By: Scott Lynn
One trip down the tollway to Uptown/Downtown Dallas leaves me in utter amazement at the amount and quality of high-density multifamily projects under construction. Apartment development clearly appears to be riding the coattails of the biggest building boom in decades. With about 28,000 units under construction in North Texas, the Dallas/Fort Worth area is the fastest-growing apartment rental market in the country. It kind of makes you wonder who is going to lease all of these apartments, and moreover, who’s got the money to pay $2.00 + sf for apartment rentals?
The DFW area is not unique. There are approximately 300,000 apartment units under construction across the country according to the Mid-Year Outlook published by Freddie Mac Multifamily Research. Even with this many units in the pipeline, the national market is now just approaching the annual historical average of new builds from 1995 to 2007.
The Freddie Mac report basically concludes that due to a shortfall in housing formation during the recession, annual demand for rental housing will average 440,000 units over the next ten years. An incredible amount of pent-up demand has been caused by demographic forces and the changing face of the typical apartment renter. Furthermore, even with the enormous increase in apartment completions, national vacancy rates have continued to fall, surprising many industry followers.
As a result, from a national perspective, the apartment market appears to be in great shape with vibrant completions being absorbed while vacancies decline and rental rates increase.
North Texas is trucking along to mirror or to exceed the national averages. According to MPF Research, 50,000 apartment units have been delivered in the DFW area over the past four years with no increase in the vacancy rates (currently less than 5%) while average rental rates have increased by 4% to a record $903 per unit. The newest apartments in the popular Uptown and Downtown Dallas sub-markets are now averaging $1,800 to $2,000 per unit…compare that to the DFW average of $903.
Approximately one-third of new apartment deliveries (roughly 9,000 units) are under construction in Central Dallas, including Uptown and Downtown along with the surrounding infill neighborhoods. Leasing velocity has been incredible. New projects have been substantially preleased…many times in excess of 30% with monthly absorption rates often double that of traditional suburban product. The pent-up demand forecasted by Freddie Mac is evident as these new renters have been Millennials who have grown up in a culture that prefers to rent and have more often than not delayed forming their households until the economic recovery gained traction. They saved, and they can afford it. They are willing to pay more rent in order to gain the flexibility and freedom of renting while not compromising their lifestyles.
However, there are also the Baby Boomers. This leads to why I was heading down the Tollway to take a peek at options for my upcoming lifestyle makeover. I’m a spec in a huge potential market of Boomers. We want to downsize, simplify, be in an urban environment surrounded by the action, and close enough to walk to a coffee shop, bar, restaurant, and more. The “Seeking Lifestyle Change Latent Boomer Renter” is a nice chunk of the profile that has been leasing the new deliveries not only in Dallas but all over the country. These renters have six-figure incomes and plenty of cash, and, importantly, a job does not have to be created in order for a downsizing Boomer to rent a nice apartment. They already have jobs; in many cases they’re already retired, or they could retire in the morning!!!
Moreover, these latent Boomer renters don’t show up in the Freddie Mac statistics. There are a number of reasons for this. Either they did not exist historically, the rental product they seek did not exist, or the reason to rent did not exist. There may very well be much more demand than even the experts at Freddie are forecasting.
Before everyone starts worrying about overbuilding infill urban apartments, (in Dallas or other national markets) make sure that you have an appreciation for the changing face and demographic of the customer. The market for potential renters is much broader than imagined but is still difficult to quantify.
Metropolitan Capital Advisors served as the project finance advisor for the redevelopment of 1401 Elm Street Tower in Downtown Dallas, now rebranded as “The Olympic.” This is a $170m project that received over $50m in economic incentives from the City of Dallas. The 1960s-era 1.5m s.f. Tower will be redeveloped into 500 Class A apartments along with commercial retail space. Finding good empirical data to support the depth of demand for high-end rental in Downtown Dallas was difficult, but finding fully occupied properties at rental rates of $2.00 to $3.00 s.f. was not. Notwithstanding the lack of good demand data, new product is being absorbed almost as quickly as it can be delivered.
If anything, developers (and renters) should be concerned about “under building” the demand for quality urban rental. This is a possibility in Central Dallas as the best sites have now been developed, land prices have skyrocketed, construction costs are escalating, and the municipal incentives have been doled out to specific projects the City wanted renovated. Many of the projects in the 9,000 unit pipeline currently underway are large, complex deals with an array of moving parts. And, since the projects are now underway, there are a limited number of existing buildings that could be renovated to refill the pipeline. All of these barriers-to-entry will keep a lid on future competition.
The bottom line is that overbuilding the market is not likely, but there might be some softening of rental rates depending on delivery timing. And, while Dallas is the leading new MF development market, we see parallel dynamics in numerous other SMSA’s around the country. Furthermore, there are still plenty of other development opportunities to prune that will be driven by those who want to take advantage of the newfound customer base flocking to infill submarkets such as retail, storage, medical, hospitality, and service space.
For further information on how Metropolitan Capital Advisors can help you to finance your next project or acquisition, contact any one of our Senior Directors at www.metcapital.com.