Growth soothes the pain of distress in DFW’s multifamily market

Just two years ago, multifamily players in Dallas-Fort Worth were flying high.

Older Class B and Class C apartment complexes sold at record prices. Rent growth soared to unforeseen levels. With an occupancy rate of more than 97 percent in the first quarter of 2022, renters held their breath for new product to come online. 

The script has flipped since then. 

A building frenzy is set to deliver tens of thousands of units in 2024 and 2025. All those multifamily babies are arriving amid a decline in occupancy levels. In the last year, the rate dropped from 91.8 to 90 percent, according to Partners Real Estate.  

Landlords no longer have the upper hand, as rent growth sputters and starts to backslide. After a steady climb, average rent prices were down from $1,507 in November of ’22 to $1,499 in November of last year. Landlords are offering discounts to keep their product competitive. 

Interest rates soared, essentially drying up the well of new apartment starts. Distress in the once-mighty Texas multifamily market is well-documented. But the country’s fastest-growing metro puts a twist on commercial real estate misfortune. 

Who’s in trouble and why 

Experts agree: the multifamily sector’s least-coveted role at the moment is the value-add developer. 

They purchased older apartment complexes at record prices intending to update them; now that property values have declined and renovation prices have spiked, rate cap expirations mean they’re unable to afford their debt. 

As a result, some properties are being sold at a discount. Others are going back to lenders. 

When Houston-based Nitya Capital sold four multifamily properties (including one in Dallas) last May, CEO Swapnil Agarwal cited declining property values and increased expenses on the firm’s floating rate debt. 

At the same time, high interest rates have also made it more difficult for buyers to finance purchases, causing transactions to plummet. 

Swiss real estate company Stoneweg, which focuses on multifamily in the Sunbelt, typically completes eight to 10 transactions per year, said Garrett Pisarik, the firm’s director of acquisitions.

In 2022, the company completed five, and last year, just two. 

New construction starts have also dropped. 

In the first 10 months of 2023, multifamily permits in Dallas-Fort Worth dropped 25 percent from the same period the year before.

“The math has gotten harder to make sense of, so I think that new starts will continue to report lower next year than this year,” said Jason Haun, senior vice president at multifamily developer ZOM Living. 

The upside 

One developer’s misfortune is an investor’s opportunity. 

Some multifamily players are buying up the properties that developers have been forced to sell, said Shams Merchant, a Fort Worth-based real estate attorney with firm Jackson Walker. 

“Deals are still being done,” he said. 

That’s exactly what Ashland Greene CEO Shakti C’Ganti told The Real Deal last August: “we are seeing opportunities from groups that bought aggressively in 2021 and 2022, for sure.”

In November, the Dallas-based firm purchased Devi at Valley Ranch, a 267-unit building in Irving, from Tides Equities at a 10 percent discount from its 2022 price. When interest rates spiked, Tides was one of many firms that saw debt costs spike, too. 

“The cycle continues,” Merchant said about this kind of activity. It’s why he remains optimistic about the sector, noting the distress isn’t “systemic.”

“I think it’s limited to some asset classes and, even deeper in those asset classes, certain operators and certain types of properties,” Merchant said. 

In the tight capital market environment, tax incentives or credits for attainable and affordable housing make it possible for developers to pencil deals. 

For example, complexes with affordable or attainable units now make up more than 20 percent of active construction projects for DFW multifamily juggernaut JPI. The firm also has more than $500 million of affordable and attainable projects in the pipeline. 

For workforce housing developments, 51 percent of the units are reserved for attainable housing, which is typically restricted to residents making 80 percent of area median income. 

At the end of the day, while capital markets have shifted, the fundamentals haven’t.

“It’s not a case of if it will get leased; it’s a case of what the rent will be,” said JPI CEO Payton Mayes. 

The growth factor

And then there are the suburbs. 

It’s hard for distress to fully settle into a market that is throttling forward with rapid growth. 

Of the five Texas cities with the most new residents, three are in Dallas-Fort Worth. 

Between 2020 and 2023, Fort Worth added 49,000 people; Lewisville added 25,000; and McKinney added 22,000, according to data from the Texas Demographics Center.

The influx of tens of thousands of new North Texas means the Metroplex “has done pretty well absorbing the historic supply,” Haun said. 

That’s aided in part by companies’ desire to plant headquarters in DFW. In 2023, at least 19 businesses relocated to North Texas, the Dallas Morning News reported. The most popular spots were Dallas, Irving, Frisco and Plano. 

In addition, projects like the $520 million Omni PGA Frisco Hotel & Resort in Frisco and the upcoming Universal theme park in Frisco draw people to north Dallas suburbs, Haun said. 

Uncertainty ahead

The sluggishness of the transaction market means it’s tough to pinpoint exactly where the market is, Haun said. 

Developers are waiting to see if and when the Federal Reserve will lower interest rates. But, there’s no timetable for what that rate reduction scheme will look like, the Wall Street Journal reported. 

Despite the economic uncertainty ahead, industry experts assure DFW’s growth will help the metroplex weather the storm. 

“We’re one of the last markets in a recession and one of the first out,” said Steve Triolet of Partners.

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