Nervous lenders are scrutinizing Dallas-area commercial property loans

With property values declining and worries about a pending recession, commercial real estate lenders are keeping a close eye on developments in Dallas and across the country.
In the Dallas area, lenders are tracking more than 1,100 commercial properties financed with almost $23 billion in commercial mortgage-backed securities, according to a new report by Morningstar Credit Information & Analytics LLC.
Some of the Dallas properties with potential problems are office buildings, which have seen slower leasing and higher vacancy rates since the start of the COVID-19 pandemic. Higher interest rates and tighter lending standards have put even more pressure on some commercial properties.

“Over the past five years, the Dallas market has witnessed strong growth in the industrial sector,” Morningstar analysts say in a new report. “However, office properties are expected to see sluggish growth, primarily due to the increase in remote working.
“Two office properties, with a total exposure of $100.8 million, are with the special servicer,” the report says. “Six are on our watchlist, echoing the headwinds the sector is facing.
“We expect this number will grow as leases roll.”
The largest two Dallas area properties that lenders are scrutinizing are both in downtown Dallas - the 2100 Ross office tower near the Arts District and the Mercantile Place on Main apartments on Main Streets, Morningstar details.
Morningstar said it added 2100 Ross with more than $86 million in loans to the list of properties’ on lenders watchlist after occupancy in the building fell below 60%.
“Morningstar’s largest concern is the high vacancy rate of 31% in the Dallas central business district, which would make re-leasing challenging if any major tenant fails to renew its lease,” the analysts said.
The Mercantile Place buildings were put on notice by lenders with the estimated value fell below the current debt of more than $45 million.
Credit analysts are keeping a close eye on office properties, which have seen weakened demand during the last few years.
“The average asking rent for office properties has risen marginally during the last five years, but the office vacancy rate increased from 18.3% to 22.4% between 2017 and 2022,” according to Morningstar.

Net cash flow have fallen by about 5% from Dallas-area office properties financed by commercial mortgage backed securities. At the same time, cash flows from industrial and apartment properties have grown by more than 10%, according to Morningstar.
Nationwide office prices have fallen in value by more than 2% in just the last 12 months, according to the latest estimates by MSCI Inc.
Some commercial property owners will face tougher lending standards and higher financing costs when their current debt expires and must be renewed.
Lenders since 2019 have taken control of more than a dozen Dallas-area commercial buildings financed with more than $200 million in commercial mortgage backed securities.
The largest default was downtown Dallas’ Harwood Center skyscraper which lenders foreclosed on last year. The building had almost $82 million in debt.

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