Panel: Multifamily Developers in DFW Should Focus on Costs, Not Revenue

DALLAS — After experiencing exceptional rent growth between 2014 and 2017, it may be time for developers of multifamily product in the Dallas-Fort Worth (DFW) metroplex to shift their attention from the revenue side of the equation to the expense side.

According to CoStar Group, average asking rents across DFW rose by about 12 percent between 2014 and 2017. The year-over-year rent growth of 6.3 percent that occurred between 2014 and 2015 marked a 10-year high for the market and kicked new development into high gear.

Now, however, the metroplex has become inundated with new multifamily supply — nearly 22,000 new units delivered in the past 12 months. Rent growth has slowed to about 2.2 percent year-to-date and vacancy is inching upward. But rather than pump the brakes on building, developers should be looking for ways to cut costs, not push rents, if they want to maintain their current levels of profitability.

Such was the conclusion of six multifamily developers who gathered at the seventh annual InterFace Multifamily Texas conference on Sept. 26. Held at the Westin Galleria hotel in Dallas, the event drew roughly 250 attendees.

Matt Brendel, divisional president and managing partner at Irving, Texas-based JPI, was the first panelist to steer the conversation in this direction, noting that at this point in the cycle, multifamily developers must be more focused on finding efficiencies in design and construction than in years past.

“Because revenues have been so strong for the past few years, everybody’s been focused on trying to put 12 pounds in a 10-pound bag,” said Brendel. “The focus has been on introducing as many amenities and unit features as possible. But now we’re looking at the cost side of development a lot more closely.”

Moderator Drew Kile, senior director of Marcus & Millichap’s Institutional Property Advisors (IPA) division, pointed out that at this point, renters of Class A units have become very accustomed to extensive amenity packages and upgraded unit interiors. Developers should not regress on these features, but should instead try to acquire a better understanding of which ones appeal most to renters.

“One of the challenges the industry is facing is that it can’t take a step backward,” said Kile. “If a unit doesn’t have certain little things, like 10-foot ceilings or a modern kitchen, renters might go elsewhere. So the challenge lies in monitoring those costs while still delivering product that’s going to lease up quickly and sell.”

Differentiation By Service

Offering renters certain services — concierge, trash valet, package handling — is becoming a cost-effective way to distinguish a property from the competition. In many cases, the costs of these services are factored into the final rental rate so that renters don’t view them as ancillary or unnecessary expenses.

Developers of Class A product are increasingly borrowing on practices from the hospitality industry to accomplish this goal, and are introducing creative ideas that promote social engagement and mingling within the community. Examples of these services include brunches on weekends, wine tastings and organized fitness classes.

Panelist Rick Perdue, senior managing director at Mill Creek Residential, said that his firm’s property managers are constantly working to gather data and feedback from residents on which amenities they value and are truly willing to pay for.

“We’re getting really good at asking questions, because we’ve realized that what developers think people will pay for is not necessarily what renters truly will pay for,” he said. “We share that feedback with managers in all markets we’re active in. And if a service or amenity isn’t something people are willing to spend on, we get rid of it, even if our competitors have it.”

Single-Family Feel, Multifamily Space

In terms of physical features, developers are finding affordable ways to add attached garages, private balconies and yard space on ground-floor units. Typically this is accomplished through designing the property so that is has an unusual shape, thereby utilizing all available land, as well as by using alternate building materials.

The goal of this activity is to capture the privacy of a single-family setting without breaking the bank. According to the panel, this is critical in a market like DFW, which not only has a strong contingent of millennial renters, but also a growing population of older couples that want to downsize once their children are grown.

Panelist Greg Coutant, director of development at StreetLights Residential, stated that his company is increasingly building product that can be marketed toward people that would normally spring for condos. This type of resident appreciates the amenities and services of a multifamily community, but also wants the intimate setting of a single-family home.

“Ultimately, it’s about delivering quality of life,” said Coutant. “That’s what you’re selling when you rent an apartment as opposed to buying a home. And there are a lot of people who when they reach a certain age would rather put their money toward rent instead of property taxes.”

— Taylor Williams

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