Allison Holland, Capital One
John Reichenbach, Capital One
Right now, the Dallas-Fort Worth metropolitan statistical area is one of the hottest multifamily markets in the country with an eye-opening 34,000-plus units currently under construction. Long-term trends suggest that even if construction slows somewhat, demand for north Texas apartments will outstrip supply for the foreseeable future.
The reason is straightforward. Dallas has much going for it that employers find extremely appealing, including a central location equidistant from both coasts, an educated workforce, a diverse economy and a favorable business climate. These underlying advantages are simply not going to change.
In the last three years, a number of companies, including Toyota North America and Nationstar Mortgage, have relocated their headquarters to Dallas-Fort Worth, while others, like Southwest Airlines and AT&T, have added thousands of positions to their headquarters. Most recently, American Airlines announced plans to create a corporate campus west of its current location near Dallas/Fort Worth International Airport.
Dallas-Fort Worth has also become a popular site for regional corporate centers. State Farm is constructing a 2 million-square-foot campus on Dallas’s main north-south light rail line in suburban Richardson. When it is completed in 2016, the company will have more than 5,000 employees in north Texas.
Liberty Mutual announced this year that it will build a huge service center in Plano, providing for another 5,000 jobs. Other large employers headquartered in the Dallas area include Texas Instruments, The Neiman Marcus Group and BNSF Railway.
Attractive Fundamentals
In 2014, the population in north Texas grew by more than 100,000 people, and if anything, the pace has only accelerated this year. These newcomers are finding jobs. Local employment grew at 3.4 percent for the year ending in June, compared to a national growth rate of 2.3 percent. The unemployment rate at the end of second quarter 2015 was 4 percent, again below the national figure.
Because the residential housing market is extremely tight, a high percentage of the new residents — even those with stellar credit ratings — will end up as renters. The number of homes for sale in June was less than half of what it was a decade ago, even though the population is much larger. In suburbs like The Colony, Bedford and Richardson, houses typically sell in less than a month. As a result, home prices are growing rapidly.
Rents in Dallas-Fort Worth are also growing at a brisk pace. North Texas rents are at an all-time high, driven by almost 7 percent annual rent growth for the year ending Sept. 30. Despite the increase, occupancy rates exceed 95 percent.
Investors Step Up
We have seen developers rush in to fill the need. More than a dozen apartment towers are under construction or planned for places like Uptown, Victory Park, Oak Lawn and the Design District. For instance, in Uptown, a series of high-rises is going up in the McKinney Avenue area. Streetlights Residential recently topped out The Jordan, a 212-unit building near Klyde Warren Park. High Street Residential, a multifamily subsidiary of Trammell Crow Co., has announced plans for the 20-story M-Line Tower, while Stoneleigh Cos.’ Waterford Residential subsidiary is working on an additional 20-story tower.
Developers are also renovating and repurposing existing buildings. HRI Properties is converting the former Mayflower Building into apartments and retail space. Built by the Mayflower Investment Co. in 1965, the property is listed on the National Register of Historic Places for its architectural significance.
The construction boom has not been restricted to the urban core. There are substantial projects in the $300 million Legacy West development in west Plano, for example. Palladium International has just announced that it has plans to build a luxury 30-story multifamily high rise there. At Craig Ranch, a master-planned community in McKinney, ground was broken on a second phase of the Parkside luxury apartments and a parcel of land for the third phase has been purchased. To put all this activity in a national perspective, Dallas-Fort Worth is the fourth largest apartment building market in the country.
The attractive fundamentals have not escaped the attention of REITs, private equity funds and institutional investors. They also value the stability of the Dallas-Fort Worth market, which has historically been less volatile and more reasonably priced than markets on the coasts. REITs own 7.7 percent of the multifamily units in the market, and during the last year, a number of Canadian investors have also made purchases in Dallas-Fort Worth. They include the Milestone Apartments REIT, Pure Multi-Family REIT and Marlin Springs US Realty. Other large private investors have been active, such as the locally based Presidium Group, which owns more than 4,500 apartment homes in Dallas-Fort Worth.
Investment and Finance
Strong fundamentals have made financing for development, acquisitions and refinancing very competitive. Banks, insurance companies and CMBS lenders are all active, and the agencies view Dallas as a strong market. Going forward though, they will likely proceed cautiously, monitoring supply and demand and financing properties that are competitive with the new communities coming online.
Taken altogether, the outlook for the Dallas-Fort Worth multifamily market is excellent. The fundamentals are solid, with demand outstripping supply for the immediate future. Both developers and investors are active, and there’s ample capital on the debt and equity sides to support future growth. Dallas-Fort Worth is truly a market with staying power.
— By Allison Holland and John Reichenbach, senior vice presidents for Capital One. This article originally appeared in the December 2015 issue of Texas Real Estate Business.