Don't Get Too Comfortable: Texas, The Darling Of U.S. Multifamily, Sees Rent Growth Slow, Absorption Dip

Rents have begun to stabilize in Dallas-Fort Worth and in the state's other metros after reaching historic highs in 2021.

Explosive job growth, more people moving to Texas and a worsening affordability crisis in the for-purchase market created unprecedented demand for apartments in DFW since the beginning of the pandemic.

Owners, saddled with their own heightened expenses, began charging more per unit, causing rent growth to hit nearly 19% last year, far exceeding the long-term average of 6%, ApartmentData.com President Bruce McClenny said. 

“That’s three years of average rent growth pushed through in one year,” he said. “You just can’t expect that to continue — it’s going to settle back down.”

A reversion to the mean is already apparent in the numbers. Rent growth in DFW averaged 11.7% over the three-month period ending Aug. 31, and the 12-month trailing average was 14.4%, per McClenny’s data.

The same trend is playing out in Texas’ other largest metros. Austin’s three-month trailing average was 8.6% compared to 24.5% in 2021; in Houston, 8.4% versus 13.9%; and in San Antonio, 8% versus 15.5%.

So far, higher rents haven’t scared off tenants. Class-A apartments, which cost the most, are outpacing their lower-tier peers in terms of occupancy, whereas Class-B units have seen leasing steadily decline since the beginning of this year, according to ApartmentData.

This is likely due to a couple of factors, McClenny said, including an uptick in forced exits following the end of the eviction moratorium as well as the current downturn in the economy.

“Renters are acting like it’s a recession,” he said. “During a recession, renters double up, they move back home, move in with relatives or move into shadow rentals.”

The hit to Class-B occupancy is creating a negative absorption phenomenon that feels antithetical to the unbridled success of DFW’s multifamily industry. So far this year, 11,600 units have been added to the DFW market, but only 7,600 have been absorbed. Last year, the market absorbed 44,700 units but added only 25,700 units.

McClenny cautioned against interpreting negative absorption as an industry slowdown. Despite persistent move-outs in lower-tier properties, Class-A, where most of the supply is delivered, is holding up fine. 

But it could be a sign of choppy waters ahead. Job growth has slowed as recession-leery bosses pull back on hiring, and fewer people may be able to afford lofty rents. Widespread negative leverage has also been reported, which could get worse as the prospect of raising rents on cash-strapped tenants becomes less tenable.

“We are on a collision course with poor economic times,” McClenny said. “The Fed is just absolutely hellbent to drive us into that. It’s a shame — just how they messed up going up, they’re going to mess up coming down.”

DFW is better positioned than most metros to withstand a recession, and rent growth through the end of this year is still expected to outpace its historical average, McClenny said. But as families fall on tough economic times and begin tightening their belts, it may be harder to charge stiff rental rates in 2023.

“A flat year [of rental rate growth] would be a win,” McClenny said. “A lot of people in the industry may not agree with me and say we need more — I don’t know if more is a good thing in 2023.”