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Texas Summer Heat Is No Match for DFW Multifamily Market

Edentree, a 360-unit apartment community in Carrollton, had 198 buyer registrations, 25 tours and 17 offers before it eventually sold to a 1031 exchange buyer. (Image courtesy of Transwestern).

To say the multifamily investment market in Dallas-Fort Worth (DFW) is healthy would be an understatement. With nearly 36,000 units across 183 properties sold in the first half of 2018, according to Real Capital Analytics, a more accurate assessment would be that the sector is — figuratively — on fire.

Investor demand for workforce housing remains at an all-time high. With strong economic fundamentals, buyers remain bullish on the DFW multifamily market. Historically low interest rates have attributed to cap rate compression as buyers continue to search for value-add opportunities. While cap rates remain compressed, the yields are still very attractive when compared to alternative investment options.

With listings averaging more than 125 confidentiality agreements, 20 tours and 15 offers, the competition has become intense. Winning a deal in today’s market takes more than a strong offer — it takes a good reputation, determination and aggression.

James Roberts, Transwestern

Buyer Strategy

Buyers can differentiate themselves and establish a competitive advantage by having the equity partner, lender, contractors and management company involved in the transaction prior to the initial offer.

Sellers have grown accustomed to tight timelines, limited contingencies and significant non-refundable earnest money at contract execution. In this competitive of a market, sellers have the luxury of choosing buyers with a solid track record of closing.

For example, Transwestern recently marketed a 300-plus-unit community in Dallas. Buyer interest was very strong; prospective buyers made 27 tours and the property ultimately received 22 offers.

The buyer pool was narrowed to six potential buyers for a “best and final offer” round of bidding, with the ultimate buyer increasing their bid by seven figures to win the deal. Almost all the top offers included substantial hard earnest money. Track record and recent experience also played a major role in the seller’s selection.

Value-Add Picks Up

One of the hottest segments in the DFW multifamily market is value-add opportunities. Buyers in the Class B and C spaces are upgrading communities in several ways, one of which is interior improvements.

Standard interior renovations in the valued-add space consist of faux wood vinyl flooring, brushed nickel fixtures and lighting packages, black or stainless steel appliances, tile backsplashes and new cabinet fronts and hardware. Buyers are looking to further increase revenue by adding washer/dryer connections to units, as well as covered parking and exterior amenities such as playgrounds, dog parks and upgraded pool furniture.

One of the most intriguing value-add propositions is the addition of water conservation devices, which save on water expenses and can help buyers earn more attractive interest rate pricing and city rebates.

Top buyers in DFW are using creative debt strategies to help leverage their renovations and maximize returns. The market has seen an increase in transactions wherein buyers have acquired properties using bridge debt — offering them a longer interest-only period, less restrictive prepayment covenants and higher debt leverage.

Looking Ahead

At this point in the market cycle, many properties in DFW have already had some level of improvement. Owners are looking beyond the standard renovation program for new ways to add value, such as adding smart features, including security systems, mobile-accessible thermostats and interior lighting automation.

While value-add investors continue to cycle through renovations, new construction in North Texas has not yet begun to slow. The region’s apartment stock has grown by roughly 14 percent during the last five years. However, the recent growth has not impacted workforce housing as new product is targeting a different demographic and higher rents.

According to research by MPF, occupancy for Class A product across the metroplex has declined nearly 2 percent since its peak in 2015. Comparatively, workforce housing occupancy has remained over 95 percent while increasing rents. The spread between workforce housing and Class A developments is over $430 per unit, leaving considerable runway for value-add investors to continue pushing rents in the face of more supply.

Just like the relentless heat of a Texas summer, the robust pipeline for multifamily investment in DFW shows no signs of cooling anytime soon.

— By James Roberts, vice president, Transwestern. Transwestern Managing Director Taylor Snoddy, Vice President Philip Wiegand and Senior Analyst Eric Stockley also contributed to this article, which first appeared in the August 2018 issue of Texas Real Estate Business magazine. 

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