A short-term interest rate cut may be on the horizon—but that doesn’t mean we are returning to yesterday’s persistent low rates and high valuations. The year ahead will require new thinking and reformulating the math as we structure financing for the next wave of commercial real estate investment. What CRE needs now is a significant recalibration—a Great Reset.

The first step: shifting how we think about interest rates. Sitting around and waiting for long-term interest rates to return to near-zero is overly optimistic. Even if the Federal Reserve achieves its inflation target of 2%, the federal funds rate will settle in at around 2% and a normal, upwardly sloping yield curve will result in a 5-year Treasury rate of approximately 3% and a 10-year Treasury rate around 4%.

With long-term Treasury rates at those levels, financing for stabilized properties will be in the 5% to 7% range—a far cry from the 3% to 4.5% range we saw just a few years ago. Unless real estate investors can withstand negative leverage for a short time because of increasing net operating income (NOI), most investors can expect to price prime properties using capitalization rates in the 6% to 7% range or higher. Moving from a 4% cap rate to a 6% cap rate is a 33% decline in a property’s value, assuming NOI is stable.

That brings us to step two of the Great Reset: changes to NOI. While there has been significant rental rate growth—especially for apartments in certain markets and industrial properties nationwide—in many instances, expenses have increased as fast or faster than rental rates. Major operating expenses like real estate taxes, insurance rates, personnel costs and repair and maintenance costs have all had significant increases. The increase in expenses outpacing the increase in rents also creates a decrease in value to all property types.

Additionally, there is the coming wave of loan maturities to consider. Twenty percent of the $4.7 trillion in outstanding commercial mortgages will mature in 2024, according to the Mortgage Bankers Association, with nearly $2 trillion coming due by the end of 2026. About one-third of the debt coming due in 2024 is a result of loan extensions from 2023 by borrowers and lenders that were hoping for rates to come down in 2024. Assuming lenders do not extend the loans into the future, this wave of maturities will bring many properties to market at prices lower than the owners paid for them in the past.

Lenders whose underwriting factored in favorable debt service coverage ratios and traditional debt yield tests will likely weather the interest-rate storm without major losses in the CRE sector due to the low leverage that underwriting based on debt yield required. Those disciplined lenders will be able to remain active in the market and stand to gain considerably as the Great Reset occurs. The moment is especially ripe for those ready to lend in sectors like industrial and multifamily real estate, where borrowers who secured financing during the low-interest-rate window between 2017 and 2020 now face the need to restructure their debt.

How can investors and lenders alike stay ahead of the curve? Here’s a look at the year ahead.

Where we are—and where we are headed

Many “pretend and extend” lenders have long been awaiting a drop in interest rates that will likely not happen. The aftermath of the global financial crisis of 2008 created a misplaced sense of permanence around the low rates that followed. Many developers, investors and debt providers misinterpreted a temporary phase (albeit a temporary phase that lasted a decade) as the new normal. The reality is that interest rates in the 6% to 7% range, or far higher, were the norm in previous decades. To expect extremely low rates indefinitely was simply unrealistic.

Sellers have also been slow to adjust. Now, the disconnect between seller expectations and buyer willingness has propelled billions into funds aimed at acquiring distressed debt or assets. The pressing question remains: What will cause the bid-ask spread to narrow enough for transactions to take place? Borrowers that have locked in low, fixed-rate financing have no reason to sell into this environment. However, as loans mature and a wave of maturities occurs over the next year or so_, these borrowers will be faced with the decision to refinance at much higher rates—assuming NOI growth has kept up enough to overcome the increase in interest rates—or they will be forced to sell or infuse significant equity into projects to replace the existing debt with lower leverage.

Different product types and geographies deliver different opportunities

Despite current challenges, the Great Reset will offer opportunities to both investors with dry powder and lenders with the capacity and willingness to lend into the CRE market. Some sectors, like new industrial and multifamily development, have cooled in recent months as the wave of new supply has overwhelmed the positive demographics of many multifamily markets (such as in the Sun Belt), and the satiation of industrial demand in the aftermath of pandemic-era supply chain disruptions.

Long term, both trends will enable unique opportunities for strategic investments amid market excess and the rise of office adaptive reuse. When an apartment community is not performing to pro forma, for example, a buyer can potentially acquire the property with less leverage and more equity, then refinance when lower rates come along.

