Too Much Of A Good Thing? The Tension Between A Great Market And Overbuilding
“DFW is where we are putting our chips in today. We see the risk-adjusted returns are better in Dallas today and the profit spread is wider in Dallas today and the growth opportunity is better in Dallas today,” JPI Senior Vice President Matt Brendel said.
But are too many multifamily developers saying it?
In a city with consistent job growth, it is no wonder developers are in love with Dallas. People flock here by the hundreds every day, and demand for multifamily product is unquestionably present, as occupancy is up around 95% in DFW. But there are some concerns with the market, namely that there are too many developers high on Dallas’ strong multifamily fundamentals. High levels of interest in a market outperforming most of the rest of the U.S. are spurring nervous mutterings about overbuilding among some experts in the field.
Research from multiple firms shows that consistent, significant construction deliveries through the end of this year and into 2018 are slowing rent growth.
CBRE Director of Research and Analysis Robert Kramp said labor shortages and increased material costs could decrease construction, preventing Dallas from oversupplying itself.
But Brendel believes Dallas is still in balance.
“Dallas is a demand story. Everybody talks about the supply, but it is about the demand. When you are creating over 100,000 jobs a year consistently for a 24-month stretch, that’s a demand story. When you are delivering 20,000 to 25,000 units within that same time frame, that is balanced supply and demand,” Brendel said at Bisnow's Dallas Multifamily Explosion event Wednesday.
According to Brendel, his assertion holds up based on the historical rule of thumb that for every four or five jobs there will be demand for one additional unit. Dallas looks just about perfect to developers who are doing the same math.
JPI and others that are still looking for new deals in Dallas are not unfounded in thinking there is still room to lean into this booming market. JLL research on the national multifamily market shows Dallas is still on its way to the top of the market with significant room to grow relative to other multifamily markets around the nation.
The takeaway is this: Right now, Dallas is a very sweet place to be for multifamily developers, but newcomers could be a little late to the party. Though the market is still booming, overbuilding is a real threat, albeit a somewhat distant one, to the equilibrium of the market.