DALLAS-FORT WORTH MSA | MULTIFAMILY OUTLOOK | APRIL 2018 (Download full PDF report here)
In 2017, Dallas ranked first in both the rate of job growth, 2.8%, and the number of jobs added amongst the twelve largest metropolitan areas in the United States . Dallas’s 2.8% local nonfarm employment is twice the national rate of 1.4% , with 100,400 new nonfarm jobs created during 2017. Dallas’s booming economy spurs rental growth rates, as 140,000 people moved to the Dallas-Fort Worth area in 2016, “the most of any metro area in the United States,” according to the U.S. Census Bureau . As Dallas-Fort Worth “offers significant employment opportunities, diverse and affordable housing options, and a wonderful quality of life,” demand for housing in Dallas-Fort Worth continues unabated in 2018.
According to the U.S. Census Bureau, the U.S. nationwide homeownership rate in the fourth quarter of 2017 remains near its lowest level of the past two decades at 64.2% , contributing to the increase in demand for apartments nationwide. Tighter lending standards since the financial crisis have restricted the number of new single family homebuyers – leaving relatively high-income renters who might have otherwise bought a home, bolstering rental demand . As a result, the multifamily sector continues to experience sustained growth and tenant demand for multifamily housing is on the rise , according to the National Multifamily Housing Council.
DALLAS ECONOMY – BUSINESS FRIENDLY AND GROWING
In 2017, Forbes listed Dallas as the number one market to invest for housing due to 3.9% job growth in 2016, 6.2% population growth from 2014 – 2016, and 12.86% growth in gross rental income from 2013 – 2015.
According to the Texas Department of State Health Services, Dallas-Fort Worth-Arlington MSA 2017 population is projected to be 7,424,256 people . The Dallas-Fort Worth-Arlington is ethnically comprised of approximately 45 percent White American, 15 percent African American, 31 percent Hispanic American and nine percent Other according to the Texas Department of State Health Services .
In 2016, the Dallas-Fort Worth-Arlington per capita personal income was $51,099 , while the Dallas real median household income was $63,812 . Total GDP for the Dallas-Fort Worth-Arlington metropolitan statistical area in 2016 was $511.6 billion .
In 2017, the Dallas-Fort Worth-Arlington MSA created 31,000 professional and business services jobs, a 5.2% increase on the previous year. The leisure and hospitality sector also grew strongly in 2017, at 4.9 percent over the previous year. These sector gains contributed to Dallas’s 2.8% year-on-year total nonfarm employment growth.
Highly diversified, Dallas-Fort Worth is not an oil-driven economy. Rather, the Dallas-Fort Worth MSA is calibrated by the presence of corporate headquarters in the telecommunication, consumer products, and healthcare sectors . Richardson, a northern suburb of Dallas, is home to more than 5,700 companies, including Texas Instruments, headquartered in Dallas, amongst Nortel Networks, Alcatel Lucent, AT&T, Ericsson, Fujitsu, Nokia, Rockwell Collins, Cisco Systems, Sprint, Verizon Communications, and XO Communications.
In addition to communications, computer gaming, cleantech, cloud computing, and semiconductors are core industries of Richardson. Plano, another suburb of Dallas, is home to four Fortune 500 companies: J.C. Penny, Alliance Data Systems, Yum China Holdings, and Dr. Pepper Snapple.
The business-friendly environment in Dallas – zero state and local income tax and a low cost of doing business – continues to attract major corporations to relocate to Dallas. For instance, Toyota announced plans to relocate from California to the Dallas region in 2014, bringing 4,000 jobs to the Dallas region. In October 2016, Jacobs Engineering , one of the world’s largest engineering companies, relocated from Pasadena, California to Downtown Dallas, bringing 700 jobs. In addition, the following Fortune 500 companies are headquartered in Dallas: Energy Transfer Equity, Tenet Healthcare, Southwest Airlines, Texas Instruments, HollyFrontier, Dean Foods, and Builders FirstSource.
Dallas has also solidified its standing as a desirable market for foreign investment. A total of $341.7 million in foreign capital was invested to purchase multifamily properties in Dallas during 2016, following an even stronger 2015 when $1.6 billion came through. Dallas has been the number two destination in the United States for foreign capital multifamily investment from 2013-2017, second only to Manhattan .
Dallas and Forth Worth are on the list of top ten “low risk markets” for investing in residential real estate, according to Local Market Monitor. In particular, Local Market Monitor took into account population growth, job growth, unemployment, home price changes, the market’s equilibrium home price, and the 12-month home price forecast.
The employment rate in Dallas has been on an upward trend since 2010. As of January 2018, the unemployment rate in Dallas was 3.6%, down from 4.0% in January 2017, according to the Bureau of Labor Statistics . Dallas’s unemployment rate is below with the Texas State unemployment rate of 3.9%, according to Bureau of Labor Statistics data .