The next phase of the Great Reset

Advancing the market requires a shift in collective thinking. After all, one investor’s bad news may be another investor’s golden opportunity. A well-performing building, such as a multifamily property within an in-fill market with high barriers to entry might simply have the wrong debt structure for the times. With a forced sale due to a maturing, low-rate loan, a new ownership group can invest at a reset basis. This creates opportunities for lenders and enables projects to be revived with a reinvented capital stack. Fresh capital and a willingness to invest and lend will be critical in successfully navigating the Great Reset.

Cushman & Wakefield announced the commercial real estate services firm has arranged the disposition of the Plano Industrial Portfolio, which includes eight buildings totaling 846,261 square feet, to DRA Advisors.

Cushman & Wakefield’s Jim Carpenter, Jud Clements, Robby Rieke, Madeleine Supplee and Trevor Berry represented the seller.

The portfolio is located immediately northeast of the U.S. Highway 75/President George Bush Turnpike interchange in Plano, Texas, and is 100% leased to 15 tenants whose average tenure is 10 years, highlighting the key location and functionality of the buildings.

Buildings in the Plano Industrial Portfolio include:

• 2700 Summit Avenue, a 120,276 square foot property
• 2701East Plano Parkway, a 53,833 square foot property
• 2801 East Plano Parkway, a 65,135 square foot property
• 3101 Summit Avenue, a 140,593 square foot property
• 3301 East Plano Parkway, a 70,880 square foot property
• 3501 East Plano Parkway, an 82,880 square foot property
• 1100 Klein Road, a 104,104 square foot property
• 3601 East Plano Parkway, a 210,560 square foot property

From Houston’s diverse economy to Dallas’s thriving selectivity, Austin’s tight market dynamics, and the Rio Grande Valley’s cross-border prowess, each region of Texas offers a tapestry of opportunities for investors, developers and retailers alike. By embracing innovation, sustainability and community-centric approaches, stakeholders can navigate the complexities of the retail landscape, seize emerging opportunities and chart a course towards long-term prosperity in the vibrant markets of Texas. ‘Be agile, innovate’ to succeed in Houston’s retail sector Houston’s retail landscape remains resilient in the face of change, characterized by a low vacancy rate of 5.2% and stable rents. This strength is attributed to a myriad of factors, according to industry experts. “Houston’s population has been steadily growing, fueled by a combination of job opportunities, affordable housing and a diverse economy. Key sectors such as energy, healthcare, manufacturing and technology are driving this growth,” said Nathaliah Naipaul, CEO and partner at XAG Group. “As the population expands, the demand for retail goods and services also rises, which in turn strengthens the retail market.” Infrastructure enhancements, including improved transportation networks, further bolster the sector by improving accessibility to retail centers, Naipaul added, noting that XAG Group exemplifies this adaptability by prioritizing sustainability and curating unique shopping experiences.
“I believe vacancy remains low because there is a lack of new quality space being constructed,” said Jonathan Hicks, principal at Edge Realty Partners. “The reason there is a lack of new construction is due to high costs of construction and high interest rates; it is very hard to build anything right now with affordable rental rates.” Hicks argued that this, along with rising labor and inventory expenses for existing tenants, has contributed to stable rents as landlords navigate this challenging terrain. Despite a recent uptick, the vacancy rate remains healthy. Hicks viewed this as a temporary phenomenon, a result of squeezed margins for retailers. Conversely, Naipaul interpreted it as a sign of a balanced market.
“This stability is reassuring for retailers, landlords and investors, as it reduces the risk of significant fluctuations in rental rates or property values,” she said. “Landlords and property owners may have more negotiating power when leasing out retail space. Like us at XAG Group, we see many maintaining diverse tenant mixes, investing in property maintenance and improvements and staying informed about local economic and market trends.” Looking ahead, retail development continues with 3.2 million square feet underway. While some projects may encounter delays at the permitting stage, Naipaul suggested that developers perceive opportunities driven by robust employment rates and consumer confidence. Hicks believed much of this construction is user-driven, with developers exercising caution due to affordability concerns. “Developers are telling me it is almost impossible to build space that is sustainably affordable to tenants,” he said. “I heard recently that a developer was just happy to have a tenant move into their project and build out the space – their risk of failure was much higher than normal, but the landlord would at least have a built out space in their retail center that may be more attractive to the next tenant.”

