Our borrowers’ favorite question is, “Where should we build next?”
As a lender specializing in financing Texas apartment communities, it’s hard to get the answer wrong. Our state is full of cities adding jobs and people at faster rates than the nation as a whole. As we drill down to help our clients differentiate between “good markets” and “good opportunities,” we focus on several factors including the current rental market, supply and demand and location. When considering these factors, the city of Arlington stands out as an overlooked “good opportunity.”
Michael Backman, Mason Joseph Co.
It’s surprising how little attention this city of 400,000 in the middle of the metroplex has received from multifamily developers in recent years. Even as home to an ever-expanding General Motors assembly plant, one of the state’s largest universities, an entertainment district featuring two $1 billion stadiums, an extensive highway system, easy access to Dallas-Fort Worth (DFW) International Airport and a pro-growth local government, we haven’t worked with a developer yet that had Arlington on its list before we talked.
Yet the selling points are obvious.
Current Rental Market
Overall, market-rate properties in Arlington show steady occupancy at 93 percent with average rents of $1.20 per square foot and annual rent growth of 4 to 5 percent.
Bur buried in these stats is the age of the rental stock. A third of Arlington’s market-rate inventory is more than 40 years old. Conversely, only 6 percent of the supply has been built in the last 20 years. The maintenance of solid occupancy and rent growth while inventory nears obsolescence is impressive.
Supply & Demand
Arlington added more than 7,000 new households from 2010 to 2018. Normally that would result in demand for 3,000 new rental units. Over that period, however, only 2,000 new units were delivered. A historic undersupply of 1,000 units is supportive of new development, but not compelling.
The additional layer to this statistic is that two-thirds of the units delivered in the last eight years were student housing residences. Thus, in a market whose household growth should have supported 3,000 new units, only 800 family units have been built. The handful of market-rate, family properties that were built stabilized quickly, leasing at a pace of more than 20 units per month.
Job growth is the main consideration for future demand. For the six-year period of 2011 through 2016, Arlington averaged 3,000 new jobs per year. This was a good, but unspectacular growth rate of 1.5 percent annually. Things changed dramatically in 2017, when the city recorded a gain of more than 5,000 jobs. That was followed by another 5,000 jobs added in 2018.
Arlington has a jobs-to-household ratio of 1.5. Stated differently, we would expect the city to add one additional household for every 1.5 new jobs. At a rate of 5,000 new jobs per year, the city will need 3,300 housing units annually to stay in balance.
Based on permit data, a total of 1,444 units (single-family, multifamily and student housing combined) were started in 2018. While this figure is up significantly from the 853 units averaged over the previous five years, it is still well below what is needed to keep up with job growth.
Impacts of this undersupply can be seen in the single-family space. At the close of 2018, the median home price in Arlington was selling for $215,000. This is still affordable compared to many Texas cities; however, it represents a 35 percent increase from three years ago.
Location
Meanwhile, Arlington is becoming a more interesting place to live. The opening of the $250 million Texas Live! entertainment and hotel complex in 2018 bridged the short distance between Globe Life Park (Texas Rangers) and AT&T Stadium (Dallas Cowboys).
Arlington’s growth in entertainment-based retail, led by the Texas Live! development adjacent to the Rangers’ new ballpark, should be a catalyst for multifamily construction in the coming years.
Next year the stadium area will add Globe Life Field, the Ranger’s new $1.1 billion retractable dome facility. That same year, a new XFL team will move in to Globe Life Park. With the WNBA’s Dallas Wings playing home games at University of Texas at Arlington, four professional sports teams and a Division I program will be located within a two-mile radius. That radius also includes downtown Arlington, which has several on-going public improvements projects, including a rebuilt main street, plus UT-Arlington’s 41,000 students.
This central core is wrapped by Interstates 30 and 20, as well as Loop 820, and Highway 360. Access to these roadways, DFW Airport, and the metroplex’s 7.4 million residents, has made Arlington a major distribution center for the southwest.
Despite these advantages, at least among multifamily developers, Arlington has largely remained the metroplex’s forgotten city. That makes it not just a “good market,” but a “good opportunity.”
— By Michael Backman, executive vice president, Mason Joseph Co. This article first appeared in the February 2019 issue of Texas Real Estate Business magazine.