There’s “light at the end of the tunnel” for DFW multifamily

“Is Dallas overbuilt?” 

Commercial Real Estate professionals descended on the Virgin Hotel in Dallas’ Design District on a balmy 101 degree afternoon to answer that question and forecast what comes next for multifamily development in Texas.

The two luxury apartment complexes across the street from the hotel — Dallas URBY and the Adelphi — might have the answer. Both are advertising between four to six weeks of free rent if upon lease signing. 

Panelists at the Connect CRE conference spoke from a place the whole group hopes is the bottom: Deliveries are at a historic high; rents and occupancy have slipped; and concessions (like free rent) are abundant as operators try to compete with new product. 

But the fundamentals haven’t changed. Dallas-Fort Worth is still one of the fastest-growing metropolises in the country; its robust growth is doing a pretty good job of absorbing the historic supply. 

The perception outside Texas is that the Sunbelt’s multifamily markets have pumped the brakes. What’s really happening is that the boom of a few years ago is normalizing, said Madera Residential’s Jay Parsons, who was featured on the conference’s first panel.

The most popular phrase of the day was “there’s light at the end of the tunnel.” How long it will take to get there is anybody’s guess. 

Peaks and valleys

A RentCafe report out this week found Dallas is just three units behind New York for deliveries expected this year. New York is expected to deliver 32,935 units this year, compared to Dallas’ 32,932. 

“We’re finally seeing what a lot of supply really is,” Parsons said. Greg Willett, Institutional Property Advisors, echoed the statement: “We are peaking right now.”

As a result, rents have continued to soften in the Metroplex. 

Data from CoStar at the end of June showed rents in Dallas-Fort Worth fell 1.5 percent from a year before. The year-over-year number was a lot more bleak in June of last year. 

There’s no need to sound the alarm, though. 

In fact, Bryan Lawrence, a senior VP at John Burns Research & Consulting, said, “There is room for rents to fall more.”

That’s because demand remains so strong, he said. “Texas is just a jobs machine.”

“The medicine”

The pain is temporary, panelists assured the group. Want to see a real tragedy? Look at the office market. 

The multifamily market will turn around after “taking its medicine,” Legacy Partners’ Brian McNalley said on a development panel, by which he meant waiting out the pain. 

“The distinction from office is that there is a certain percentage of office that is completely obsolete,” Jenna Unell said during a discussion about distress. Unell is the senior managing director of special servicing at lender Greystone. 

“It’s not a matter of time. It’s not a matter of money,” she said.

Plus, the hope offered by potential office-to-residential conversions has largely deflated. 

Turning old office buildings into multifamily developments is “harder to pull off than people think,” Transwestern’s Steve Pumper said while moderating the distress discussion. 

The abundance of supply could amplify multifamily distress, resulting in more liquidation, “but we’re not saying the sky is falling,” Pumper added, “just for office.”

Light at the end of the tunnel

If this situation is temporary, when will it end? 

Experts disagree. Panelists gave answers of next year to early 2027, but two events pose big question marks in their forecasting: the presidential election and the future actions of the Federal Reserve. 

Vic Clark with Lument hopes whoever gets elected hires more people at Fannie Mae and Freddie Mac. Avatar Financial Group’s Mark Holman said the election could affect the decisions of international investors. 

Multiple panelists voiced their belief that the Fed will soon start lowering rates, which will provide a soft landing for the delivery cliff the market’s about to fall off of. 

Amid the unknowns, Holman summed it up: “it’s gonna be a weird one.” 

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