists early in the pandemic have since been refinanced or recovered with outstanding payments.
Stone said the commercial real estate market in D-FW is on the decline.
“Today we see a strong demand for leasing in most markets,” he said. “Texas continues to roll together because of the dynamics of being in a cheaper place that is pro growth.
“I do not think we are out of the woods in hotels,” Stone said. “Some of the hotels have recovered, and some are still not.”
Hotel occupancy in North Texas – although rising sharply from 2020 – has still not returned to pre-pandemic levels.
R. Byron Carlock Jr., national real estate agent at PricewaterhouseCoopers, says there has been plenty of capital to save problem real estate and strong pre-pandemic loan insurance.
“The industry has been resilient for several reasons,” Carlock said. “The judicial system favored owners during pandemic – foreclosures were very difficult to get through the judicial system.”
And leasing activity picked up speed in some real estate sectors. “Demand exceeds supply in most asset classes, especially multi-family and industrial,” Carlock said.
Texas property owners have benefited from the thousands of people who moved here over the past two years, either to work remotely or to get new jobs, analysts said.
“You’ve seen a lot of companies move headquarters to Houston, to Dallas, to Austin,” said Christian Henkel of Moody’s Analytics. “Because of that, you bring a lot of people, money and business, and it creates a lot more demand for real estate.
“It definitely is supporting why Texas is doing much better than many other states. “
Henkel agrees that expectations of the first roots of commercial property default caused by the pandemic were “excessively serious.”
“We thought losses would be significant and there would be lots of charges,” he said.
He said the lender’s indulgence and federal pandemic relief programs kept many properties afloat.
Henkel said some commercial real estate that managed it through the pandemic could still get into trouble as interest rates rise and if the economy goes into recession.
“We could definitely see a wave of additional risk,” he said.