The abundance of completed units delivered to the market has had the biggest effect on the Dallas/Fort Worth multifamily sector. From September 2008 to September 2009, almost 15,000 units were completed in the Metroplex — nearly double the 7,600-unit annual average during the previous 5 years.
Occupancy in the Dallas area dropped 0.2 percent to 89.8 percent during the third quarter of 2009, its lowest point since early 2005. However, occupancy for newer product held steady, while occupancy in older product tiers has suffered. The 1990s-era properties were the only product age category to achieve occupancy of more than 90 percent in the quarter, posting 92.4 percent occupancy. During the third quarter, 2000s-era product posted an 89.4 percent occupancy rate, and 1980s-era product posted an 89.8 percent occupancy rate. MPF Research forecasts that occupancy will drop 170 basis points to 88.1 percent in the next 12 months, given the huge stock of new deliveries expected to hit the market.
New construction deliveries will also cause rents to drop further while rent concessions are expected to increase. One planned construction project is the redevelopment of the historic Continental Building downtown. The Dallas City Council approved $17 million in tax increment financing for Cleveland-based developer Forest City to redevelop the building. The project will include 200 apartment units with ground-floor retail. Construction at the 11-story building could begin as soon as the first quarter of 2010.
Leasing demand for apartment units picked up during the third quarter, as the Metroplex posted positive absorption of 2,770 units, the first positive absorption recorded in a year. However, the annual number of units absorbed in the Metroplex is at negative 8,260 units during the 12-month period that ended in September.
Some of the larger apartment sales transactions this year included Madison at Cedar Springs, a 380-unit community that sold for $32 million in September; Mustang Park, a 389-unit property that sold in August for $28.3 million; and Prairie Creek, a community of 464 units that sold for $46 million in February.
The pool of distressed assets has grown over the last year ,and a dozen of the property sales transactions during the last 12 months resolved a troubled asset situation. As of Oct. 1, RCA reported 59 apartment properties totaling $620 million are currently in distress. As a result, the volume of troubled asset transactions is expected to rise during the next couple of years.
The majority of properties currently on the market have asking prices of less than $10 million, according to listings available through LoopNet and CoStar. There are a few Class C portfolios currently being marketed for more than the $10 million threshold; this includes The Hub portfolio, a 783-unit redevelopment opportunity situated on nearly 28 acres of land that is being offered for $54 million; the 634-unit East Dallas Portfolio offered for $22.3 million; and the Dallas Multifamily Portfolio, which contains 668 units, offered at $21.8 million.
The DFW apartment market has 16,557 units under construction that are projected for completion in the next year, according to MPF Research. Another 1,019 units are under way, with completion dates of late 2010 and early 2011. Also according to MPF Research, nearly 18 percent of the units completed in the last year are located in the West Plano submarket. This submarket continues to draw residents due to its attractive employment centers, relatively low cost of living and award-winning school district. For these reasons, MPF Research forecasts that 3,486 units of the new supply to be completed in the next year will be in the West Plano submarket.
Stagnant employment and a glut of new supply have stalled rent growth in the DFW apartment market. But, once employment kicks in, the apartment market could start to see some recovery as early as the end of 2010.
— Roger McElroy is a vice president with Grubb & Ellis' Multi-Housing Group.