by Todd McNeill
The rebound in home prices in the Dallas / Ft. Worth residential market has been record-setting during the last three years. I know this first hand as I was a beneficiary. I recently sold my residence in Plano to move closer to my office and was shocked at the state of the sale market for residential homes. The house was listed on a Thursday afternoon. By Saturday we had in excess of thirty showings and seven contract offers, all of which were at least $10,000 above the listed asking price! All of the contracts came with pre-approval letters from various mortgage companies. The exercise between picking the winning contract was simply a matter of who had the most earnest money with the largest down payment.
Why has the North Texas / DFW residential market recovered so quickly? Most assuredly, the DFW economy did not dip as low as the rest of the country during the “Great Recession.” There was still significant activity in these markets during the downturn. The only thing missing was the banks’ willingness to lend to developers to build product, whether it was single family, multi-family, shopping center, office, etc. I am not suggesting that DFW needed development of the scope prior to 2008, but there was continued demand throughout the recession for most all product types depending on the submarket. This dynamic created significant pent-up demand for all things related to real estate.
The lack of funding for this pent-up demand created a “jolt” in the price of real estate across the board from residential to commercial. This is simply the most basic form of economics, supply and demand. Texas has created 33% of the entire country’s new jobs since 2004. That is a staggering amount of people moving into this region. Meanwhile, DFW multifamily and office occupancy rates continue to climb to very healthy levels. Over 20,000 new apartment units are under construction in Dallas. People are having trouble finding places to live, shop, and have as offices.
The good news is that we have all real estate product types firing on all cylinders! The office, retail, multi-family, and industrial markets are all filling up fast, and rents are rising quickly. In DFW, the residential market has a scarce three-month supply of homes, with a normal market equilibrium being six months, which is continuing to drive home prices upward. The bad news is that Texas is now moving into a ‘moderately’-priced place to live whereas before the crash it was considered an affordable place to live. If we can’t get residential development off the ground fast enough, we risk more price increases on houses and on losing the advantage of affordability as a selling point when companies are looking to move into the region. Toyota, for example, factored that aspect into their move from California to Plano, and even with today’s price increases on houses here in DFW, it is still significantly more affordable than where they were in California.
So, you can thank the FDIC, OCC, and FINRA for our recent run-up in real estate values since they told our local banks to stop funding and get the commercial real estate loans off their books as fast as possible during the recession. In their infinite wisdom, they painted our market with a broad brush rather than looking at the local economics, leaving us with the perfect situation where demand is far outstripping supply and prices are increasing month over month. I am glad I sold my house last month!
So, what does a residential housing price have to do with commercial real estate capital markets? Well, everything, as a matter of fact. Remember when housing prices went over the cliff in 2007, the rest of the world went with it! When prices are stable and/or accelerating, lenders can underwrite fund loans and create liquidity. That’s a good day for everyone. The residential recovery is leading the commercial markets into the next development cycle and bringing with it an abundance of new capital providers.