When will Texas’ multifamily roller-coaster ride end?

Developers, investors and lenders navigate frozen capital markets and explosive growth

When Will Texas Multifamily go Back to Normal?
(Photo Illustration by The Real Deal with Getty)

Texas multifamily investors have been on a roller coaster ever since the Federal Reserve began raising interest rates last year, and at a conference in Dallas on Tuesday, they tried to figure out when that ride will end. 

As lenders, developers, brokers and at least one reporter gathered at the Virgin Hotel for the series of panels, organized by Connect CRE, there was a sense that the frozen market had turned a corner, even if what lay ahead remained unclear. 

“A month or so ago, I went to an office conference, and it was not the same vibe. It was really sad,” one environmental construction consultant said. 

Running through his firm’s Texas multifamily research data, Institutional Property Advisors’ Greg Willett set the state of play.

Some things remain the same. Texas cities are still adding jobs and young adults at the fastest rate of any American cities — Dallas and Houston are the top two cities for inbound migration of young adults, and Austin ranks fourth. Dallas-Fort Worth added 200,000 jobs last year, top of the list for American metros. 

All those young adults are coming to cities where it remains cheaper to rent than buy, especially those moving to Austin and Dallas. It cost $2,433 more to buy instead of rent in Austin, compared to the national spread of $1,124.

The explosive rent growth of 2020 and 2021 has tailed off, but rents ticked back up slightly In Houston and Dallas. Meanwhile, Austin and San Antonio have slipped into rent cuts, as rents declined about 3 percent annually in Austin. Rents have shrunk even on a submarket basis in Austin, where every submarket beside San Marcos is in the red on the year, Willett said.

Apartment demand bounced back from net negative absorption in 2022, although vacancy is moving up slightly. Several people in the audience snapped photos of a slide with vacancy charts for the four Texas Triangle metros, each bearing a line shaped like a smirk. 

Behind the slowdown in rents is an influx of supply. Each metro area is expecting huge increases to its apartment stock as units come online in the next 18 months. Dallas-Fort Worth is expecting 73,000 new units, the most of any American city, while Austin will get 46,000, Houston will add 39,000 and San Antonio expects 17,000. 

But the effects of the increase may soon wear off. “Construction starts just went off the end of a cliff,” Willett said. In each city, starts have plunged in recent months as it has become increasingly difficult to close on financing. 

That leaves an opening for those who can break ground in the coming months, according to Roberto Casas, a multifamily investment executive with JLL. “If you can figure out a way to get a development deal capitalized today, you’re going to be delivering into a market with very little supply, not a lot of competition, and probably very strong operational fundamentals,” Casas said.

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Assuming migration trends continue, today’s slow starts should result in something closer to the balance of supply and demand that allowed significant rent growth in the past three years. 

Willett expects that rents could improve as early as spring 2024, and that by 2025, prices will be “robust.”

The rollercoaster has left asset buyers and sellers at odds over how much apartment buildings are worth. Willett said price discovery is happening across the markets, and he expects pricing to settle between 20 percent and 25 percent down from 2021 and 2022 pricing. 

A later panel looked deeper at the question of why starts have slowed so severely. 

Paris Rutherford, a principal at Catalyst Urban Development, said his firm has just closed a loan. “Amazing,” he said sarcastically, prompting knowing, nervous laughter from the audience.  

Several panelists said they’re still interested in some deals. Rutherford said his team likes transit-oriented developments and those close to workplaces, because the costs a renter avoids in things like minimized gasoline bills can be wrapped up into rents. Hailey Ghalib, an executive with Affinius Capital’s housing and development arm, said the fundamentals are still strong for “workforce housing,” or apartments affordable to people earning an area’s median income. 

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The difficulty of dealing with rising costs, particularly for labor, came up again and again. “We haven’t had an issue with demand — we had an issue with cost,” Rutherford said. “For the last ten years, rates have been bailing us out. They’re not bailing us out anymore.”

Those higher costs have made it even harder for multifamily owners to juice their incomes. “The vast majority of our multifamily assets are on plan in terms of returns, but NOI is flat,” said David Sotolov, who heads up debt originations for American commercial real estate at AllianceBernstein. “For anything that requires a human, we’re seeing rapid inflation.”

Sotolov has seen an uptick in transactions over the last 60 days as the massive supply wave starts to come online. Many of those projects were financed by banks that wanted to be paid quickly. He said he’s seeing two or three construction takeout loan requests a week.

Still, with debt growing more expensive, lenders and developers are coming to the table with vastly different expectations, according to Gary Bechtel, CEO of bridge lender Red Oak Capital. He’s had several conversations with borrowers who recoil at paying more money for smaller loans. 

“Yeah,” Bechtel said he tells them. “The markets move, sport!”

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