Dallas/Ft. Worth's office sector posts vacancy of nearly 24%, one of the highest rates in the nation, and it also accounts for the largest share of local distressed commercial real estate dollar volume. Job growth will resume this year, but office-using jobs are forecast to account for only 24% of the total positions created, compared to 30% nationally. Vacancy will continue to rise, albeit at a relatively modest pace, through 2010, resulting in more distressed situations. Already, the delinquency rate for CMBS loans secured by local office properties exceeds 12%, compared to 10.4% for all property types metrowide. While lenders are showing a strong preference for loan extensions or modifications over foreclosures, not all owners will qualify. More REO activity will occur as owners run low on reserves necessary to renew and/ or sign new tenants.

The retail sector experienced a brief but sharp downturn and now accounts for 16% of the distressed commercial real estate in the Dallas/Ft. Worth metro area. Retail vacancy rates should begin to stabilize by year end, but new leases today are being signed at effective rents similar to those recorded in 2004, placing significant stress on local property owners.

Banks are generally shying away from foreclosing on local shopping centers, instead focusing on note sales to move the riskier debt off their balance sheets. Loan modifications and extensions are occurring, though, particularly for larger centers, including those owned by Centro and General Growth. Nonetheless, more distressed opportunities are likely to emerge this year, as approximately 40% of past due CMBS loans are currently in foreclosure or REO. In recent months, lenders have reclaimed a few higher-quality retail properties, which may be an indication of shifting strategies in dealing with distress, or expectations for strengthening recovery rates this year.

New apartment construction in Dallas/Ft. Worth will slow dramatically this year, but the impact of last year's surge in deliveries continues to linger. The spike in new supply last year coincided with significant job losses, causing an increase in vacancy and concessions, and rent reductions, which in turn resulted in a growing number of distressed properties. Approximately three-quarters of the multifamily CMBS debt outstanding in the metro area was originated during 2005 to 2007, a period marked by peak pricing and high-leverage loans. This suggests more troubles lie ahead for the local apartment market.

Class A properties in the marketplace posted positive absorption through the recession, but in some cases, the absorption came at the expense of rents and concessions. More class A distress will emerge this year, particularly in suburban mixed-use projects that encountered difficulties at lease up, and where rents have slipped well below original pro forma projections. A few class A foreclosures have occurred in recent months, but they have been scattered across the metro area, with one in McKinney, another in North Dallas and more recently a high-rise located downtown.

As rents slipped for local apartments, many renters upgraded from class B/C units, leading to softening in the lower tiers and mounting distress in East and Southeast Dallas, particularly Skillman/ Audelia, along with the I-820 submarket in Forth Worth, parts of Arlington and Irving. Meanwhile, Dallas/Ft. Worth slipped into recession later than most US markets and remains positioned at the leading edge of economic recovery. While the local economy has not been immune to the housing downturn, its effects have been far less severe in Dallas/Ft. Worth than in other higher-growth metro areas in the West and Southwest. Without a significant drag from housing, Dallas/Ft. Worth's economy should enter a sustainable expansion cycle sooner than most metro areas, with job growth in 2010 expected to surpass the national average.

Despite a more optimistic economic outlook for Dallas/Ft. Worth, commercial real estate fundamentals will follow national trends, lagging the broader economy into recovery. Locally, supply-side pressures have ebbed but not rapidly enough to prevent further weakening of occupancy and rents this year, which will result in more distressed situations across commercial property sectors in the Metroplex.

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