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Soaring Home Prices Drive Multifamily Absorption, Sales in Fort Worth

The Dallas-Fort Worth (DFW) metroplex will lead the nation in absolute job creation for a third consecutive year in 2018.

Kyle Palmer, Marcus & Millichap

Strong employment gains have produced healthy household formation trends as new residents migrate to the market and young adults continue to move out on their own. As a result, many new residents are filtering into apartments as homeownership in the metro falls out of reach.

Pricing Concerns

Since the end of 2012, median home prices in DFW have increased nearly 60 percent to more than a quarter of a million dollars, with median prices in some core neighborhoods reaching well above half a million dollars. At the same time, the projected minimum qualifying income rose marginally in comparison.

Al Silva, Marcus & Millichap

The gap in growth between these two metrics makes single-family homeownership unattainable for a number of residents. And although the homeownership rate has ticked up over the past couple of years, it remained below the national average in the first quarter of 2018. These trends bode well for the apartment sector, ensuring overall absorption will be healthy at a time when developers are adding a record number of units to inventory.

Households, whether renting or owning, are searching for affordable living options in the metroplex. A wave of luxury apartments has come on line in urban submarkets such as Intown Dallas, Intown Fort Worth and areas of north Dallas over the past few years. This influx of supply has prompted investors to renovate a slew of older assets to provide additional amenities and upgrade units, resulting in higher rents at these properties.

Upward pressure on pricing has forced renters searching for more affordable housing options to look farther from the core. Southwest Dallas is one area that has benefited, with vacancy falling from nearly 9 percent in 2013 to less than 4 percent in the first quarter of 2018. Tight vacancy has supported healthy rent growth in the area and, despite the average rent rising more than 30 percent over the past five years, the rate remains more than $250 below the metro-wide average.

Vacancy/Rent Updates

Investors looking for Class B and C product are being drawn to West and East Fort Worth due to steep declines in vacancy over the past few years, prompting rent growth that outpaces much of the metro.

In contrast, developers are staying focused on Frisco this year. Nearly 10,000 apartments have been added to this submarket since 2012, more than doubling its total inventory. Vacancy in this submarket has climbed to more than 7 percent as a result, remaining highest in Class A units at 8.3 percent.

Class B vacancy in Frisco has also risen more than 300 basis points during the past two years. The gap between Class A and Class B rents has closed to approximately $30 per month, which could result in Class B vacancy ticking up further as the gap continues to narrow and tenants jump to newer units coming on line. Nearly 5,500 apartments are underway in the area, with deliveries slated through 2020.

During the first quarter of this year, developers completed more than 6,700 apartments, contributing to annual additions of more than 26,000 units. Deliveries during this span were heaviest in Intown Dallas and Richardson. Intown Dallas remains a target for new apartment with 6,000 units underway as of the end of March.

As inventory continues to rise at a robust pace across the metroplex, vacancy has been on an upward trend since the middle of 2016, reaching 5.7 percent in March — up 60 basis points from the first quarter of last year. Over the last year, Class A vacancy rates have risen 80 basis points to 6.5 percent while Class B vacancy reached 5.9 percent on a 90-basis-point increase.

The combination of increased supply and softening vacancy in some areas has slowed rent gains. Average asking rents have risen 2.9 percent to $1,082 per month, moderating from the 5.2 percent increase in the first quarter of 2017. The average Class C rent rose at the strongest pace, gaining more than 4 percent during each of the past four years, resting at $866 per month in the first quarter.

Investors Flock

With the metroplex economy firing on all cylinders, investors are very active in the market. Many first-time and newer investors are targeting DFW for opportunities, drawn to nation-leading job creation and healthy property operations. This trend is especially pronounced for Class B and Class C assets throughout the metroplex. In these spaces, vacancy remains tightest and rent growth is strongest.

Many suburban submarkets boast current rental rates well below the metro-wide average, as well as low vacancy rates that have risen due to residents’ search for affordable housing options. If vacancy remains tight, these areas will see healthy rent gains and as a result, investors seeking upside may target assets in these submarkets.

Apartments in these locales are generating cap rates in the mid-4 to 6 percent range, depending on a number of factors. East Dallas remains especially popular with buyers. Year-to-date, there have been more than twice as many properties sold in this submarket than in any other submarket in the metroplex. Cap rates on sold properties in East Dallas are currently clocking in around the upper-5 to 6 percent range.

Overall, the average price per unit continues to climb. We see asking prices as high as $100,000 per door — about 58 percent above the prior peak achieved in 2006. Despite rising interest rates, cap rates have also compressed further; the metroplex average reached 6.1 percent over the past year, signaling investors’ confidence in the market.

Property owners with plans to list assets in the next 12 months may find this an opportune time to sell, and those who speed up timelines will be met with strong buyer interest.

— By Kyle Palmer, vice president and regional manager, Marcus & Millichap; and Al Silva, senior managing director of investments, Marcus & Millichap. This article first appeared in the June 2018 issue of Texas Real Estate Business magazine. 

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