The rise of e-commerce necessitates adaptation for traditional retailers. Hicks observed stores evolving into fulfillment centers and enhancing
customer experiences through interactive displays and vendor-led classes. Naipaul highlighted XAG Group’s strategy of extending the shopping experience outdoors with seating, gardens and event spaces, fostering a more inviting and community-oriented atmosphere. “Multi-functional outdoor spaces accommodate various activities like markets and fitness
classes, with amenities such as Wi-Fi and charging stations,” Naipaul said. “By integrating outdoor areas, retailers differentiate themselves, appeal to a broader demographic, and enhance the overall retail experience, emphasizing sustainability and eco-friendliness.”
For long-term success, stakeholders must adapt to evolving consumer preferences, embrace technology and prioritize sustainability, Naipaul suggested. This entails integrating mobile payments and augmented reality, along with strategic location selection and tenant mixes that cater to food, beverage and entertainment desires.
“Retailers should be agile, innovate in response to consumer trends and invest in sustainability practices to attract eco-conscious shoppers,” Nailapul said. “By focusing on these strategies, businesses can navigate the evolving market and position themselves for long-term success in Houston’s retail sector.”
Hicks anticipated further retail closures due to rising interest rates on business loans. He saw opportunity in repurposing existing buildings and acquiring failed businesses’ space at a discount. A key takeaway for investors, according to Hicks, is the current disconnect between owners and tenants. “I have tenants who are prepared to expand, but the majority require purchasing rather than leasing,” he said. “In most cases, the purchase prices are at or above market, but so many owners continue to wait for a lease. Many owners are also waiting to see what happens with interest rates, but I’m being told by many sources that rates are not expected to change much, if at all, before the end of this year.”

‘Momentum’ describes retail sector success in Dallas

Dallas distinguishes itself with a thriving retail market, defying challenges encountered by other sectors. Robert Franks, managing director at JLL Dallas, attributes this resilience to a burgeoning population and the proliferation of grocery stores, particularly with the entrance of H-E-B. Sun Belt markets like Dallas benefit from high population growth and historically low vacancy rates. “The fundamental principles of supply and demand are at play here,’ Franks said. “With vacancy rates at an all-time low, costs have increased, leading to record-high rental rates. We anticipate this trend to persist as the baseline market has been fundamentally shifted. Landlords now have the luxury of being selective with tenants, as quality vacancies attract numerous options.”
While advantageous in the short term for landlords, Franks noted that excessively high rents could strain tenants in the long run. Investment opportunities abound across various retail property types in Dallas. While larger assets are scarce, single-tenant buildings and smaller strip centers offer promising entry points. “Now is a great time to look at well-placed assets with lower rents that can be repositioned long-term,” Franks said. The rise of e-commerce has catalyzed the transformation of older malls. Malls with prime locations undergo redevelopment into mixed-use hubs, integrating multi-family housing and entertainment options. Notable examples include Collin Creek Mall, Willow Bend and Valley View Mall. “Landlords are fighting to keep up with changing customer behavior,” Franks said. “In Dallas, Class A malls continue to experience high demand, while Class B and C malls struggle to compete. These older, outdated assets are now ripe for redevelopment into mixed-use, multi-family, or entertainment centers.” Savvy investors and developers leverage data analytics to assess location suitability and shopper demographics. This data, encompassing demographics, competitor performance, and even cell phone usage, is indispensable for making informed long-term real estate decisions. “The growth trajectory of the Dallas retail sector remains strong, fueled by the region’s status as one of the fastest-growing metroplexes in the U.S.,” Franks said. “Momentum is expected to continue, with asset performance and value creation opportunities here being as strong as ever.”

‘Varied opportunities’ available for retailers, developers in Austin

At the end of 2023, Austin’s retail sector boasted an impressive 96.8 percent occupancy rate, a testament to its resilience. “The city’s zoning and planning regulations have historically limited the availability of new development spaces, creating a supply scenario that is markedly lower than demand,” said DeLea Becker, owner, founder and broker at Beck-Reit Commercial Real Estate and Beck-Reit Asset Management. “This regulatory environment, coupled with Austin’s rapid population increase and its status as a technological and cultural magnet, has sustained low vacancy rates and high demand for retail space.”

