The Tarrant County multifamily market remains healthy, but apartment deliveries are beginning to impact fundamentals. In 2017, more apartments were added to inventory in the Dallas/Fort Worth Metroplex than any other metro in the country. The saving grace is that the Metroplex also led the nation in job creation. The combination of robust job gains and thousands of new residents moving in search of these positions should allow the market to weather this peak in the construction cycle, with occupancies hovering above the long-term average and near the highest point in over a decade.
An estimated 30,000 apartments opened their doors across the Metroplex last year, up significantly from the approximately 18,000 units completed in 2016. Labor shortages, more complex construction sites and stricter building codes are driving longer development timelines that likely pushed some of the deliveries slated for 2016 into 2017. A trend of longer construction timelines will likely continue, and fewer available sites for new projects and tighter capital markets will also slow the development cycle going forward.
Elevated deliveries pushed down occupancy in Fort Worth 100 basis points to a still-healthy 95.2 percent, with Dallas running lower for a second consecutive year at 94.4 percent. With more competition for tenants, annual effective rent growth slid to 4.6 percent across the Fort Worth area, down from of 8.0 percent in 2016. Class B and C assets are still leading in rent growth, and submarkets with little new supply are at the top of the rankings. That said, the Intown/University submarket had a solid year of rent growth at 4.6 percent, despite being the epicenter of new construction.
The Dallas/Fort Worth Metroplex continues to be the national leader in job creation with 95,100 jobs added in the 12 months through November 2017, adding almost 30,000 more employees to payrolls than number two New York. Job gains are expected to continue, though a gradual slowdown driven by a tight labor market is anticipated as the Metroplex’s unemployment rate stays below 3.5 percent and 80,000 jobs are added in 2018. The silver lining for the Tarrant County side of the region is that while overall Dallas/Fort Worth job growth is cooling, Tarrant County job growth is accelerating. The Fort Worth-Arlington sub-MSA added just 13,800 jobs in 2015. In 2016, 19,400 positions were added, and 2017 realized another strong jump as 24,300 employees were added to staffs, or 25 percent of the Metroplex’s total jobs in 2017. A stark contrast to just 13 percent of the overall DFW new apartment supply that was delivered.
Another key metric that continues to support strong demand for apartments is the growing gap between the cost of a home and average apartment rent. While rents continue to rise, they are not keeping-up with the strong appreciation occurring in the single-family home market. In 2017, Dallas/Fort Worth home prices were up 60 percent from the prior peak in 2005, and the difference between the monthly mortgage payment for a single-family home and average monthly apartment rent grew to $573, rising from $241 in 2010. With home prices and interest rates continuing to increase going forward, it will only make it more difficult for aspirational home owners to make the jump financially. New home construction is not alleviating the situation either, as only 7 percent of homes being built are targeting prices of $200,000 or less, down from 28 percent of total construction in 2015.
Looking forward, there are another 24,000 apartments expected for completion across DFW this year, and central Fort Worth will register another year of significant deliveries. In the submarket, there are 6 properties comprising 1,897 units that will be in active lease-up in 2018, down slightly from 7 properties containing 1,971 units in lease-up during 2017.
The transaction market will remain strong as investors have amassed huge amounts of equity that needs to be deployed, and the long-term stability of multifamily makes it a favorite for both private and institutional investors. Fort Worth is appearing on more investors’ target lists as it continues to be recognized as a robust and dynamic city. The 10-Year US Treasury, the benchmark for the majority of multifamily financing, is back up to where it was at this time last year after falling during the middle of 2017, but the major lenders for multifamily, Fannie Mae and Freddie Mac, continue to be aggressive. In fact, we expect a tightening of their spreads which could mostly offset the higher treasury rates and keep all-in interest rates flat year-over-year. New construction cap rates remain in the 5 percent to low-5 percent range, and quality 1980’s, 1990’s and 2000’s vintage assets continue to see initial returns below that, in the mid- to high-4 percent range for best-in-class assets with real ‘value-add’ upside.
This year will continue to challenge multifamily operations as supply pressures persist in select areas of the Metroplex, but overall fundamentals will continue to run at levels well above long-term averages. While we cannot predict an unknown political or financial disruption, the outlook beyond 2018 is also optimistic. The development pipeline will continue to shrink while population and job growth grow at a steady pace in Dallas/Fort Worth. We just need to keep the job engine running in a relatively high gear to get us over the peak in deliveries we are currently experiencing.
Drew Kile is a Senior Director at Institutional Property Advisors (IPA), a multifamily brokerage division of Marcus & Millichap serving the needs of institutional and major private investors. Over the course of his fourteen years with the firm, Kile has facilitated and overseen the closing of transactions valued at more than $4 billion, including $873 million and 7,673 units of Tarrant County apartment sales in the last three years.
Sources: Marcus & Millichap Research Services, Real Page, Inc., US Census Bureau, BLS