Multifamily Absorption in Dallas Surging Leading into Second Half of

2024-09-27 22:55:03

Contents

Supply and demand growth were the primary forces in the Dallas-Fort Worth multifamily market during the second quarter. Multifamily developers delivered projects totaling nearly 14,000 units, but that total was nearly matched by net absorption. The second quarter marked the strongest period of net absorption in the market in nearly three years, while the total number of units that came online was the highest figure in more than a decade. With supply and demand closely tracking one another, vacancy remained unchanged for the quarter, and operators posted a minimal rent increase. Further rent gains are likely, particularly if the recent pace of absorption can be sustained. During the first half of the year, absorption topped 19,000 units, exceeding the total for all of 2023 and only slightly lower than the recent peak total recorded in the beginning of 2021. The Dallas-Fort Worth region is on pace for net absorption of approximately 38,000 units for the full year, or about 95 percent of the total deliveries scheduled for 2024.

The investment market returned to its familiar trajectory during the second quarter. Investors were active, with the number of properties that changed hands in the second quarter spiking by more than 50 percent from levels in the first three months of the year. This trend is poised to continue, with preliminary totals from the third quarter showing additional sales volume. The bulk of the transaction activity to this point in the year has involved Class B and Class C properties, even as dozens of new Class A properties have been delivered in recent years. Cap rates have remained steady, averaging between 5 percent and 5.5 percent across most transactions.

Looking ahead

The outlook for the Dallas-Fort Worth multifamily market is generally favorable, despite some softer conditions in the near term. The only significant threat to the market outlook is on the supply side. Developers are active, and deliveries should continue at an elevated pace through the remainder of 2025. Still, no market in the country is better positioned to absorb new apartment units as Dallas-Fort Worth. Since the beginning of 2019, net absorption in the market has exceeded 120,000 units. Through the first half of this year, absorption is only 5 percent behind the record-setting demand pace recorded in 2021, although the second half of this year is not expected to duplicate the levels posted a few years ago. Still demand should be strong enough to limit any additional vacancy increases and allow for modest rent growth through the remainder of 2024. Conditions should improve at a faster pace in 2025, particularly if easing monetary policy measures kick in and have a stimulative effect on the region’s large financial sector.

Dallas-Fort Worth Is routinely a leading market for total multifamily investment transactions, and that should be the case once again in the second half of this year. The surge in sales velocity during the second quarter is a signal that sentiment has stabilized and investors should remain active through the remainder of the year. Cap rates have remained in a tight range for the past three quarters, and buyers and sellers have closed the expectations gap. Anticipated declines in interest rates should spur some additional transaction activity in the coming quarters and could eventually lead to modest cap rate compression as borrowing costs decline. Investors will closely track lease-up of new properties and the rents that are achieved during both new leases and trade-outs. Assuming rents edge higher, investor sentiment should strengthen.

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