With recession-related effects vanquished by robust demand, the local apartment market is painting a portrait of its former robust self. By Reis’ count, nearly 11,200 market-rate apartments were under construction in a host of new projects across the Dallas side of Metroplex as of early August. Numerous others are planned. The Metroplex economy, noted Texas Real Estate Center (TREC) in July, “is generating new households, creating the tightest apartment conditions in over a decade and facilitating healthy rent growth.” Vacancy has fallen to its lowest level in more than a decade and strong, accelerating rent growth is indicated. With the economy running strong and positive signs emerging in the single-family market, however, the apartment sector honeymoon could be coming to an end if elements of demand diverted from the stricken ownership sectors return to single-family. Still, however, apartment fundamentals otherwise should remain strong. While active, construction is not expected to overbuild the market.
The vacancy rate has had two recent double-digit spikes. The first, in 2004, was promptly reduced in 2005 with the unexpected arrival of thousands of renters exiled from the Gulf region by Hurricane Katrina. The second, a result of the recession, was alleviated by the explosive demand that emerged in 2010, a trend seen in apartment markets nationwide at the time. With construction slowing as well, the vacancy rate had fallen to 5.7% by the end of second quarter 2012, a reduction of 30 basis points for the quarter alone, a reduction by 140 year-over-year and the lowest rate on Reis’ records for this market since year-end 2000. An additional decline is expected by year-end before increasing construction delivery volumes in 2013 stabilize the rate—in the neighborhood of 5.0%.
A trend common to many of the nation’s apartment markets and seen as well in metro Dallas features low Class A vacancy rates relative to vacancy in lower-tier sectors. The gap between the two, however, is not great. Reis put first quarter Class A and B/C rates at 4.9% and 6.5%, down 100 and 160 basis points, respectively, year-over-year. The latter, accordingly, has been decreasing more rapidly. “Over the past year,” explains Marcus & Millichap’s third quarter 2012 report in the Metroplex market, “Class B/C demand received a boost from the creation of an estimated 9,000 jobs in the typically lower-paying Leisure and Hospitality sector. The Class A sector, on the other hand, benefited from the addition of a combined 13,000 positions in Financial Activities and Professional and Business Services.”
SUPPLY AND DEMAND
The recent progress has been remarkable. The surge in demand that began in 2010 resulted in a record 16,819 units of positive market-rate net absorption. Construction, meanwhile, still affected by the recession and the strains imposed on development financing, was slowing. The 2,391 units that completed in 2011, accompanied by 9,608 units of positive net absorption, amounted to the smallest single-year completion total recorded by the firm for this market since 1993.
With the stage thus set by strong demand and high occupancy, the next phase in the history of the local market features the onset of a new cycle of development. Reis’ early August report on individual construction projects reports 11,168 market-rate units underway metro wide—in addition to the 2,668 that delivered during the first seven months of the year. Measuring by the quarter, meanwhile, the 1,625 units that completed construction in 8 projects during the first half of 2012 were roughly
doubled by the 3,357 units of positive net absorption counted for the same time span. With the year-end 2012 market-rate completion total currently projected at 4,839 units, 2013 would be the year that more sternly tests the market. The 6,708 units currently given 2013 completion dates likely will be augmented by additional projects through additional starts and/or as completion dates become more certain. Reis’ second quarter analysis, accordingly, calls for the delivery of approximately 8,000 units next year; a total nearly as great currently is expected for 2014.
Developers and analysts, it appears, have rested confidently on recent trends in demand, those generated by the rousing recent performance of the local economy and those arising from troubles in the single-family market—foreclosures and weak confidence in the future of values—that resulted in enhanced demand for rentals. It is a truism, though, that nothing in real estate is constant and the much-reported shift in demand from ownership to rentals may not be permanent either. Nor, perhaps, will be the vaunted current preference among the Generation Y demographic cohort for new urbanism-style rentals. The future of these trends remains uncertain at present. More certain, however, are the signs nationwide that the single-family housing swoon may have reached its bottom. In Dallas, with its generally healthier housing sector, the signs are no less apparent. Thus, notes Marcus & Millichap, a year-over-year increase in home sales on the order of 20.0% (other observers report rates of increase) is cited for Metroplex home sales, “an indication that more renters are transitioning into single-family homes” and a reversal, to some extent, of what had been the prevailing trend. Too, single-family building permit totals, as indicated, are on the rise (as are multifamily totals).
Rents in metro Dallas held up relatively well during the latest downturn; measured by the year, only 2009 suffered a net loss—and only in the effective average. Growth, along with the surge in demand, returned promptly in 2010 and has accelerated since. At $861 and $789 per month, asking and effective averages for the second quarter of 2012 were up 1.1% and 1.4% for the period in the wake of gains nearly as great during the first quarter. The gains of 4.0% and 5.7% currently projected for the year all told would stand as the highest recorded by this source for this market in more than a decade. At $1,060, the second quarter average Class A asking price was up 1.0% from the quarter before. The $669 mean asking Class B/C price was up 1.2%.
“With business booming, job seekers will flock to the area from some late-recovery markets in the Midwest and the West Coast,” notes Marcus & Millichap report. “As a result, leverage in lease negotiations will remain firmly on the side of apartment operators through the end of the year, spurring strong revenue gains.” In addition, the combination of new apartment construction and a reduction in single-family foreclosure activity could apply pressure to apartment rents (see Special Real Estate Factors).