Dallas at dusk.
tam/stock.adobe.com Dallas at dusk.

Due to tremendous job growth, resulting in-migration, and strong fundamentals, the eyes of apartment investors are on multifamily markets in Texas—as well as Colorado, Nevada, and Arizona.

The Texas Triangle—which spans the Dallas–Fort Worth, Houston, Austin, and San Antonio metros—continues to top national lists for job and population growth. The area’s quality of living and strong fundamentals draw both millennial and empty-nester renters—with no demand slowdown in sight.

In Nevada, thanks to yearly increases in migration, approximately 4,000 units per year need to be built. And with land prices rising, either rents will increase or new construction will slow down. Accordingly, well-financed developers and those with equity will have a chance to buy the best development sites and build to better-than-market caps.

In Colorado, REITs and international buyers are becoming more active. Meanwhile, Arizona buyers continue to chase value-add assets, finding ways to upgrade previous renovations and/or reduce expenses to help optimize their investment strategies.

New Investors in the Mix
In particular, the growth potential in Dallas–Fort Worth has attracted CRE investors that previously had no interest in the multifamily space. In Houston, institutional investors are active again, bidding and underwriting aggressively, though not yet buying at the same pace. Transaction flow in the core-plus and value-add spaces has caught the eyes of new-to-market international buyers and fund buyers.

And buyers who once overlooked Phoenix are taking note that the market has room to run.

Opportunities Lie Within Potential Challenges
While Austin and San Antonio face many of the same macro- and micro-challenges as other markets—the potential of rising interest rates that may cause wider spreads and slightly decreased prices, continued delivery of Class A construction, and some hesitancy among buyers and sellers—strong fundamentals there will continue to attract investors.

In Dallas, rising interest rates in the second half of 2018 created some disconnect between buyer and seller expectations, especially concerning the Class A sector. In 2019, expect challenges from new-construction deals with loan maturities that aren’t hitting debt coverage requirements for extensions.

In Houston, data don’t tell the whole story. Only a handful of the metro’s submarkets are facing temporary headwinds from Hurricane Harvey recovery. The Energy Corridor, Katy, and Kingwood are now re-leasing repaired units that feel like new supply, and the underlying fundamentals of job growth and balanced supply–demand remain strong.

Meanwhile, in Denver, unemployment rates have dropped so low that developers’ attempts to decrease costs overall have fueled the use of innovative solutions like light-gauge steel framing systems and prefabricated construction.

Submarkets to Watch
Once Harvey-impacted units lease in the submarkets of Katy, Kingwood, and the Energy Corridor of Houston, the lack of supply behind them will help generate rent growth and strong performance.

Look for South Austin/the I-35 corridor and Lakeline/Cedar Park in Austin, as well as Rim and Westover in San Antonio, to see the most gain. These four submarkets have experienced new deliveries but should have stronger occupancy, concession burn-off, and rental growth as that activity tapers.

Downtown Denver will continue to surprise the market with its resiliency and ability to absorb new product. New-office developments are outpacing multifamily construction starts in key downtown neighborhoods, and the downtown multifamily submarket will continue to exceed expectations.

In Nevada, keep an eye on North Las Vegas, as new industrial and medical are driving an increase in housing needs. Likewise, as the Phoenix metro draws more well-known employers, new developments will elevate the attractiveness of various locations.

Secrets to a Successful 2019
Expect dramatic rent growth in Las Vegas’s B-grade market this year as the spread between Class A and B product contracts. Meanwhile, as Houston’s infill market recovers, supply slows, and rent growth returns, the pipeline will swell downstream and create an opportunity for core buyers to flourish again.

Phoenix, once considered a market of booms and busts, has improved its fundamentals to the point of building a steady live/work/play destination. There continues to be strong interest in corporate relocations to the Dallas–Fort Worth metro as well as Denver, combined with gradual increases in institutional and capital-markets activity.

Overall, a healthy pace of job formation, stable interest rates, and a steady burn-off of concessions should ensure a successful 2019 for multifamily markets across the Western U.S.