The U.S. economy’s continued expansion, combined with the migration of people from high-tax states in the Northeast and California, bodes well for multifamily real estate investment in metros across the Southeast and Texas.
Many cities in the so-called “Sun Belt” will continue to experience strong demand for apartments thanks to the low cost of living and new jobs stemming from corporate investment across the region. The Fort Worth market has been a beneficiary of all of these dynamics, and there are a plethora of compelling reasons why multifamily investors are eager to invest in the Panther City.
Joe Lubeck, American Landmark Apartments
Population Boom
Fort Worth’s population has seen considerable expansion over the past decade, serving as a catalyst for Texas to become a leader in this key fundamental. U.S. Census Bureau data shows that from 2010 to 2018, Texas led the nation in population growth with over 3.5 million new residents, 1 million of which moved to the DFW area between 2010 and 2019.
Just this past year alone, Texas continued to be a national leader in population growth, with Tarrant County coming in at No. 3 for total new out-of-state residents, according to the Texas Association of Realtors®.
In terms of how this growth has impacted multifamily demand, consider that almost 28,000 apartments were leased last year, far outpacing the nearly 23,000 units delivered in 2019, according to data from Berkadia. As net absorption is expected to exceed the five-year average, we can expect the current trend to continue this year and to put upward pressure on effective rents.
Much of this population growth has to do with the fact that corporations have taken notice of the existing talent pool and regulatory climate found in the metroplex.
Jobs, Jobs, Jobs
Charles Schwab’s announcement last fall to move its headquarters from San Francisco to DFW this year might have come as a surprise for many. But the area’s low operational costs for companies big and small have put it on the short list for most relocating firms across the nation.
Core-Mark, another Fortune 500 firm from California, moved operations to the area about a year ago, and Uber’s recent scaling of a large hub at The Epic in Dallas is set to reach about 3,000 employees. These are just a few examples of a larger trend that supports the surrounding labor force, with the Bureau of Labor Statistic’s latest numbers showing that the metroplex added the largest number of jobs nationwide over the past year (roughly 120,700 new jobs).
The job growth forecast is also encouraging, with the Dallas Federal Reserve expecting a 2.1 percent increase in Texas employment figures for 2020 and Berkadia anticipating about 65,000 new jobs in the metro. Tech and manufacturing companies Microsoft and Ericcson are among the local firms planning to hire hundreds of new employees.
The affordability of the metroplex relative to other markets has made it a magnet for both talent and corporate relocations, and that’s perpetuated the cycle of growth and demand for apartments in the region.
According to a Hoyt Advisory Study commissioned by National Apartment Association and the National Multifamily Housing Council, DFW needs approximately 19,000 new apartments each year to meet current and anticipated demand. Fortunately, the availability of land and regulatory climate in the Fort Worth region are conducive to that kind of growth.
Uninhibited Growth
With low taxes, an extensive road network, vast reserves of land and a regulatory climate that supports “horizontal” (i.e. low-density) growth, it’s not surprising to see why developers have built more apartments in DFW this past decade than any other metropolitan area in the nation.
The lack of geographic boundaries to development has, on the positive side, allowed for a natural outward progression of development, in turn making the region more affordable. A negative side effect, of course, is that unrestricted growth leads to sprawl and traffic congestion — an issue that municipalities are now beginning to acknowledge and address.
But for now, as demand for multifamily housing accelerates, the ability for developers to expand further into Fort Worth and beyond has been a positive for investors, allowing them to enter the Fort Worth multifamily market at a lower cost basis than nearby Dallas.
As a result, DFW led the nation in apartment deliveries in 2019 with over 22,000 new units, according to Berkadia, which forecasts that close to 25,000 units will be delivered in 2020. Still, the growth in supply is having only a nominal effect on occupancy, and rents are forecasted to rise another 2.8 percent this year thanks to the steady stream of demand.
As renters move up into Class A units, there is a long waiting line to lease the older, more affordable Class B properties in the area, which constitute about 40 percent of the metro’s housing stock.
In short, this thriving market has all the right ingredients in place for investors to reap strong returns from multifamily investment. Our experience in the market for over 15 years provides plenty of evidence to support that
thesis.
Investment Dynamics
Our team’s first foray into the DFW market was in 2005, when there was still considerable yield to be found in the workforce housing/value-add segment of the market. Much like today, Fort Worth’s comparatively low pricing, coupled with population growth, offered an important pull factor at that time. We enjoyed above-average rent growth as a result of our in-house management platform and attention to performance.
Today, Fort Worth continues to offer investors many of the benefits of big-city investing without the hefty price tags, but the field is markedly more competitive. Increasing competition in the value-add space has driven down yields in this space, forcing us to shift our focus to newer Class A product and multifamily properties that are still in lease-up. Underwriting, which was also less stringent in previous cycles, now requires more thought and creativity, as well as a sharper analysis of all line items of NOI, not just capital expenditures tied to rent increases.
In conclusion, the Fort Worth area’s fundamentals — strong job and population growth and lower pricing relative to other major metro areas — presents a compelling investment opportunity over the long-term.
The renaissance of suburban neighborhoods surrounding multifamily properties — with an influx of restaurants, breweries and entertainment options that provide off-site property amenities — is another interesting dynamic that’s only likely to accelerate demand and rent growth in Fort Worth. For all these reasons, the Panther City should continue to be a premier multifamily investment market in the Sun Belt region.
— By Joe Lubeck, CEO, American Landmark Apartments. This article first appeared in the March 2020 issue of Texas Real Estate Business magazine.