JOB GROWTH IS BACK—at least in Dallas/Forth Worth, Texas. And the return of jobs has led to strengthening demand across the entire metroplex, driving absorption to the highest level in a decade.

What's more, that positive trend is expected to last. Job growth in Dallas is forecast to rise 2.8 percent next year, and 3.9 percent in 2012, while Fort Worth is expected to see employment gains of 3.5 percent next year and 4.1 percent in 2012, according to New York-based market research firm Reis.

That increased demand, combined with a significant decline in new construction, has pushed vacancies down and allowed for modest rent gains. Demand has strengthened the most for higher quality Class A units, which account for the majority of apartments absorbed year-to-date. The recovery in the Class A sector is due in part to elevated concessions and rent reductions during the downturn.

All of this good news points the way ahead for apartment owners—and investors— in an unprecedented way.

Tale of Two Cities

The Fort Worth area continues to post a higher vacancy rate (8.2 percent) than Dallas (7.8 percent), but improvements have been more pronounced in Fort Worth thanks to a dwindling supply of new units.

Approximately 7,900 apartments will come online in the metroplex during 2010, down significantly from 2009 when developers completed 17,200 units. But that new product is heavily weighted in Dallas, where about 85 percent of this year's new supply will be delivered.

Within Dallas, developers have been most active in the Plano/Allen/McKinney, Lewisville, and East Dallas submarkets. Combined, those areas account for half of the new supply slated for completion during 2010.

Deliveries in Fort Worth will fall 70 percent this year, with some new units spread across the Northwest, Northeast, and Grapevine submarkets. And the Fort Worth pipeline will probably stay low in the near term, as developers applied for 3,700 multifamily permits over the past year, down more than 52 percent from the previous 12 months.

Give and Take

Apartment demand has increased significantly over the past year. The metro area added an estimated 41,000 households from January through September of this year, up from 34,000 households during the same nine-month period in 2009. Approximately 16,500 apartments were absorbed, up from fewer than 500 units over the same period last year.

Vacancy continued to retreat in the third quarter, falling 100 basis points (bps) to 7.9 percent, continuing a trend that has seen vacancy decline 180 bps since the beginning of the year. And we expect that trend to continue: Vacancy in the Dallas/Fort Worth market will end 2010 at 7.5 percent, down 220 bps from end of the year 2009.

Rising occupancy has allowed owners to begin raising rents this year, following cutbacks through most of 2009. Asking rents have increased 1.2 percent to an average of $774 per month, while effective rents have gained 1.5 percent to $693 per month, through the first three quarters of the year.

Supported by lower vacancy, the Class A sector has registered stronger rent growth than the Class B/C segment. Class A asking rents have increased 1.1 percent, to $935 per month, while the average Class B/C rent rose 0.6 percent to $620 per month this year. While rents continue to move up from their cyclical lows (reached in late 2009), owners have maintained relatively high concessions to attract and retain residents. On average, concessions account for 10.5 percent of asking rents, up from 8.5 percent two years ago.

All told, asking rents will advance 2 percent in 2010 to $780 per month, and effective rents will increase 2.2 percent to $698 per month.

Going Full Throttle

In addition to the improvement in fundamentals, apartment transaction velocity continues to accelerate. While most of the sales involve Texas buyers, activity has increased among out-of-state investors.

Many California buyers returned to Dallas/ Fort Worth in recent quarters, attracted by above-average economic growth, declining vacancy rates, and comparatively low per-unit prices.

At $32,000, the median price per unit over the past 12 months actually reflects a 10 percent increase from the median reported during all of 2009. Prices for REO and distressed properties, however, start around $10,000 per unit.

Increased buyer demand has begun to drive down cap rates for most Class A and Class B-plus properties. Indeed, cap rates for Class A deals currently average in the high-6 percent to low-7 percent range, while Class B deals price approximately 100 bps higher. Cap rates for performing Class C deals, however, will remain flat this year as buyers show a preference for deeply discounted distressed deals offering more upside at this stage of the recovery.

As the economy continues to grow and stabilize, Dallas/Fort Worth will be wellpoised to capitalize on the new opportunities in ownership, operations, and investment that arise.