Up To the Challenge: Dallas Apartment Market Absorbs Record Levels of New Supply
In 2019, Dallas/Fort Worth (DFW) once again represents the nation’s top metro for job creation and net migration. These market conditions are occurring at an opportune time as more than 26,000 multifamily units have been completed throughout the market this year, marking a record wave of annual deliveries.
This influx of new apartments will increase the metro’s rental inventory by 3.3 percent, yet robust demand for new supply allows net absorption to match delivery volume, lowering overall vacancy by 20 basis points.
Over the past three years ending in June, DFW’s apartment stock expanded by 10 percent, or 74,000 units, yet vacancy adjusted moderately during this period. Unit availability hovered in the high-4 to high-5 percent range, with demand supported by the creation of 400,000 jobs, robust in-migration and the widening gap between a monthly mortgage payment and average rent.
The extended period of strong leasing velocity was highlighted by the second quarter of 2019, when a record 12,000 apartments were absorbed. Performance during this three-month stretch lowered vacancy by 90 basis points on a quarter-over-quarter basis.
With employment growth slated to further improve during the second half of this year — the result of corporate relocations and expansions — a continual inflow of new residents are expected. The arrival of more millennials and households during a period of historically high construction activity will allow market conditions to mirror last year, when vacancy adjusted nominally and annual rent growth reached the 4 percent range.
Demand Exceeds Supply
Over the past four quarters, Dallas’ rental stock expanded by more than 4,400 units, yet vacancy compressed 50 basis points to 5.2 percent. Entering the second half, all 13 of the cities’ submarkets were home to sub-6 percent unit availability, a testament to the appeal of apartments in or near the urban core.
Recent deliveries were most pronounced in Intown Dallas, where 1,335 apartments came on line. Amid this influx, local vacancy dipped 10 basis points to 5.9 percent. In contrast, the Intown Fort Worth/University submarket welcomed 2,750 rentals, which triggered a 120-basis-point rise in vacancy.
Supply additions were also noticeable in North Oak Cliff/West Dallas, where nearly 1,300 rentals were finalized. Robust absorption negated the impact of these new apartments, lowering vacancy 150 basis points to 4.8 percent. The area also recorded the largest annual rent gain among Dallas submarkets, as the average effective rate spiked 9.7 percent to $1,168 per month.
Entering the second half of 2019, approximately 11,200 apartments are underway in the city of Dallas, with 2,500 of these units slated for delivery prior to the end of this year. The steady arrival of new units may place upward pressure on vacancy and increase the frequency of concessions usage; however, improving job creation and continually strong in migration suggest these units should be well-received.
Outside of Dallas proper, second-half completions are concentrated in Farmers Branch and other submarkets just north or east of I-635, where a combined 5,700 rentals are slated to come on line. Intown Fort Worth/University and Frisco are also both scheduled to welcome roughly 1,200 new units.
Above-Average Rent Growth
While concessions usage was on the rise throughout the metro over the past 12 months, the pace of average effective rent growth in the metroplex improved on a year-over-year basis, rising 4.7 percent to $1,155 per month.
Submarkets in Dallas proper that recorded plus-7 percent rent growth over the past year include East Dallas, North Oak Cliff/West Dallas, Southwest Dallas and Zang Triangle/Cedars/Fair Park.
Overall, the metroplex’s Class C sector, aided by low-4 percent vacancy, recorded a 5.9 percent jump in average effective rent to $912 per month. Average rates at Class A and B properties each grew by about 4 percent, supported by 40-basis-point reductions in vacancy.
Out-of-State Investor Interest
Sales activity slowed by 25 percent over the past 12 months ending in June, driven by a notable drop in Class B listings. But investors from outside Texas remain very active, accounting for two-thirds of recent deal flow.
In Dallas proper, Class A deals have been distributed throughout suburban markets and Uptown Dallas, where inventories of properties built within the past 10 years attract buyers from primary coastal markets.
In Northwest and East Dallas, local value-add buyers are obtaining older complexes at below-average pricing. The net operating income (NOI) growth potential of these property types has these investors accepting high-4 percent to high-5 percent first-year returns.
Complexes along Interstate 30, between Dallas and Fort Worth, also appeal to a broad range of investors. Class C properties along this transportation corridor often provide buyers with yields in the 6 percent range, with sub-$100,000 per unit pricing prevalent.
Moving forward, the recent decline in the overall volume of listings should influence more activity on those properties that do come to market, causing further price pressure and yield compression through the end of 2019. Additionally, more investors may consider multi-property acquisition opportunities when attempting to quickly expand their local portfolios.
— By Al Silva, senior managing director of investments, Marcus & Millichap, and Mark McCory, regional manager, Marcus & Millichap. This article first appeared in the August issue of Texas Real Estate Business magazine.