“Despite being underbuilt, Austin boasts a dense and expanding population,” echoed JD Torian, director at Cushman & Wakefield. “The purchasing power of young professionals plays a significant role in sustaining a resilient retail market. Additionally, tourism contributes to the market’s strength. Austin remains affordable for buyers, making it an attractive destination for both residents and visitors alike.” Becker described a landscape where landlords hold sway, with high demand leading to competitive leasing dynamics and rising rental rates. “This means navigating a landscape where they might have to absorb a larger portion of the build-out costs themselves, which could affect their budgeting and design choices,” Becker said. “Tenants must be financially prepared to invest more upfront in their leased spaces, which underscores the necessity for thorough financial planning and possibly seeking out alternative funding sources for their fit-outs.”
For investors, Torian emphasized the importance of considering longterm tenant mix and prioritizing sales performance over aggressive rent increases.
“Attempting to raise rental rates without robust sales could jeopardize businesses,” he said. “To achieve success, investors must comprehend and prioritize the tenant mix within the local retail market. Striving for a 10 percent rental factor may not align with tenants’ needs and could ultimately backfire for landlords, who risk inflating costs solely for the
sake of higher rents.”
The recent elimination of parking minimums by the Austin City Council marks a significant change, according to Becker, who saw it as ushering in a new era of denser, more efficient development. “This shift also revitalizes older buildings and smaller empty lots previously hindered by stringent parking requirements, allowing them to be repurposed into previously disallowed retail, offices, restaurants, event spaces, etc.,” Becker said. “By reducing the need for extensive parking, these properties can now contribute more actively to the urban tapestry, promoting a diverse and innovative use of space, increasing value and demand for landlords’ buildings and opening up new opportunities for architects and developers.”
Looking at specific property types, Becker highlighted the unique opportunities each presents. Freestanding buildings offer high visibility and attract stable tenants. Neighborhood centers benefit from foot traffic and are less susceptible to economic downturns. Power centers expand with pad sites for additional tenants. Malls transition into mixed-use spaces with entertainment and leisure options. Outparcels and pad sites are developed to optimize space for quick-service businesses. “For investors, understanding these distinctions and trends is key to capitalizing on the varied opportunities within Austin’s retail landscape, from stable neighborhood centers to innovative uses of traditional mall spaces,” Becker said. “An investor’s short-term and long-term goals tend to guide which retail asset type they favor when making investments and planning developments.”
Austin’s retail sector presents a high-stakes, high-reward environment, she added. While Becker acknowledged potential short-term market fluctuations, she emphasized the city’s long-term potential, driven by a resilient consumer base. Investors and developers are advised to adopt a long-term perspective, brace for short-term headwinds and seize the opportunities within this dynamic market. ‘Vibrant retail environment’ draws shoppers to McAllen The Rio Grande Valley has emerged as a major international trade hub, attracting a diverse range of retailers and investors. “The opportunity is in the growth of quality jobs, education, healthcare and lifestyle of which McAllen is leading the way on all counts,” said Mike Blum, partner at NIA Rio Grande Valley. “McAllen, Texas, stands out as a powerhouse city and the epicenter of the Rio Grande Valley, boasting impressive retail sales for 2023.”
The gross sales tax for the McAllen MSA was upwards of $10.6 billion, Blum shared. “By capitalizing on the region’s diverse shopping venues, increased foot traffic, cultural exchange and logistical advantages, retailers can position themselves for success in this dynamic and rapidly evolving market,” said Rebecca Olaguibel, Director of Retail and Business Development for the City of McAllen. “With the rise in international trade, there has been a corresponding increase in foot traffic from both local residents and international shoppers. This creates a vibrant retail environment and provides retailers with a larger customer base to target.” McAllen’s reputation as a premier shopping destination is attributed to several factors, according to Roger Stolley, associate at NIA Rio Grande Valley. Easy access from Mexico, a modern airport with convenient connections and a renowned shopping mall (La Plaza Mall) position McAllen as a shopping paradise. The city also boasts a vibrant entertainment scene, with a convention center, performing arts spaces and a symphony orchestra. While historically reliant on Mexican shoppers, McAllen’s retail sector has diversified, although Mexican visitors remain a significant customer base, Blum shared.
“Many of the travelers from Mexico have been banking in McAllen for generations,” he said. “They come to visit their money.” When they choose to spend it, shoppers in McAllen can choose from everything from high-end luxury brands or budget-friendly deals. “McAllen actively promotes itself as a shopping destination through various marketing initiatives and promotional campaigns,” Olaguibel said. “These efforts help raise awareness of the city’s retail offerings and attract shoppers from neighboring regions.” Looking ahead, the expansion of international bridges, growth in warehousing and manufacturing and the addition of the UT Health Cancer Treatment Center solidify the Rio Grande Valley’s position as a dynamic trade and commerce destination. This unique blend of factors creates an attractive environment for retailers and investors seeking to capitalize on the region’s potential.