Apartment Finance Today

REGIONAL MARKETS

South Central

Texas-Size Growth

APARTMENT FINANCE TODAY • November/December 2008

Builders have more than 20,000 units under construction in Dallas-Fort Worth, the most of any area in the state.

BY DONNA KIMURA

Dallas—The large number of apartments under construction shows the confidence developers have in this market. That faith may soon be tested as concerns over an oversupply of apartments and a sinking economy grow.

There are approximately 20,500 multifamily units under way in Dallas- Fort Worth. While it doesn’t approach the fevered pace seen in the 1980s, the amount of building is aggressive and beyond that of the past few years, according to Greg Willett, vice president of research at M/PF YieldStar.

He estimates that construction in the market is up 55 percent from a year ago. While the area shows good absorption, about 3,700 units in the third quarter, the hot pace is a critical issue to watch because there is so much product on the way, says Willett.

There were more than 56,000 units under construction going into the second half of the year within Texas’ big four metro areas, reports M/PF YieldStar. The area that looks to be the biggest concern is Austin, where there are approximately 12,810 units under way, about an 8 percent growth rate in the metro’s total apartment inventory by the end of 2009, according to the firm.

Where the jobs are

Apartment builders feel better about Dallas. Employers in the market are “poised to add jobs at one of the healthiest rates in the country,” reports Marcus & Millichap Real Estate Investment Services in its second-quarter market update. “Approximately 50,000 new positions are forecast for creation this year, expanding payrolls by 1.7 percent.”

Will Balthrope, senior director of the Balthrope Group of Marcus & Millichap in Dallas, also points out that many of the apartments under construction will replace a large number of units that are being lost due to a variety of factors, including redevelopment efforts. He says about 4,600 units were removed from inventory in the second quarter.

Construction is expected to peak in early 2009, but the planning pipeline has thinned from a year ago to 11,200 units, adds the firm’s researchers.

Despite healthy demand, the delivery of new units will push the vacancy rate up about 80 basis points to 6.9 percent by year’s end, according to Marcus & Millichap.

Overall, it expects asking rents to climb 3.4 percent to $788 per month by the end of the year, while effective rents advance 3.1 percent to $720. Concessions will likely increase for the first time since 2005.

New deals

One of the most active developers in Dallas is Trammell Crow Residential (TCR), a national multifamily real estate firm headquartered in Atlanta.

The Dallas multifamily market is “holding up,” says Darren Schackman, senior managing director at TCR. “As of right now, we’re certainly one of the better markets in the country.”

TCR began leasing the first apartments at the 452-unit Alexan Fitzhugh in June, one of six properties that it has under construction in Dallas. The firm has more than 2,000 units under way in the area. The projects involve everything from suburban developments to urban infill, says Schackman.

Located in the Knox-Henderson corridor, the Alexan Fitzhugh is an infill development, replacing three aging apartment projects that used to be on the site. TCR leased those existing properties down and then razed them to make way for the new community.

The interiors feature stainless steel appliances and granite countertops. The property includes an 1,800-square-foot athletic center and monthly nutritional cooking classes. In addition to three pools, there is a gaming station equipped with Wii and PlayStation systems.

The apartments, which rent for about $1.37 per square foot, have been leasing at an average of approximately 25 per month, beating expectations, according to Schackman.

Dallas-based Riverstone Residential Group manages the Alexan Fitzhugh and about 6,000 other units in the area. The market is entering an interesting time because the communities being built offer more diversity than Dallas has previously seen, says Stephanie Brock, president of the central division at Riverstone. The new projects include mixed-use developments, mid-rise buildings, and redevelopment projects like the Alexan Fitzhugh.

While many of the deals under construction secured their financing before the latest economic troubles and credit crunch took hold, some deals continue to get the green light.

Fore Property Co. announced in October that it had secured financing with its joint-venture equity partner, Fidelity Investments, and debt partner, the Bank of Texas, for the development of a 216-unit luxury community in nearby McKinney. The Bank of Texas will provide $15.4 million in construction financing toward the $22 million development of Stonebrook Villas.

Fore, a national real estate firm, expected construction to begin at the end of October. The two- and threestory garden-style buildings will house one-, two-, and three-bedroom apartments, ranging from 880 to 1,240 square feet. The community will also feature a 3,550-square-foot clubhouse, a fitness center, an entertainment lounge, and a resort-style pool.

The ability to secure financing in today’s turbulent conditions highlights that there is still a need for quality apartments in the right locations, says Chairman Richard Fore.

“Given the current status of the financial markets, it will certainly be more difficult in the near term for new development to occur, thus limiting the supply of multifamily communities,” he says. “At Fore, we believe there will still be a need for quality multifamily housing, with Generation Y entering the workforce and continued population growth. As a result, investment partners will be looking toward quality developers to pursue the right opportunities in select areas.”