With higher interest rates and rising construction costs, real estate analysts are predicting a cool down in Dallas-Fort Worth’s red-hot apartment building market.
But developers are already working on plans for thousands of new D-FW rental units coming this year.
North Texas leads the country in apartment building, with more than 65,000 rental units in the construction pipeline at the start of the year. That number is over 70% greater than what was underway just four years ago.
With a credit crunch making it harder to finance new apartment starts, real estate industry forecasters are all expecting fewer new rental projects to break ground this year in D-FW and nationwide.
“Starts will definitely slow this year, but they won’t fall off the cliff,” said Jay Parsons, the top economist at Richardson-based RealPage. “Construction loans are getting harder to come by, as some lenders have become over-allocated, and deals that are occurring often require lower loan-to-value ratios and therefore more equity.
“Those trends do not impact every developer equally, though,” Parsons said. “It’s thinning out the pool, but it’s not like 2009 when starts basically evaporated.”
The National Association of Home Builders is also forecasting a decline in a nationwide apartment building.
“We are still seeing a significant pullback for multifamily starts due to the largest number of apartments under construction since 1973,” said the builders’ trade group’s chief economist Robert Dietz. “We see a 28% pullback for multifamily starts in 2023.”
The supply of D-FW rental units on the way is still staggering. More than 36,000 new apartments are scheduled to open here in 2023.
Just in the first two months of the year, local builders disclosed plans for another 9,200 rental units in almost 30 projects.
Still, most builders say they expect fewer D-FW apartment starts this year — even as new developments start.
“We’re starting to see slowdowns in permit applications,” said Tyler Sibley, vice president with developer Kairoi Residential. “I suspect you’ll start to hear more about projects over the next six to 12 months that were planned and are now paused or canceled. There are lots of pressures on why deals are struggling to move forward.”
The factors at play
Along with higher financing costs caused by the Federal Reserve’s interest rate hikes, lenders have tightened credit standards and are pulling back from making some loans, builders say. At the same time, financial costs are soaring and the cost of building materials, land and labor continue to rise, Sibley said.
“The labor resources are still very scarce in the market,” he said.
With single-family home construction in North Texas declining, apartment builders had hoped to see lower costs for some building materials.
“We have not seen any pullback yet,” Sibley said. “We’ve actually seen continued expansion in various elements of the construction budget.”
North Texas’ busiest apartment builder is Irving-based JPI, which recently announced plans to build 11 new D-FW communities. JPI senior vice president Miller Sylvan said putting the deals together requires more effort and time due to credit market hurdles and higher costs.
“We have not been immune to these challenges,” Sylvan said. “But fortunately, we are still able to get deals done in this environment because of our track record.
“Last year, we started 13 communities, which was a little bit over 4,300 units,” he said. “As we look to 2023, we expect to start construction on about the same number of communities with about 4,500 homes in the D-FW area.”
The rate of cost increases for apartment builders has slowed, Sylvan said, but prices are still rising.
“Over the last five years, our construction costs have grown between 75% and 80%,” he said. “Class A apartment rents have grown 40%. That leaves a gap that makes it more challenging to get deals done.”
In recent months, D-FW average apartment rents have actually seen a modest retreat from recent highs. Concessions — free rent and other perks to lure renters to new projects — are widespread.
“Cost increases have outpaced rent increases and the cost of capital has gone up,” Sylvan said.
Despite those greater challenges to building, Sylvan said demand for new apartments in North Texas continues to grow.
“There is obviously a housing shortage everywhere in D-FW — we are undersupplied in multifamily and single-family housing,” he said. “We are still seeing in-migration of folks to this area who are leasing our units. And the incomes we are seeing from our renters are continuing to go up.”
JPI is changing the mix of what it builds to include more moderately priced rental units. Many of those projects are planned as public-private partnerships with support from communities.
“We are looking at doing five or six of these communities this year in D-FW,” Sylvan said. “That will be about 1,000 units of affordable homes.”
JPI is also doing more joint ventures with investors and landowners on new projects.
‘More picky and risk-averse’
Even with all the recent apartment development announcements, Sylvan expects some builders to cut back on starts.
“As capital is more picky and risk-averse, the smaller shops could have more difficult times capitalizing their deals and getting them done,” he said. “We are seeing some deals getting dropped. It does feel like we are going to see a reduction of supply.”
Michael Blackwell, senior managing director with developer Mill Creek Residential, expects the D-FW apartment project count to fall.
“When the year is up and we count the number of real starts, I think those numbers are going to be way down,” Blackwell said. “There is a remarkable volume of deals being dropped. Debt financing is a major issue.”
Mill Creek is building apartment communities in a downtown Dallas tower, on the banks of the Trinity River in West Dallas, near White Rock Lake and in west Fort Worth. The builder has another project in the works in north McKinney.
“We’ve been fortunate with our pipeline and timing,” Blackwell said.
While North Texas apartment starts are likely to drop this year, Blackwell said he thinks they will bounce back because of continued economic growth in D-FW.
“Ultimately, the mood is not going to be Chicken Little for long,” he said. “I think 2024 stands to be a pretty substantial recovery year.”
