The new jobs and residents Dallas-Fort Worth has gained since 2003 are finally making a difference in the Metroplex’s multifamily market.
Vacancies across North Texas are declining, rental rates are growing, and concessions have been cut in half.
“After five continuous years of decline, we’re now headed in the other direction,” said Don Ostroff, a director with Cushman & Wakefield of Texas Inc.’s multifamily group. “What was a very unattractive market has now become an attractive market.”
Bruce Marshall, an adviser with the Dallas office of national apartment broker Sperry Van Ness, agrees: “My father-in-law has owned apartments here for decades, and he said that we’re coming out of the worst apartment market in 50 years.”
Over the past three years, the Metroplex has added nearly 200,000 new residents, according to Reis, Inc., a New York-based real estate research firm. During that same period, the region experienced annual job growth between 2.1 percent and 3.3 percent – representing roughly 250,000 new jobs.
“Dallas-Fort Worth always shows up on the national radar for long-term economic growth because its central location and low cost of doing business attract a lot of large companies,” said Tom Bakewell, regional vice president of Gables Residential, which has a portfolio of 3,500 units concentrated in Dallas’ Uptown submarket, in addition to three properties under construction.
While the Metroplex may be infamous for unbridled development and limitless land, new apartment construction has been modest, said Billy Hurst, first vice president of Countrywide Commercial. “Over the last five years, we’ve seen a more conservative approach to apartment development,” he noted, adding that single-family home development and the rising cost of construction can be credited (or blamed) for the slowdown.
Across Dallas-Fort Worth, demand has been steadily increasing. The market absorbed 11,590 units in the first nine months of 2006, with third quarter absorption reaching 6,510 units, according to research firm M/PF YieldStar. That means more apartments were absorbed in the third quarter of 2006 than were completed in the first nine months of 2005.
And the pipeline shows no signs of catching up to demand. As of early October, roughly 10,100 apartment units were under construction, far below the 24,000 units that flooded the market in the late 1990s, according to M/PF YieldStar.
Ostroff said it’s getting harder to find development sites in the Metroplex, since many close-in suburbs are loath to offer approvals for multifamily projects. “Some folks think that there are no limits to land, but those who are active in the market quickly hear the story that there are not any sites in a lot of submarkets,” he noted.
The fairly low number of new units coming to market has helped occupancies. On a marketwide basis, occupancy reached 93.7 percent at the end of the third quarter, increasing 1.5 percent from third quarter 2005, according to M/PF YieldStar.
Even better, rental rates increased 2.9 percent during the third quarter compared to the same period in 2005, the first meaningful rent growth since fall 2001. Throughout 2006, concessions continued to decrease, and at the end of the third quarter, 43 percent of properties were offering concessions—the smallest number since late 2002. Most concessions were for two to four weeks of free rent, a marked decrease from the two to three months of free rent available just 18 months earlier.
Dallas’ downtown and the close-in submarkets of Uptown and Victory are generating the most buzz, said Ed Hamilton, a principal with The Hanover Co., a Houston-based multifamily developer. “There’s more demand for dense, urban projects,” he said.
Hanover was one of the first apartment developers to tackle high-rise living in Dallas, and today the firm has two high-rise projects under development: the Cirque, a 28-story apartment tower in Victory, a mixed-use district near American Airlines Arena, and 1900 McKinney in Uptown. The 530,000-square-foot Cirque, which offers 252 apartments and 10,000 square feet of retail space on the ground floor, will open next November, while 1900 McKinney will welcome residents in April 2008.
Like Hanover, Gables Residential continues to heavily invest in Uptown Dallas, Bakewell said. “Uptown has been the exception rather than the rule when it comes to occupancy and rental rate growth, and that’s why we’ve focused on that submarket,” he noted.
The former real estate investment trust (REIT) recently completed two projects in Uptown, Gables West Village and Gables 3636 McKinney, and both are more than 97 percent occupied, Bakewell said. The properties also leased at rents 25 to 30 cents per square foot more than the company’s expectations. “Given that recent history, we’re very high on Uptown,” he said, adding that Gables recently broke ground on 250 units at the corner of Cole and Cedar Springs avenues.
Gables also has dipped its toe into the downtown market, Bakewell said, and is putting the final touches on the 229-unit Republic Bank building, which will welcome residents in late December 2006. Several other large developers such as Forest City Residential and JPI are following Gables’ lead. Cleveland-based Forest City, for example, is converting the old Mercantile Bank Building into multifamily units, while JPI will start construction on the second phase of Jefferson at 1001 Ross later this year.
“Dallas is starting to have urban living, and the whole city is rallying to make downtown an attractive livable place,” said Mark Bryant, senior vice president of Dallas-based JPI, which owns four properties totaling 1,300 units in downtown with an occupancy rate in the mid-90 percent range and rental rate gains of between 3 and 5 percent.
Plenty of developers have been bullish on downtown Dallas for quite a while, said Ted Hamilton, a partner with Hamilton Properties. “Urban infill is what’s hot in Dallas,” he said. The locally based firm specializes in historic redevelopments and renovated the Dallas Power & Light Building earlier this decade. It is now working on its second adaptive reuse project: the former Union Tower Complex. Dubbed Mosaic, the 440-unit property will lease for $1.60 per square foot, the highest price in downtown.
But Dallas’ downtown couldn’t be more different from the city center of Fort Worth, its neighbor to the west.
“Downtown Fort Worth has actually become more of a 24-hour environment than Dallas,” said Mark Alfieri, vice president of multifamily acquisitions for Behringer Harvard, a Dallas-based private REIT that owns Firestone Apartments, one of the largest multifamily properties in Fort Worth’s core. “The rental market is thriving.” He attributes much of the residential demand to companies that have relocated or expanded in downtown Fort Worth, including the new headquarters of Pier 1 and RadioShack Corp. Lincoln Property Group has several hundred rental units under construction in downtown Fort Worth, while Carleton Residential Properties has stabilized The Depot, a 210-unit apartment community on the eastern edge of downtown.
“This market has consistently been the strongest and the most consistent in the entire metro area,” said managing partner Printice Gary. The Depot, which leases for about $1.30 per square foot, was more than 93 percent occupied as of mid-October.
The Depot is a bit ahead of the rest of the market, according to M/PF YieldStar, which doesn’t expect Fort Worth’s occupancy rate to reach 93 percent until mid-2007. Dallas’ 2007 occupancy rate is forecast at 94.3 percent. Rent growth across the Metroplex will be modest at 3 to 4 percent, but demand is expected to stay strong and nearly 13,400 units will likely be absorbed in 2007. “We’ve gathered enough momentum so the Metroplex’s apartment market will continue to strengthen,” Ostroff predicts.