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Have Upscale DFW Multifamily Developments Worn Out Their Welcome? Not Yet, But Wall Street Is Watching Supply Closely

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The Dallas-Fort Worth market continues to absorb luxury apartments with rents above the $1K/month price point, but the capital side of the industry is beginning to sound the alarm on the prospect of oversaturation.  

Wall Street Sign

The multifamily market remains solid and in demand, but Wall Street is definitely watching closely for signs of too much supply, Mag Mile Capital CEO Rushi Shah said. 

“Wall Street and the lending community are going to regulate the market,” he said. “They are starting to ask questions. Everybody wants to know the [multifamily] supply situation.”

Bisnow will address the latest in multifamily capital markets at the annual DFW Multifamily conference May 2.

Shah sees lenders as the first line of defense in preventing oversupply in North Texas. He envisions a not-so-distant future when financiers question developers who project higher rental returns on developments out of the gate. An example of such a scenario would be an apartment development where the developer estimates rent rates of $1,500/month during underwriting when nearby apartments are leasing for $1,250. 

“That’s where the lenders are going to push back and say, 'We don’t agree with those numbers,'" Shah said.

This natural pullback on the part of lenders and suppliers of capital will serve as a natural market correction.  

Wall Street and lenders may be watching, but they aren't panicking. Nor are they turning against DFW, which remains a hotbed for corporate relocations and population growth.

“Generally speaking, there is high demand [for apartments] because of the number of companies coming into the area from California and other high-tax states,” Mag Mile Capital Senior Vice President Michael Taylor said. 

As long as these new renters keep coming, there is no immediate incentive for developers to carve back on higher-priced projects under construction.

“The demand is there,” Taylor said. "And since the demand is there, it’s kind of where we stand." 

Rushi Shah
Mag Mile Capital CEO Rushi Shah

The Apartment Affordability Saga Begins In DFW

The price points of new projects are raising a few eyebrows, though, especially in Dallas County, where affordable rents remain elusive for many people. 

The median household income in Dallas County declined 16% between 1999 to 2015, according to a study completed last year by the Communities Foundation of Texas. And of the new jobs created in Dallas County over the past decade, 63% came with median wages under $50K a year, the report found. 

According to RentLingo.com's Affordability Calculator, the optimum monthly rent for a $50K annual salary is $980/month. The average rent for DFW hovered between $1,029 and $1,154/month in 2018, JLL data shows.

There aren’t enough units at or below $980/month, and that won’t be resolved soon, affordable housing experts say.

“The city of Dallas has a shortage of 20,000 affordable housing units, and we’ve made a commitment to developing affordable housing via general obligation bonds, federal grant funds and our comprehensive housing policy,” Dallas Director of Housing and Neighborhood Revitalization David Noguera said. Noguera will be speaking at Bisnow's upcoming annual DFW Multifamily conference.

“Neighboring cities are still catching up, and we’re looking for opportunities to partner with them to do more," he said. "Catching up on the level of affordable housing needed across the region will take a coordinated effort and financial commitment over the next 10 years.” 

But the market isn’t driving anyone to tackle price affordability, since developers are filling their new high-end products just fine.  

JLL - DFW 
Apartment Deliveries
From 2013 through 2018, DFW apartment unit deliveries averaged 20,400 per year.

New Product Pipeline Remains Strong, But Affordability During Construction Remains A Hot Topic 

The DFW market delivered approximately 28,000 apartment units in 2017, and about 25,000 units in 2018, JLL data shows. Comparatively, the market delivered an annual average of 20,400 units between 2013 and 2018, as production levels recovered from the 2008 recession.

And that consistent flood of units recently has been commanding top-tier rents.

“Most of the apartments are on the higher end,” JLL Executive Vice President of Capital Markets Multifamily Jorg Mast said.

In 2017, 98% of apartment projects built in DFW were luxury units, one of the highest percentages in the country, Rentcafé found.

When you look at apartments built from 2013 and beyond, “we basically have absorbed 100% of these units,” Mast said.

The average multifamily occupancy rate for DFW has hovered at 94.5% for the last few years, according to JLL. 

“Absorption comes at a cost because the new supply is not spread out over the Metroplex,” Mast said. Instead, it has been concentrated around the big urban centers. 

But as long as the steady absorption continues, there is no economic impetus to discourage developers from doing upscale projects with rents well above what is considered affordable to the average Dallas resident. 

JLL expects multifamily fundamentals and liquidity to remain strong in 2019, and that, combined with continued population growth and job growth in North Texas, will keep high-end products viable, Mast said.

He noted that developers are not intentionally avoiding affordable housing products — land costs are driving the equation to higher rents.

“You are looking at a $144K to $150K per unit [cost] to make that [apartment development] economically viable," he said. "You have to charge rents that are $1.35 to $1.45/SF — that gets you in the range of $1,250 per month and going up.”

To try and balance out these construction costs, developers are forced to either push their projects farther outside the DFW Metroplex for cheaper land or to charge higher prices. 

Some developers are trying to build more budget product, said Domus Studio Group Principal Penny Diaz, who has been designing multifamily projects in and around Plano.

“The new apartments going in are more expensive than my mortgage,” Diaz said. “I don’t get how people are affording them."

Diaz’s firm is working with developers to create what she calls “solution housing” to help citizens afford multifamily units built with budgets and rent in mind from the start.

One such example is Hoque’s So-Good @ Cedars project south of Downtown Dallas. Diaz estimates the rent range for this type of affordable project is under $1K a month. But to get lower numbers, developers have to have mindfulness during the construction phase. 

To trim budgets, Diaz’s design and architectural firm works with contractors from the onset of a project to cut development costs — whether through modular concepts or other price-conscious designs, she said. 

But not every developer is willing to do what it takes to build these projects.

“You have to have a developer who is on board with this because they are going to make a few dollars less at the end of the day, potentially,” Diaz said. 

To learn more about the state of the multifamily market in DFW, come to Bisnow’s full-day Annual DFW Multifamily Conference May 2.