If you slam the brakes on a speeding bicycle, you’ll flip over the handlebars.
For the past three years, Texas apartment developers have been riding one such bike. In Dallas, Austin and Houston, builders have pumped out more apartments than almost any other big cities in the country. They’ve been rewarded with Texas-sized rent growth and asset appreciation.
By now, the story is familiar: High rates, expensive debt, slowed rent growth and an unprecedented supply surge have caused some distress. But farther down the road, where long-term players tend to find their greatest profits, there’s a huge opportunity. Almost nobody is taking it.
Apartment development has plummeted. Halfway through 2023, starts plunged nearly 75 percent from the average. It will take another 18 months or so for the projects already under construction to actually top out, but once they’ve entered the market, there will be little new supply for years.
New projects will need to secure funding and permitting, and actually get built — a process that can run on for more than two years. The development bicycle has come to a screeching halt, and those that can get back on and get it rolling again will come to market with limited competition.
“If someone can get a development off the ground now, targeting a 2026 delivery, I think that’s a huge opportunity,” said Jack Stone, a managing director at Greysteel, a real estate investment services firm with offices in Dallas and Austin.
But at investor roadshows and on fundraising calls all over the world, developers are having trouble getting the people with the money to buy in.
Apartmania
It may sound like a cruel joke to New Yorkers and San Franciscans, but in Texas, landlords are battling an excess of apartments.
In Dallas, which has about 1.3 million people, some 20,100 units came online in 2023, according to John Burns Research and Consulting. Another 55,200 apartments are under construction, which means the Big D has the biggest apartment pipeline in the country. By contrast, New York City, which has a population larger than that of the entire DFW metroplex, delivered about half as many units last year and has a similar number under construction.
The picture is even more severe in Austin, a city of about 1 million. While New York City has more than eight times as many residents, its developers opened only 10,500 apartments in the past year. Austin’s builders put 17,000 online during that time.
The state’s pipelines swelled in 2021 as capital moved from office and hospitality into multifamily, particularly in Texas and elsewhere in the Sun Belt, where growth seemed limitless and developers were building on any parcel they could.
“What we’re feeling right now in 2023 and 2024 is that extreme year of 2021,” said Cindi Reed, an expert with MRI ApartmentData.
In this era of national undersupply, while it’s good news for renters that Texas cities have done better than most at building apartments, it has put landlords and developers in a bind. After years of double-digit growth, rents have fallen or held flat in every major Texas metro over the past year.
“Every developer in the country is out there trying to raise capital off the strategy that there’s gonna be a lot less delivering in 2026 and 2027. No one really doubts that.”
Rents decreased 6.7 percent in Austin in that span, a stunning turn in a city where they rose by more than 30 percent between 2021 and 2023. They decreased by a little more than 2 percent in Dallas-Fort Worth and San Antonio and were barely flat in Houston, according to figures from MRI ApartmentData.
That’s not for a lack of growth: Even as rents have fallen, Texas cities have been an epicenter of job creation and migration. Their developers were simply building faster than others, diluting landlords’ pricing power and flipping places like Austin and San Antonio into renters’ markets.
“We’re delivering all of these units in 2024, and there’s a lot of them that are under construction,” Reed said. “It’s going to take every bit of 2024, and a good part of 2025, to absorb what we’re delivering.”
Just as the state works to burn off that excess weight on the back end, it has largely stopped building. The results of Texas’ building frenzy — large pockets of oversupply, stricter lending, low or negative rent growth — are influencing developers to stop feeding the beast.
Making it math
Texas multifamily brought in plenty of real estate big boys in the last few years, but the market is no longer an all-you-can-eat buffet.
Some 84 percent of developers are dealing with construction delays, according to a survey by the National Multifamily Housing Council. A startling 92 percent of developers said they’re delaying starts.
One reason why new development has slowed — the reason, depending on whom you ask — is the harsh lending environment. Loan-to-cost ratios are down, meaning banks are offering smaller loans as a percentage of total project costs. That forces developers to contribute more equity to get deals across the finish line.
Combined with higher interest rates, that requires developers to jump from Algebra I to calculus. “That just crushes it,” Stone said. “The deal just doesn’t make sense.”
