Dallas’ Multifamily Market Poised for a Turnaround

The region has suffered from oversupply and a dearth of new deals, but the fundamentals position it for quite the recovery

reprints


The business narrative in Texas has generally been one of pure victory these past few years, as over 200 corporations have relocated there over the past decade, and the state has seen an influx of transplants from around the country since the start of COVID.

Given this, the multifamily sector in the Dallas-Fort Worth metroplex has what seems like the raw materials for a full-blown modern-day success story.

SEE ALSO: Gold Rush for Manhattan Retail Space Waning, Thanks to Lack of Availability

But, in this time of rate instability and economic uncertainty, nothing is quite that simple.

Bill Kitchens, director of market analytics for real estate data firm CoStar (CSGP), refers to multifamily demand in the metroplex as “bipolar.”

“We saw a surge in demand coming out of 2021, and a dramatic pullback in 2022,” said Kitchens. “In the time since, we’ve been looking for demand to come back in a meaningful way. In the first quarter, we’re beginning to see the first signs of that demand coming back into Dallas-Fort Worth.”

According to CoStar’s latest multifamily market report, “in an encouraging signal, renters filled about 4,700 units in the first quarter, closer to first quarter averages from 2017 to 2019.”

But a recent burst in construction brought vacancies up to 10.6 percent, “up from the trough of 6 percent in 2021.”

“Occupancy may have come down a bit, but a lot of that is due to the massive amount of new supply we have, which is all getting absorbed,” said Jorg Mast, executive vice president at brokerage Colliers (CIGI). “It’s not like apartments or communities are not filling up. It’s just that concessions have come back into the market. It’s a little bit tougher to get people in the door and into beds.”

Colliers’ recent multifamily report for the region cites 69,370 units currently underway, with an annual average of 55,000 units over the past five years. The report cites standout projects, including the 500-unit Hastings End at The Sound in Las Colinas and The Margaret at Riverfront, which has 536 units slated for delivery in early 2024.

Mast notes that while the number of units in the pipeline has led to “an oversupply situation,” new construction permits dropped by 60 percent in 2023, and are expected to drop another 50 percent this year, because “it’s so hard to get deals done right now.”

Drew Kile, executive managing director for investments at Institutional Property Advisors (IPA), a division of Marcus & Millichap (MMI), concurred, saying that while the region is absorbing supply and maintaining rent growth better than most markets, in the metroplex overall, development is “the hardest part of the business right now.”

“Our pipeline’s off between 70 and 80 percent from the peak, which would’ve been early to mid-2022,” said Kile. “Value loss is making it hard to pencil new deals, and access, availability, cost of debt and construction costs are still at record highs and don’t show any significant signs of dropping. So it’s extremely hard to get deals to pencil.”

Nick Fluellen, executive managing director of investments at Marcus & Millichap, adds that even with pricing at a relatively low point, investors are proceeding with caution.

“This is the biggest adjustment to pricing we’ve had since the Great Recession, yet activity is slower than you would expect,” said Fluellen. “When your interest rates nearly double, you put short-term debt on your properties, and rent growth is not as robust as it was, it’s a bad combination all around. I think we’ll come out the other side in a really good position. But these challenges we’re facing are short-term challenges, and no one is really immune to them unless they happen to put long-term debt on their deals, which is very few people.”

Ray Gabriele, chief investment officer with developer Vero Sade, notes that the slowdown has been accompanied by a geographic shift in activity.

“We’ve definitely seen a slowdown in terms of deal flow on the development and acquisitions sides,” said Gabriele, who notes that for the deals that are getting done, “there’s been a shift in focus from a lot of larger infill projects to smaller-scale suburban projects.”

On that front, the area’s northern suburbs are seeing some of the strongest activity in multifamily.

IPA noted in a recent investment forecast for multifamily in the region that “the suburban trio of Allen, McKinney and Frisco have more rentals underway with scheduled completion dates between 2024-2026 than at least 35 major U.S. metros, with 18,800 units slated to finalize in the next three years here.”

