Thursday, November 10, 2016

Why Dallas Area Apartment Builders, Analysts Expect Starts to Slow in 2017

With more than 28,000 apartments set to open in North Texas next year, will there be enough renters to fill them all?
As long as Dallas-Fort Worth's economy keeps growing at current levels demand for new rental units will remain high, apartment analysts and developers say.
But developers say that tougher financing requirements and affordability issues could put a ceiling on rising apartment construction in the year ahead.
Currently there are more than 50,000 apartments under construction in North Texas - more than any other metro area in the country.
"Dallas-Fort Worth has really had a tremendous run in this cycle," said John Sebree, national director with commercial real estate firm Marcus & Millichap. "
people say it seems this cant keep going - look at all the cranes in the air.
"It seems like a lot but you have had 130,000 new jobs in the last 12 months so it' going to be okay," Sebree said. "I'm not seeing anything that leads us to believe we are getting out over our skis."
But other factors are likely to reduce apartment starts next year, even in D-FW, Sebree told hundreds of apartment builders and managers meeting in Dallas Thursday morning.
"About six months ago the lenders really started pulling back on new construction," he said. "They started increasing the equity and requirements.
"There is a possibility that in 2018 we actually see a drop in new construction deliveries."
Apartment builder say they are having to put more money into new projects at the same time construction costs are jumping and rents resistance is growing.
"In the really active markets the lenders have been pulling back a lot," said Spencer Stuart with developer Legacy Partners. "Where we used to be able to get 10 or 12 lenders to look at a new project, now we are sometimes looking at one.
"The equity requirements - especially on our larger projects - is a minimum of 40 percent," Stuart said. "We think that's going to slowdown the market a bit."
Stuart said he sees no slowdown in construction or land cost increases, which have driven rents in North Texas to record levels.
On average apartments in the D-FW area now rent for more than $1,000 a month. And the newest units go for about $1,400.
Developers say that spiking apartment costs have put a strain on renters.
"It's an affordability issue," said Doug Chesnut, one of the founders of StreetLIghts Residential, one of Uptown's busiest apartment developers. "People just can't afford the cost.
"We can build it but if they can't afford it will set there vacant."
Rick Williamson with Dallas-based apartment builder Lang Partners is also worried about rising apartment tents.
"We are seeing a ceiling of around $1,800 a month," Williamson said. "I'm not sure how many 27 year olds coming out of school want to keep spending $1,800 a month for an apartment."
He said developers are having to start offering rent concessions to attract and retain tenants in some neighborhoods where there has been lots of construction.
"We're typically seeing a month free up front," Williamson said. "You always have our crappy units and end up doing two months."
Construction costs have been rising even faster than apartment rents, which is reducing profits on new developments, builders say.
"We've had upward pressure on labor," said developer Mike Lynd. "Hopefully we will see that trend down soon but we haven't seen it yet.
"Texas is still on fire."
Even though North Texas apartment vacancy averages less than 5 percent, apartment builders and analysts seem resigned to more empty units and smaller rent increases in 2017.
Greg Willett, chief economist with MPF Research, said that about 50,500 apartments are being built in the D-FW area.
"We've been at that point just one time previously in the mid 1980s," Willett said. "It's a lot that's on the way.
"In Uptown and downtown Dallas we have more than 6,000 units under construction," he said. "You also have about 6,000 units under construction in Frisco and about 4,000 in the Allen -McKinney area."
He said so far demand has been keeping up with new supply but that might change in 2017 because of the huge volume of apartments that will be opening.
"We have been doing pretty well but we are going to have to do better than that if we can absorb all these new apartments," Willett said.
He predicts that average vacancy will increase by about 25 percent.
Written by Steve Brown - Dallas Morning News