Multifamily developers in the Dallas-Fort Worth (DFW) metroplex in 2020 expect to see a slightly slower pace of rent growth brought on by record levels of new supply in recent years. This trend, paired with higher costs of adding features that distinguish properties from their competition, could lead to slightly more modest profit margins for multifamily developers.
According to the latest data from CoStar Group, the average rate of multifamily rent growth in DFW between 2015 and 2019 was roughly 3.5 percent, skewed in part by a massive annual gain of 6.1 percent in 2015 and 3.9 percent in 2016. The citywide vacancy rate compressed below 7 percent in those two years, leading to an even more pronounced building boom.
Since then, annual rent growth has maintained the current projection of 2 to 3 percent, with gains in the Class B space outpacing those of Class A product, a classification that captures virtually all new construction outside of purpose-built affordable housing. During the five-year period ending in 2019, nearly 110,000 new units were delivered in DFW, with annual supply growth as a percentage of total inventory topping 10 percent in some years.
The new year purports to be the first since 2015 in which fewer than 20,000 new units will be added to the supply, but then, the year is still very young. Nonetheless, a recent article in The Dallas Morning News cited data from local research firm RealPage stating that roughly 17,500 new units are set to hit the metroplex in 2020 — the highest total among major U.S. cities.
While these trends suggest that the DFW apartment market is nearing maturity, the sector undoubtedly remains a very lucrative and popular space in which to develop. A perennial leader in new construction and absorption, the metroplex has become a top landing spot for major corporate relocations and expansions over the last few years. As such, multifamily supply and demand have largely remained in balance with one another.
Many multifamily professionals are forecasting rents to increase between 2 and 3 percent in DFW this year. On the other side of the equation, although capital is cheap in an environment of suppressed interest rates, unemployment is low and causing labor costs to rise. Land is, of course, in shorter supply this year than in 2019, and costs of materials have almost never declined historically, only flattened.
Specific Pressure Points
At this point in the cycle, the escalating nature of construction and operating costs is nothing new, and developers have long since begun pricing them into their pro formas. Rather, it’s the emergence of two relatively new expense items — costs of introducing aggressive marketing initiatives and top-notch amenities — that are among the biggest contributors to higher operating and construction costs, respectively. The appreciation of these items speaks to a market that is nearing maturity, and one in which developers must get increasingly creative to boost occupancies and push rents.
“We expect to see continued upward pressure on the expense side in 2020, both controllable and non-controllable, resulting in moderate revenue growth of 1.5 to 2 percent,” says Mark McHenry, vice president at Hillwood who serves as managing director of the company’s multifamily division. The Fort Worth-based industrial giant has several apartment projects under construction in the metroplex, including the 322-unit Cadence at Frisco Station and the 332-unit Tacara Village, the latter being located on its 26,000-acre AllianceTexas master-planned community in Fort Worth.
“More and more of today’s renters are seeking best-in-class convenience and service in their communities,” McHenry adds. “Features like smart home technology, increasing connectivity and bandwidth and indoor and outdoor social spaces that allow for resident interaction are important to our residents and have all been very well-received at our properties.”
In terms of the “non-controllable” costs, McHenry says that he also expects heftier insurance premiums and tax appraisals to factor into his firm’s multifamily operating expenses in 2020.
Geopolitical issues like trade disputes and impeachment proceedings that are coming to a boil in an election year also cannot be ignored. Besides generating higher materials costs via tariffs, these forces also influence the confidence of multifamily investors and the purse strings of multifamily lenders.
Ultimately, however, McHenry and other local developers believe that if the metroplex maintains its rates of job creation and in-migration, multifamily supply and demand should largely continue to move in lockstep. Other developers appear to echo this sentiment.
“We view the supply-demand balance in the DFW market as one defined by strong job growth that continues to drive healthy absorption,” says Payton Mayes, executive vice president and Central Region manager at JPI. “With that perspective, our strategy in 2020 is to have market occupancy that is in-line with or above historical averages.”
JPI has been among the most prolific multifamily developers in North Texas during the building boom of the last few years. The Irving-based company has some 5,000 units under construction throughout the metroplex after announcing within the last two months that it secured construction financing for two new projects. These include the 430-unit Jefferson Central in Uptown Dallas and the 354-unit Jefferson Rockhill in McKinney.
Mayes shares McHenry’s view that programmable thermostats and locks are hot with today’s renters in terms of in-unit features, and that residents as a whole are highly drawn to communities that offer large, inviting communal spaces. These spaces can include coworking offices, fitness centers with yoga and spin studios, rooftop decks and expanded pool areas. JPI has also found success with “micro markets” — areas that are open 24/7 and where residents can meet and chat while purchasing snacks and drinks.
Multifamily developers and managers, whether third-party or in-house, have long since realized the importance of activation programs and social media promotions in building a sense of belonging and comfortable interaction among residents. But before those programs can work their magic, the number of occupied units has to reach a critical mass.
And with so much competitive product coming on line throughout the metroplex, it’s becoming imperative for multifamily developers and managers to spend the necessary dollars that get their properties to contend in online search rankings, the primary means by which renters find housing.
SWBC is underway on Phase II of its Royalton at Craig Ranch project, which will add 271 new units to the rapidly growing McKinney submarket. The company is developing some 1,500 units throughout Texas and is also pursuing value-add investments.
“While we believe the demand is there to keep up with supply for the foreseeable future, given the high level of competition, we also understand the importance of ramping up our digital marketing to reflect higher search rankings and of paying a little extra to get that traffic to our properties,” says Stuart Smith, senior vice president at SWBC Real Estate.
“As supply continues to grow, the emphasis on retention becomes even more important,” Smith adds. “We’re focused on having community events that allow the staff to get to know residents personally and bring them together, and we’ve seen our retention rates increase as we’ve done more events at our properties.”
A development firm focused on suburban pockets of the metroplex, SWBC also has several projects underway throughout the metroplex, including the 300-unit Royalton at Grand Prairie, the 271-unit Royalton at Craig Ranch in McKinney and the 295-unit Royalton at Rockwall Downs.
Smith notes that in these suburban submarkets, many projects must go through costly rezoning processes. Meanwhile, developers must invest time and resources in convincing civic leaders and residents that their project will ultimately be an asset to the larger community.
“Getting people comfortable with our projects and going through the rezoning process takes a lot of time and upfront money, and there’s no guarantee that it will get approved,” says Smith. “You can lose a lot in terms of legal, engineering and architecture fees. So even though apartments continue to be in high demand, it’s important to ‘go against the grain’ and develop in niche pockets where demand is high and rental rates make sense for new product.”
— By Taylor Williams. This article first appeared in the February 2020 issue of Texas Real Estate Business magazine.