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How Multifamily Investors Can Find Success in the Competitive Dallas-Fort Worth Market

Gateway-Pines-Forney

As demand for value-add deals surges in the metroplex, investors are developing a better sense of what amenities and features renters value most, including high-end kitchen finishes like this one at Gateway Pines, a 337-unit property in the Dallas suburb of Forney.

By Ryan Mueller and Mitch Faccio, vice presidents of acquisitions, MLG Capital

There’s no end in sight for the rising competition among multifamily investors in the desirable Dallas-Fort Worth (DFW) market.

These days, it’s common for a fully marketed multifamily property in the DFW metroplex to receive upwards of 50 offers during the first round of the sale process alone. This sheer competitiveness in acquisitions has forced sellers to pursue several rounds of bidding and buyers to differentiate themselves through pricing and terms. In addition, the level of competition has made it difficult for new buyers to participate in the market at all.

Ryan Mueller, MLG Capital

Ryan Mueller, MLG Capital

The metroplex has been, and continues to be, the top transactional market in the country for multifamily. In the last 12 months, sales volume across Texas has exceeded $19.2 billion, with DFW accounting for $9.6 billion, or approximately 50 percent of the Lone Star State’s total sales volume. DFW has outpaced both Atlanta and New York City by more than $1 billion in sales volume in the last year, with those markets seeing $8.6 and $8.4 billion in multifamily sales, respectively.

At the same time, we are seeing capitalization rates compress across the metroplex. In the last 12 months, cap rates have compressed by 25 to 50 basis points with most assets now trading below a 4-cap. As a result, prices are being pushed to record levels, with many brand-new properties netting $235,000 per unit and higher.

What Makes DFW So Desirable?

MLG Capital has had a market presence in DFW since the 1980s. Our founders started buying properties off the courthouse steps when the federal government created the Resolution Trust Corp. (RTC) to help manage the selling of assets out of conservatorship after the Savings and Loan Crisis of the 1980s. Today, our firm has an office and dedicated staff in Dallas and owns more than 21,800 multifamily units.

Mitch Faccio, MLG Capital

Mitch Faccio, MLG Capital

Many of the factors that led MLG to invest in Texas back in the 1980s still hold true today and are spurring interest from investors across the country as well.

The metroplex offers a lower cost of living than the coastal markets in the United States, a business-friendly environment, a growing population and employment base and strong public school systems. DFW is also one of the few top metropolitan statistical areas (MSAs) in the country that isn’t constrained by natural boundaries such as the ocean or mountains, which means there is still plenty of land to further expand.

DFW vacancy rates are at their lowest since 2017. Rent growth is near historic highs, outperforming most data forecasts. MLG’s DFW portfolio currently has a 96 percent occupancy rate, with renewal percentages above 55 percent. Annual rent growth on new leases is at 5 percent, and rent growth on renewals is at 4 percent.

While DFW is a leader in the country for new supply, we are seeing that supply beginning to taper and expect this will further push occupancy and rental rates upward in the next 12 to 18 months. All of these elements should combine to create the perfect storm of competition over multifamily properties in the metroplex.

How Can Investors Remain Competitive?

While the metroplex is a desirable and competitive market, many investors are still finding formidable success in the region by identifying the right properties, features and amenities that will attract renters.

Demand for value-add assets continues to dominate the marketplace. Investors should remain focused on interior renovations in the kitchens and bathrooms. The standard, luxury renovations today include stone countertops, undermount sinks, gooseneck faucets, LED lighting, modern cabinets, backsplashes, contemporary paint colors and faux wood flooring.

Depending on the submarket and tenant demand, owners are also testing out technology packages with upgrades like keyless entry, smart thermostats and USB outlets. Other elements that make an asset desirable include attached garages, in-unit washers and dryers, pet yards and nine-foot ceilings.

New trends in community amenities and services have also emerged recently. For example, package lockers or package delivery services have become a standard amenity across most apartment complexes in DFW. Stemming from the growth of online shopping and undoubtedly accelerated by COVID-19, residents are more conscious of delivery needs, security, status updates, ease of access and more.

Owners should forecast their future package volumes to ensure they install ample locker systems upfront, or contract with a third-party package delivery service that can fulfill capacity needs. Without this foresight, resident dissatisfaction is likely as packages are left on floors, outside doors, in mail centers or in other unsecured places.

Finally, it’s essential that investors have strong relationships in the market. Real estate is a relationship-based business, and having local relationship helps investors source deals, create value-add opportunities and identify operator mistakes, ultimately resulting in accretive investment opportunities.

— MLG Capital is an investment manager in private real estate for investment advisors, family offices and accredited individuals. Since its inception in 1987, the firm and associated entities have had active, exited or pending investments totaling approximately 26.5 million square feet of total space across the United States.

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