Investors of middle market apartment properties are likely to benefit from strong rent growth with few vacancies in the Dallas/Fort Worth Metroplex.
“Middle market property (generally pre-1990's construction) – with limited supply and increasing demand – we think is the safest part of the market to be in," says Todd Franks, managing director of Dallas-based Greystone | Investment Sales Group.
Simply buying and holding an older apartment building might benefit investors due to the strong rent growth in Dallas/Fort Worth. Many developers are busy opening new, luxury apartments in concentrated areas of DFW, which is increasing the number of vacant units in that sector. In addition, more aggressive plans to reposition older apartment buildings have already been completed.
Fewer vacancies for older apartments
Apart from newly constructed units, the apartments of Dallas/Fort Worth are “essentially full," says Franks.
91% of units were occupied over the 12 months ending in December 2019. Older apartments are even more in demand: 93.1% percent of those built before 2000 were occupied, according to ALN Apartment Data in Dallas.
Apartment developers are looking to capitalize on the region's high occupancy rate: 24,590 new units are forecasted for 2020.
That's slightly more than the number of new renters who are likely to need a place to live. “We need to add 19,000 new units a year to keep up with demand in North Texas," says Franks.
Rents are still growing quickly, particularly for the oldest apartments. In 2019, ALN data shows managers raised the rents of apartments built before 1990 by an average of 3.5%. For newer apartments, the rate was an average of 2.7%.
Apartment rents are likely to keep growing at about the same rate, according to ALN, 3% on average overall, over the next 12 months. This is still higher than the rate of inflation, despite all of the new apartments opening.
Investors pay high prices, low capitalization rates
Overall, the demand for apartments is supported by a strong market in the Dallas/Fort Worth metropolitan area. “I still don't see a single economic indicator showing that it would be a bad idea to invest in Multifamily in the North Texas region," says Franks.
The unemployment rate is a low 3.1% in Dallas/Fort Worth, as it is across much of the U.S. “It is extremely hard to find employees," says Franks. Dallas's economy is supported by a wide range of industries, unlike other major metros in Texas, like Houston, which largely depends on the energy industry.
“Problems in any one particular employment sector like energy, technology, etc. do not heavily impact the Dallas/Fort Worth economy," says Franks.
Apartment properties are selling at high prices relative to their current income in the Dallas/Fort Worth metropolitan area. Capitalization rates for these properties averaged 5.4% for the year according to aggregated data from CoStar, Real Capital Analytics and Greystone.
Apartment properties with low occupancy rates or deferred maintenance often sell for much higher prices relative to their current income, with cap rates as low as 3% as these properties offer investors the opportunity to reposition the assets to an above market cap rate of 6.5% or more.
“The cap rates for value-added investments have lowered because they have become harder to find," says Franks. “A lot of the value-add opportunities have played out…we have seen a slowdown in radical increases in value."