There are just under 3.7 million workers in Dallas at an unemployment rate of 3.9%. Employers added a net 101,400 workers to local payrolls through August of 2017, a 2.8% annual expansion. According to the U.S. Bureau of Labor Statistics, both Dallas and Tarrant Counties have lower unemployment rates than the U.S. as of January 2018, at 3.8% and 3.6%, respectively. The cities of Irving and Grand Prairie are located in Dallas county. Haltom City is located in Tarrant county, near Fort Worth. Dallas county has the highest average weekly wages, along with Collin County.
DALLAS – FORT WORTH CONSUMER EXPENDITURE
With strong job growth and rising wages, tenants are able to spend a significant portion of wallet on housing. Figure 5 below displays the percentage of wallet spent on eight major categories, comparing the Dallas-Fort Worth area to the U.S. as a whole.
Figure 5: Consumer Expenditures for the Dallas-Fort Worth Area: 2015-16
The Dallas-Fort Worth Area spends 34.2% of average annual expenditure on housing, slightly higher than the U.S. national average of 32.9% of annual income.
FORTUNE 500 EMPLOYERS
Dallas is home to six major industries: (1) telecommunications (2) consumer products (3) healthcare (4) logistics (5) transportation (6) education. Dallas has 12 major four-year universities in the region and seven community college districts . Dallas’s logistics and transportation sectors are aided by Dallas-Fort Worth’s central location and world-class transportation infrastructure, including DFW International Airport and many rail lines connecting Dallas-Fort Worth to the rest of the country.
According to the Bureau of Labor Statistics, Dallas exceeds the national average in percentage of total employment in both business and financial operations, computer and mathematical, and transportation and material moving. At the same time, the mean hourly wage for all occupations in Dallas is $24.21, slightly above the national average of $23.86, demonstrating the demand for labor in Dallas.
LOCAL MULTIFAMILY TRENDS
MEDIAN GROSS RENT
According to Local Market Monitor’s Economic Outlook in February 2018, Dallas is amongst a handful of U.S. cities experiencing a real estate boom. According to Arbor, Dallas posted the fastest rent growth and the lowest vacancy in the Southwest region during Q4 2016 . According to Reis, “the average asking rent reached $1,063/unit during the quarter, up from $1,049/unit during the third quarter, and has risen every quarter since year-end 2009.” Year-over-year, asking rent climbed 6.0%, up from $1,003/unit in 2015.
Class B / C properties rose 5.7% to $785/unit, while class A properties averaged $1,290/unit, up 5.0% year-over-year
In spite of median gross rent growth, occupancy has remained stable at 92.1%. Figure 9 below shows the occupancy rates and rent trends for Dallas as of 3Q of 2017. Effective rent was $1,100 in 3Q of 2017.
While deliveries of new apartments constructed outpaced demand in 2017, the new apartments were still absorbed at an 80% lease rate. This strength of demand for new, more expensive apartments reflects the strength of the multifamily market in Dallas – Fort Worth.
LOCAL RENTAL ECONOMICS
Rental rates in the Grand Prairie, Haltom City and East Irving areas are all below the Metropolitan area average of $1.24/ ft / month – at $1.16 for Grand Prairie, $1.12 for Haltom City and $1.02 for East Irving, respectively. Occupancy rates for these particular submarkets are near or above the Metropolitan average of 92.1% at 95.0% occupancy for East Irving, 94.7% for Haltom City and 91.3% occupancy for Grand Prairie.
CBRE categorizes Dallas as a Tier II market for multifamily housing.
Class A apartments are usually located in luxury grade buildings, and thus command higher rents than their Class B and Class C counterparts. Class B and Class C apartments, by contrast, tend to attract a wider demographic – from working-class individuals, millennials entering the market, and downsizing baby boomers. These properties are typically 15 to 25 years old and are located in well-established middle income neighborhoods. Class B and Class C properties tend to offer residents the best value for their dollar, attracting renters in a bearish economy .
A cap rate refers to the percentage of net operating income represented by the purchase price of an apartment complex. In this way, one can think of the cap rate as the return an investor can expect to receive on a given apartment complex or the amount of money an investor can expect to receive as a proportion of the apartment complex’s purchase price.
Class B stabilized cap rates are at 5.50%-6.00%, while value add cap rates are 6.25%-6.75%. Class C stabilized cap rates are at 6.25%-6.75%, while value add are floating around 7.00%-7.50% . Dallas’s cap rates are favorable compared to other metropolitan areas, especially Tier I assets, which have cap rates between 4.50% – 6.00% for stabilized class B assets and 4.00% to 7.00% for class B value add assets . The lower cap rates seen in Tier l markets are due to the overbought nature of these markets. As a result, we are drawn to the yield opportunities in the Tier II and Tier III markets.