Commercial real estate investors continue to be drawn to theD/FW Metroplex because it has one of the strongest job markets inthe nation. As a result, the region's multifamily and retailinvestment sectors have reaped the benefits with improvingfundamentals. In spite of these gains, the recession has taken itstoll on the CRE market, as each product type works through variousstages of delinquency, particularly the highly exposed officesector. The outlook for the multifamily and retail segments is morepromising because employment gains have sparked increased demandfor both types of assets. Meanwhile, industrial assets in D/FW haveexperienced a limited amount of loan defaults, following a similarpattern nationwide, and the sector should stabilize relatively soondue to very little new construction.

The Dallas office sector remains nearly 22% vacant, one of thehighest rates in the country, and distress continues to impact themarketplace. By year's end, vacancy is expected to increase 50basis points to 22.5%, and rent gains will be nominal. Asking rentswill rise 1.1% to $19.42 per square foot, while effective rateswill pick up 1.3% to $15.14 per square foot by year end. Officeperformance will vary dramatically by quality and location, withclass A assets in Preston Center, Las Colinas, East Dallas/NearNorth Central Expressway and the Fort Worth CBD expected tooutperform this year.

At the same time, many class C buildings will continue tostruggle to attract and retain tenants. Top-tier propertiesregistered a more significant spike in vacancy through the downturnthan the class B/C sector; however, class A maintains a tighterrate overall and will continue to lead a recovery as tenantsupgrade to higher-quality space at reduced rents. Constructionactivity remains near historic lows, and while the current overhangof space will hinder substantial growth in occupancy and rents thisyear, the pace should increase in 2012. These challengingfundamentals have not only led to a large pool of distressedassets, but have also shaped the approach many lenders andservicers are taking to these properties. With a low estimation ofrecovery value on distressed office assets, lenders have pursuedrestructuring and modifications as opposed to foreclosure and REO.This is especially apparent among CMBS loans where 10% ofoutstanding office paper by dollar volume is listed as distressed,but by less than 30 days.

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