Urban infill within the metroplex, on the other hand, is reflecting the overall challenges of the market.

“It’s very tough to do deals in urban infill, like in Dallas proper or in Fort Worth, because there’s not that many sites available, and it’s expensive to build,” said Mast. “Investor sentiment is favoring the suburbs.”

On the rent front, Colliers notes that the average monthly asking rent in the fourth quarter of 2023 was $1,526, “slightly lower than Q3 2023,” and CoStar puts 12-month asking rent growth at negative 1.4 percent.

CoStar’s Kitchens said, though, that he believes rent growth is on the verge of turning around, driven by forecasts of renewed demand.

“We’re starting to see some positive signals into Q2, which is prime leasing season. I’m really encouraged that we’re going to continue to see vacancy flatten out by the end of the year,” said Kitchens. “With demand coming back and construction rolling over in the next year, I anticipate rent growth to really come back. Our forecast expects vacancies to begin to re-tighten through the next year. This year we expect to end with rent growth closer to 1 percent, before igniting closer to 3 percent by the end of 2025.”

The area’s major developers, meanwhile, do have some projects in the works and on the way.

In December, Trammell Crow Company announced the beginning of construction on a joint venture with MSD Partners, The Retail Connection and Highland Park Village Associates for a 1 million-square-foot, mixed-use development in Dallas’ Knox Street neighborhood that will include 48 ultra-luxury condominiums ranging from 2,500 square feet to over 15,000 square feet, and a 27-story, 173-unit multifamily building, all with extensive amenities. This is in addition to office, retail, restaurant space, a half-acre park, and a 140-room hotel. The development is expected to open in 2026.

Trinsic Residential Group is in the early stages of the Aura Northline in Plano, a 325-unit, five-story Class A apartment development offering one- and two-bedroom apartments with amenities such as a resort-type pool, a fitness center, a coworking lounge, and a dog wash and dog park.

And, in 2022, JPI, which has built over 29,000 housing units in the Dallas-Fort Worth area with almost another 10,000 under construction, announced a joint venture with Madera Residential and WayMaker on 10 communities in Dallas-Fort Worth that will provide over 3,500 Class A multifamily homes throughout the area.

While the company has historically served the luxury rental market and that remains its primary focus, it’s also found success of late with public/private partnerships such as Jefferson Eastchase in Fort Worth, which had its construction groundbreaking several weeks ago.

The development, a partnership with city agency Fort Worth Housing Solutions, will include 398 apartment homes ranging from studios to three-bedrooms, with 50 percent available to tenants earning no more than 80 percent of the area median income (AMI). Leasing is slated to begin in the fourth quarter of 2025.

“With all the issues in the economy right now, we’re finding that these 80 percent AMI projects actually pencil out. They make sense,” said Blake Taylor, senior vice president of development for JPI. “We are having success there just as we still have some success, although not as much, with the math working on high-end, market-rate deals.”

But Taylor does note that market challenges can still make high-end development in the region worthwhile, with the right sort of strategic mindset.

“Most of the market research companies are predicting less supply and potential shortages in 2026, where you will not have nearly the amount of apartment construction deliveries that we have today,” said Taylor. “So, while the interest rates are higher today and the map a little more difficult, with that long-term mindset and the view that there are fewer communities able to start construction, that [should] mean substantially less competition when we start leasing.”

While the metroplex has faced unquestionable challenges, the general long-term thinking has the multifamily market continuing to enjoy advantages over many others, as sustained job and population growth fuel a hopefully healthy and robust market in the not-too-distant future.

“All the structural drivers that have allowed Dallas-Fort Worth to perform really well over the past development cycle remain in place,” said Kitchens. “People keep moving here. We added 153,000 new residents last year. I see positive momentum to the south of Dallas-Fort Worth in terms of population growth. We continue to add jobs at a pretty strong clip, and the types of jobs here, reflective of our office market becoming a financial services hub, will boost average household income for the market overall. So those are some key themes that I would keep in mind.”