Why DFW's Multifamily Construction Slowdown Won’t Last Long

Dallas-Fort Worth’s multifamily pipeline has finally cooled off, but another wave of development is on the horizon.

Metroplex multifamily construction during the third quarter was at its lowest level since 2015. Yet the 30,000 units under construction in DFW is still on par with the largest pipelines in the nation. 

That construction slowdown isn’t because the market is overbuilt, Northmarq Vice President Charles Hubbard said. It’s more of a breather to allow all the new deliveries to be absorbed.

“DFW continues to be the top growth market in the nation,” Hubbard said. “We need more housing, and we need more investment in existing housing.”

The region's housing market has grown by 27% since 2010, buoyed by explosive expansion in Collin and Denton counties. But developers are offering widespread concessions to get new Class-A properties leased up. That has removed the pricing power of Class-B and Class-C properties as the desire for the latest and greatest units lessens the appeal of some older units.

DFW is on pace to overtake Chicago as the nation’s third-largest metro by 2030, and the U.S. Census Bureau estimates more than 450 people move to the Metroplex each day. 

While the record amounts of supply delivered over the last few years caused some concern about DFW being overbuilt, Hubbard said the market has absorbed nearly all of it.

Absorption outpaced new supply during the third quarter, according to Matthews’ latest multifamily market report for the metro. The region's vacancy rate remains elevated at almost 12%, but the positive absorption signals hearty demand as the market recalibrates. 

DFW's exponential growth makes it difficult to overbuild, JPI Managing Director of Capital Markets Adrienne Bain said. Nearly 40% of construction is happening in northern suburbs like McKinney, Frisco and Denton.

“They've seen an influx of employers coming into the market, and they need housing to support that increase,” Bain said.

Much of the new development is also focused on bringing more luxury multifamily to the metro. The NRP Group broke ground in August on an upscale 370-unit multifamily community in Carrollton called Jackson Road. 

That development will offer an average unit size of more than 1K SF and is designed to cater to working professionals and families in need of space for remote work.

The pipeline slowdown should give newer projects like Jackson Road time to lease up. 

Elevated interest rates are another factor in the slowdown in new projects in the Metroplex. But after last month's 25-basis-point cut by the Federal Reserve, Bain expects an uptick in new construction in the months ahead.

“A lot of developers, as well as a lot of lenders, sat on the sidelines during the rise of interest rates,” Bain said. “Now that we're starting to see those rates come down, lenders are back in the market [and] developers are able to source debt capital.”

While the Metroplex’s biggest suburbs need the new construction, Hubbard said deeply suburban areas like Celina, Melissa and Princeton have enough units for now. Those markets will take longer to lease up their existing supply, so landlords are increasing concessions to get tenants in the door.

Elevated concessions are a trend throughout the Metroplex, as the market has experienced negative 2.5% rent growth over the last 12 months, Hubbard said. Matthews' report showed rents declined by 1.4% during Q3 — the eighth straight quarter of negative performance. 

It’s a trend happening across the country.

Nationally, apartment asking rents fell 2.2% in August, the 25th month in a row of year-over-year declines, according to the Realtor.com August Monthly Rent Report.

That is sending renters out looking for U-Hauls.

“Rental declines across the majority of markets in various-sized homes are providing new options for renters, who have been squeezed by significant increases since the pandemic,” Realtor.com Chief Economist Danielle Hale said in a statement. 

Those elevated concessions in DFW could last for another year or two, RailField Partners Chief Investment Officer Jon Siegel said.

That spells trouble for Class-B and Class-C properties as developers lower rents to get their new Class-A units filled. It takes away properties’ pricing power and affects occupancy for everyone else in the market, Siegel said. 

“If I live in a Class-B property and it costs $1,500 a month, and I can live in a Class-A property for $1,600 a month, I’m probably going to do that,” Siegel said.

The Class-B vacancy rate was nearly a full percentage point higher than Class-A's 11.5% during the third quarter, according to the Matthews report. Class-C properties had a 10.8% vacancy rate.

Elevated vacancy also affects investors' value-add plays, Siegel said. Investors who bought Class-B and Class-C properties can complete unit upgrades, but it doesn't make sense to try to raise rents right now. 

“That's not a particularly operative strategy at this point in time,” Siegel said.

The wave of new, high-end properties has also taken some of the shine off the market's existing stock of Class-A units. 

Without strong demand for those older properties, owners spend less money on them and they begin to show their age. Multifamily developments from as far back as 2010 still garner significant interest on the open market, but Siegel said there are fewer buyers for properties from the 1980s.

Rise48 Equity acquired the more-than-40-year-old Shiloh Oaks Apartments in Garland during the third quarter at a more than 30% discount from its peak valuation 18 to 36 months prior. The investment group plans to make significant improvements to the Class-B property. 

The market’s supply-demand gap is expected to narrow with the construction slowdown and become more balanced. Positive rent growth is projected to follow next year, Hubbard said.

“If you're closing on a deal in the next 90 days, you can certainly make the argument to your investment committee that you're timing the market perfectly,” Hubbard said.