Some builders are still moving forward, just in pieces. Pearlstone Partners recently started groundwork for the Belvedere, a 247-unit condo project at 300 Pressler Street, just west of downtown Austin. But it is still looking for more equity to go vertical in the spring.
Building now will pay off for the company when things pick back up, Chris Zaiontz, a Pearlstone executive, told the Austin Business Journal.
The lending environment has made alternative sources of financing, like credit unions and syndication, more popular. That has opened up new lines of business for in-the-know advisers who help developers sort through their options.
“Everyone’s up for grabs,” said David Schwartz, founder of WelcomeLend, a tech-charged advisory based in Denver.
Austin is still awarding some multifamily permits, but most have been for affordable projects with significant public funding, which hasn’t seen the same slowdown. Income-restricted projects have made up a significant portion of new building permits awarded in recent months. Multimillion-dollar tax credits and construction financing from the city have made several projects pencil out.
Downtowns down bad
The areas that have slowed down most are downtowns, where a glut of newly built, similar apartments is expected to take years to be absorbed. Some 81 multifamily projects have been proposed for the Austin metro area, according to MRI ApartmentData, and just 17 of those are downtown. Another six will rise near the University of Texas’ campus just north of the business district, but still, the bulk of new development on the radar is expected to land well outside the city proper.
There is Pearson Ranch, Inspire Development’s $2 billion redevelopment slated to include 2,500 apartments. However, it lies nearly 15 miles north of the city. It is part of a trend in Austin — and cities across the state — that will only intensify as development hollows out in the urban core.
“You drive ‘til you qualify. The further you drive, the lower the rents get,” said Reed, the MRI ApartmentData expert. Out in Austin’s exurbs, around 34,000 apartments are either under construction or recently completed, and another 12,600 are proposed.
Out in places like Kyle, Buda and Leander, “they can’t build them fast enough,” Reed said. Similarly, Dallas’ new construction is concentrated in its northeastern suburbs like Allen and McKinney.
Texas has long been known to build out rather than up, and new starts show that trend continuing, even in Austin, where a suite of YIMBY reforms aims to encourage denser development.
Today’s apartment deliveries were the apartment starts of one to three years ago. So following years of record construction, Texas cities will see a steep drop in new apartments starting in 2025.
People and jobs are still moving to Texas. It would follow, then, that new multifamily projects should be a smart bet, especially when there are so few in the pipeline. If a developer can open a new apartment in 2025 or 2026, it would be coming to a growing market with new homes and little competition.
Easier said than done.
“Every developer in the country is out there trying to raise capital off the strategy that there’s gonna be a lot less delivering in 2026 and 2027. No one really doubts that,” said Jay Parsons, RealPage’s head of economics.
Problem is, the money is just not there.
Equity investors have shifted strategy, Parsons said, targeting the buildings struggling to lease up in today’s relatively renter-friendly markets. With so much supply coming online, new buildings are taking longer to lease up and facing intense pressure to refinance expensive construction debt. But most of the time, lenders will only want to refinance stabilized buildings, so bridge lenders have stepped in to give owners of newly built apartments a lifeline.
Investors have also been targeting distress.
There has not been a full-scale bloodbath, although firms have been raising money for preferred equity injections on the expectation that things will deteriorate this year.
“It’s unlikely we’re going to see fire sales, but we’re probably going to see some ‘for-sales,’” Parsons said.
There have been notable cracks in the multifamily market, particularly among value-add syndicators. Once-promising developer StoryBuilt flamed out over the summer; some of its properties have already sold in foreclosure, according to records from Roddy’s Foreclosure Listing Service. More are expected to follow.
Parsons foresees significantly fewer apartment completions by the second half of 2025.
“As demand catches up to supply again, we should see occupancy rates rebound a bit, and we should see rent growth return. But I still don’t think it’d be anything like what we just went through in 2021 and early 2022,” Parsons said. But that doesn’t mean Texas will go gangbusters to the extent it did before the slowdown, he added:
“I don’t think we’ll ever in our careers see a period like we saw in those peak years of 2021.”