Multifamily Experts Forecast Market at Connect Media Conference

The first panel of the Connect CRE Texas Multifamily conference kind of buried the lead.

It opened with the good news: Texas’ strong demographics enabled major metros to absorb historic supply of multifamily that came online in the last few years.
The bad news came in the second panel. This creeping distress in the market? It’s just the beginning.

Foreclosures have been ballooning in Texas over the last few months. From $400 million in CRE loans headed to the auction block in July to more than $700 million facing foreclosure in September. At August’s auction in Harris County, multifamily operator Fercan Kalkan faced foreclosure on 3,000 units tied to at least $140 million worth of loans.

“We’re in the early stages of this,” Trimont’s Rob Walton said during the panel titled, “How Distress is Rewriting the Texas Playbook.”

A renter’s market

Commercial real estate folks filled the conference room at the Joule in downtown Dallas to hear experts’ prognosis for the state’s multifamily market. Last year, multifamily operators were holding their breath. That hasn’t changed.

Concessions still dominate the market, with tons of owners offering between six and eight weeks of free rent, Zonda Advisory’s Kimberly Byrum said.

Meanwhile, there’s an “amenities arms race” between Class A operators, who now need to install golf simulators and pickle ball courts to compete with peers. It’s all in the service of “making the renter feel like they don’t have a reason to move,” JLL’s Kai Pan said.

With the power balance tipped in favor of renters, landlords are scrambling to convince tenants to renew their leases. As a result, spending on marketing has ballooned, Byrum said. Among spending for operators, the biggest year-over–year increase was seen in marketing budgets.

Rents have fallen so much in Austin that the city leads the country in rental affordability, Pan said. Decreased rents, paired with high salaries, mean Austin renters, on average, spend 16.8 percent of their income on rent.

Luckily for landlords, Austin’s tailwinds are promising, Pan said. In the last 10 years, the city has seen 30 percent population growth and 48 percent job growth. Its Sun Belt peers average growth rates of about 25 and 30 percent, respectively.

Just like last year, “Everyone’s watching for Fed cuts,” said George Smith Partners’ Matt Hiller.

More distress to come

The distress experts agreed: “That’s where the problem exists,” Transwestern’s Steve Pumper said about interest rates.

Between deflated rental revenue and increased costs, the numbers aren’t working out for multifamily operators across the Lone Star State.

And, there’s an approaching wave of debt tied to properties facing these same issues. In the next five years, $19 billion in CMBS loans tied to Texas multifamily will mature, CWCapital’s James Shevlin said.

“It’s trouble,” he said.

Multifamily investors without deep pockets are the worst off. When interest rate hikes hit, they couldn’t keep up. Since many of these landlords mostly focused on value-add properties, the money crunch left them with aging properties they couldn’t afford to update.

As a result, many of the properties landing in special servicing or getting foreclosed on are in pretty bad condition, Walton said.

Where does that leave Texas multifamily? Waiting on the Fed, just like last year.

“A drop in interest rates and cap rates will help,” Walton said.