Highs, Lows of Texas Apartment Market Under Microscope at InterFace Conference
Speakers at the "What’s the Big Picture for Multifamily Supply, Demand & Demographics?" panel at the InterFace Multifamily Texas conference included, from left, Bruce McClenny, president, Apartment Data Services; Greg Willett, chief economist, RealPage; Ryan Davis, senior economist, Witten Advisors; and Richard Kelley, senior vice president, InterFace Conference Group/France Media Inc.
DALLAS — The multifamily market in Texas has cooled off on the lending and development front, and even leasing activity isn’t as robust as it once was in some markets. That’s the consensus of panelists at Interface Multifamily Texas, which took place last Thursday, Oct. 6 at the InterContinental Dallas.
The conference’s opening panel, “What’s the Big Picture for Multifamily Supply, Demand & Demographics?” featured three economists specializing in the Texas multifamily market, all of whom agreed the sector was slowing from the same time a year ago.
“‘Noise’ is a great term to use, and in our company we are using ‘chop’ to describe the market,” said Ryan Davis, senior economist with Witten Advisors. “Apartments are steady, but the economy is slowing from the ramp-up.”
That said, the Texas economy is generating plenty of new jobs, which is a positive sign for apartments in certain markets, added Davis.
Dallas Metroplex Shines
Among individual markets, all agreed that Dallas/Fort Worth displayed the strongest real estate fundamentals. With the area benefiting from some large corporate relocations, demand for apartments is rising. Rents have grown in the market 7.7 percent over the past 12 months, and there are more than 30,000 units under construction.
Austin is the second healthiest market. It is the most expensive market to rent in the state, with units renting for an average of $1,100 per month, according to Bruce McClenny, president of Apartment Data Services and an InterFace panelist.
McClenny said that Austin has experienced rent growth of 5 percent in 2016. The market record was 7.7 percent growth in 2013. There are 8,000 units under construction in the Austin market, while 8,000 have been delivered thus far in 2016. McClenny forecasts the number of deliveries in the market to rise to 10,000 units by the end of the year.
One Outlier: Space City
Houston has lost 70,000 jobs over the past few years in the energy sector, causing some concern in the apartment industry. There is negative rent growth in the market, especially among Class A properties, a segment that has experienced a 6 percent dip in rents on average.
Additionally, many landlords of Class A properties in the Houston apartment market are offering one to three months free rent as a concession for lessees. Approximately 19,000 multifamily units are under construction in the Houston market.
San Antonio is considered the middle of the road for the Texas economy, with stable employment and growth.
“It is the Goldilocks market — not too hot, not too cold,” said McClenny of San Antonio. He added that the San Antonio market has recorded 4.4 percent rent growth, which is above its 3.3 percent historical average. There are approximately 6,500 units under construction in San Antonio, where occupancy is hovering around 90 percent.
Bankers tighten purse strings
Lending on new multifamily properties is another area where the market is more tempered than in the past, according to the panelists. While cap rates have remained stable, financing for new multifamily properties has become much more difficult to obtain. New banking regulations are forcing lenders to focus intensely on deal terms and specific projects.
“There has been a pullback on capital flow from the banks in general,” said Greg Willett, chief economist with RealPage. “They are being much more selective on which deals they choose.”
Davis explained that while equity is widely available from sources, there is a thinner pool of buyers in the multifamily market today.
Although there are fewer buyers, cap rates been relatively unaffected based on recent deals that have closed, according to panelists.
Davis added that he thought cap rates may be too high. He pointed out that interest rates and other market factors are “really good,” all of which means there is room for cap rates to move lower.
Investment sales trends
The economists’ insights were supported by the conference’s second panel, which provided an overview of the state of the investment sales market. Moderated by Jeremy Faltys, first vice president of CBRE, the panel featured several investment sales brokers and institutional owners in the apartment sector who are active in the state.
Buyers are still interested in Texas multifamily properties, all agreed. The flight to quality from international capital has trickled down to many Texas markets, especially Houston and Dallas.
Brian O’Boyle, senior vice chairman with ARA, said that while high-net-worth buyers were still the biggest buyers of multifamily assets, foreign capital was the second largest group.
Over the past year, O’Boyle said investment groups from Hong Kong, Bahrain and Germany have sought to invest in multifamily assets in Texas. Paul Nelson, senior director with Invesco Real Estate, said Canadian, Asian and Australian capital groups have been pursuing real estate investments in the United States as well.
While the investment sales market remains healthy with low cap rates, the number of interested buyers has thinned, according to brokers on the panel.
“A year ago you might have had six or seven groups in the call for best-and-final offers,” said O’Boyle. “Today, you have three.”
Second-generation, value-add properties are a bright spot in the multifamily sector, many panelists pointed out. Older apartment buildings — which are in less demand than newer, Class A assets — can provide an opportunity for owners to make small capital expenditures in order to elevate the level of amenities and create value for both the tenants and the real estate.
Rounding out the agenda
Other sessions in the morning included panels focusing on the Dallas/Forth Worth and Houston multifamily markets, and concurrent sessions on student housing and leasing and marketing.
The afternoon began with a general session on new development, moderated by Drew Kile, senior director of Institutional Property Advisors. Other panelists included Matt Brendel, development partner at JPI; Kelly Osburn, principal and vice president with Humphreys & Partners; Jeb Cox, senior managing director with Millcreek Residential; and Adam Brown, managing director of Trinsic Residential Group.
The conference concluded with two concurrent sessions: one on capital markets and the other a San Antonio/Austin market update.
For audio recordings of the conference, please click here.
InterFace Conference Group will present InterFace Multifamily Southeast on Dec. 1 in Atlanta. Click here for more information.