Is the Dallas/Fort Worth multifamily market headed back to the same level of intensity we experienced from 2005 to 2007?
Most of the signs suggest that we are on track to not only meet this same amount of demand, but also outperform the market of the mid-2000s. So what are the drivers that are leading this investor demand?
First, as a whole (not only Dallas/Fort Worth), Texas is flourishing right now. The state leads the nation in job growth, gaining nearly 300,000 new jobs in 2013, with one-third of those being considered high-paying jobs.
Second, Texas leads the nation in population growth. These new residents benefit from the affordability of Texas versus that of other states. Here, we enjoy no income taxes and a lower price of living. In turn, this provides a better quality of life.
Performance
Needless to say, such growth and business-friendly conditions have a large impact on the multifamily sector of commercial real estate. Occupancies are the highest they’ve been in more than a decade. The current overall vacancy of 5.4 percent is a full 100 basis points below the level we saw 12 months ago, and effective rents have increased by 3.3 percent in the same time period, which shows that the increased occupancy was achieved without have to give large concessions to renters.
In Dallas/Fort Worth, the blend of high-paying jobs and blue-collar positions will generate apartment demand across all tiers in the coming months. At the same time, development is strong, and the city is expected to bring online more than 13,000 new units this year.
That number, however, does not take into consideration the number of units being torn down. Thus, the net amount of new apartments will be considerably less. Also, the majority of units that are due to come available are in Class A assets, which demand higher rents.
As such, many of the new Texas residents (or current residents who cannot afford the increase in rents) will be looking to move into existing Class B and Class C assets. This is the same trickle-down effect we have seen in other boom markets, which is why the demand in B and C assets will continue to be very strong.
Transactions
During the most recent 12-month period, the velocity of multifamily transactions in the Metroplex area jumped by 40 percent. Much of the increase can be attributed to the Class C apartment segment, which recorded a 50 percent spike in velocity.
These stabilized Class C properties that local owners are liquidating are generating attention from out-of-state investors. In 2013, 48 percent of all commercial deals brokered by Marcus & Millichap in the state of Texas were completed with out of state investors. This capital is coming from all over, including New York, California and every other corner of the country. We are also seeing an increase in capital come in from other countries to be placed in multifamily assets in Texas.
The Class C tier of multifamily offers investors the opportunity to attain a double-digit return, as there is a “value-add” component. Most of these investors are looking to make some physical improvements to the asset so they can be in a position to push rents and increase total return.
This is a strong indication that properties are trading on current fundamentals rather than speculation. In other boom periods, local investors were sellers, while speculative capital moved in from the coasts.
However, the current spread between cap rates and interest rates remains favorable, and the local investors are active and trading up the quality ladder during this cycle.
Bottom Line
In the end, the big question is: What sort or return can an investor expect to get in Dallas/Fort Worth in comparison to other markets across the country?
Taking an average across all property sectors, sales in Dallas/Fort Worth show a 200-basis-point greater in return than sales on either of the coasts. With interest rates remaining low, and despite compressed cap rates, the spread in Texas is more attractive than most parts of the country.
Meanwhile, in the multifamily sector, investors can purchase assets that can generate a total return of 10 to 15 percent. With the continued growth in Dallas/Fort Worth, if an investor offers a quality home to their tenants, then the potential to increase rents and decrease concessions can add several basis points to a total return.
“Everything is bigger in Texas,” so now is time to get on the horse and make the best of the market lying ahead.
— By John Barker, Director, Nation Multi-Housing Group, Marcus & Millichap. This article first appeared in the June issue of Texas Real Estate Business magazine.