Like all things in Texas, Dallas thinks big, and the Dallas/Forth Worth (DFW) multifamily market is no exception.
In 2010, more jobs and more people will keep the future of this apartment sector looking bright. Population growth has historically been positive in the metro: Between 2004 and 2007, the Real Estate Center at Texas A&M University reports that the DFW area grew a whopping 8.1 percent, from 5.75 million to 6.22 million residents.
Still, after some decline in fundamentals, most experts believe that DFW metrics will stabilize in 2010. “Our expectation is that we will see about 40,000 jobs in Dallas/Fort Worth in 2010, allowing absorption to return to a significantly positive level, after a few net move-outs were suffered during 2009,” says Greg Willett, vice president of Dallas-based M/PF Research.
Unfortunately, it may be 2011 before population growth and job creation push existing construction projects and nagging distressed assets through the system. Only then will apartment owners, investors, and developers be able to reap the benefits of their bright horizon.
Rental and development fundamentals have seen a recent slip. Population growth in the mid-2000s helped rental rates increase, topping out at 4 percent year-over-year improvement in 2007. Following suit with the rest of the United States, however, DFW rents started to slide in 2008—a slight net of 0.3 percent for the year that continued into 2009. M/PF Research reports that rental declines reached 3.5 percent over the past 12 months. Currently, average quoted rents are $772 per month in Dallas, $686 per month in Fort Worth, and $749 per month for the entire DFW market.
Although the Dallas area has outperformed most of the nation in job growth, demand has not kept up with supply when it comes to the construction of new units. It has been two years since the region has seen positive absorption, with year-end occupancy in 2007hitting 94.1 percent (7,155 completions and the absorption of 1,095 units, creating an increase of 1.3 percent over 2006).
In 2008, there were 12,148 completions but a negative absorption of 5,580 units, leaving year-end occupancy at a respectable 91.4 percent, but none-the-less reflecting a decrease of 2.7 percent from 2007. Through November 2009, an additional 18,961 units were completed, creating a 3.5 increase in an overall inventory that now totals 534,418 units. This brings us to 2009 and its year-end occupancy that Willett has set at 88.8 percent, down 2.8 points on an annual basis.
“The market’s key challenge will be dealing with still-significant completions,” Willett says. “Whereas new construction has nearly wrapped up almost everywhere else across the country, there are about 12,000 units [still waiting] to be delivered in Dallas/Fort Worth during calendar 2010 and on into first quarter 2011.”
The M/PF forecast “calls for demand to be strong enough to allow occupancy to hold basically stable. But further rent cuts seem likely to be necessary to make that happen … we’re calling for effective rents to fall between 3 [percent] and 4 percent during 2010,” Willett adds.
While the DFW metro thinks big, it has not been immune to the country’s overall decline in transaction volume. The peak in apartment sales in the DFW metro occurred in 2006, with a volume of $4 billion. Volume remained healthy in 2007 at $3.6 billion but was hit hard in 2008, falling 49 percent to $1.8 billion. By third-quarter 2009, year-to-date volume had careened to an anemic $651 million. Unless there are significant closings in the fourth quarter, 2009 year-end volume is projected at $868 million.
In terms of returns, in 2005, DFW cap rates bottomed out at 6.6 percent. As transaction volume has decreased, cap rates have steadily increased, reaching a high of 8.1 percent in 2008. And although the volume of sales is still very low, it appears that average cap rates in 2009 have actually declined—down to 7.2 percent at the end of third-quarter 2009, according to Real Capital Analytics. Based on a typical market cycle, this decrease in cap rates should indicate that values are making a comeback.