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Report: Oversupply, Interest Rates Threaten CRE Expansion The Most

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Shifting interest rates and product oversupply pose the greatest threats to expansion in the Dallas-Fort Worth commercial real estate market, a new survey by Henry S. Miller says. But respondents don't expect that pain to hit this year, and they think things will remain strong in DFW for longer than the rest of the nation.

The Dallas-based commercial real estate firm on Monday released its 2019 Real Estate Investment Trends report, surveying local and national developers, asset managers, loan officers, brokers, appraisers, mortgage bankers and CRE investors. 

Almost 68% of respondents expect the current North Texas real estate cycle to last another 12 to 24 months. Of that group, half see the cycle lasting between 12 and 18 months, with the remainder expecting growth for another two years.

Only 21% expect the North Texas real estate cycle to last more than 24 months, while 11.3% expect the cycle to reach its end within the next six to 12 months. 

Respondents showed less optimism about the national real estate cycle with 50.8% expecting it to last only six months to a year. Twenty-three percent expect the national cycle to continue for another 12 to 18 months, while only 19.6% expect it to last 18 months to two years. 

While slightly more than 20% of respondents expect the North Texas real estate cycle to last more than two years, only 6.6% cite the same level of confidence when it comes to the U.S. cycle. 

Real estate faces several major headwinds — from the impact of trade tariffs to interest rates and a glut of CRE production. However, only two of those issues triggered intense responses from respondents when asked the greatest threats to CRE expansion. 

Of those surveyed, 47.8% cited interest rates, followed by product oversupply at 20.3% as major concerns. Political instability came in third with 17.4% of the vote.  

Only 5.8% of respondents consider tariffs, which garnered a great deal of press attention this year, a primary threat to the CRE cycle.

For investors scouring DFW for commercial product with promising cap rates, Henry S. Miller assessed respondents’ opinions of average cap rates by asset class. 

The takeaway? The apartment sector reported some of the lowest cap rates, with Class-A and Class-B multifamily’s average cap rate hovering around 5.05% and 5.72%, respectively, the report said. 

Class-C multifamily, on the other hand, reported cap rates of 7.04% on average with a range of rates falling in the 5.5% to 10% range, according to the survey. 

Some of the highest cap rates came from the hotel segment, with respondents reporting Class-C hotel cap rates at 11.42% on average. 

Class-A and Class-B hotel properties maintained average cap rates of roughly 6.89% and 8.55%, respectively, according to data from respondents.