Short-Term Metrics Aren't Great For Multifamily, But The Long Game Looks Good

The Dallas multifamily market is looking a little rough with rent growth continuing to sag due to incessant Class-A deliveries. More product is on the way — Dallas is No. 2 in the nation for multifamily permits issued this year. This has raised some concerns about overbuilding, but experts say the long-term outlook for the market is strong despite rougher-than-usual numbers in the short term.

Dallas’ multifamily rent growth decreased by another 2.49% from October to November, according to a report from Abodo. Continued deliveries of Class-A product are cited as the primary source of the softening.

“With a 2.49% decrease in rent price from October to November, Dallas continues to experience steady declines in rent prices due to a huge number of new apartments coming to the market,” Abodo Senior Communications Director Sam Radbil said.

Despite this, Dallas issued 20,150 permits in 2017, including 1,389 in September, a study from RealPage shows. Taken together, these stats seem to indicate weakening in the market, but experts say these numbers do not tell the whole story.

Axiometrics Senior Vice President Jay Denton said a decline in Dallas’ frenzied job growth numbers may have caused the recent stress on the market.

“As of September, according to the Bureau of Labor Statistics, [job growth in Dallas] is down from 105,000 [jobs added year-over-year] to 67,000. So you can ask the question of, ‘do we have too much supply or do we not have enough demand?’ I think in the long-term perspective, those will come back into balance, but right now, the two key indicators that we would look at for the market are heading in opposite directions for what would create really strong performance,” Denton said.

Denton said the level of growth Dallas has been displaying over the last few years was unsustainable. The growth numbers are softening, but he is not worried about it as the Dallas economy is projected to remain strong.

CBRE Director of Research and Analysis Robert Kramp agrees. He said slowing job growth and continued Class-A deliveries over the last six months have slightly soured the short term, but long term looks just fine as Dallas’ economy remains strong and multifamily permitting appears to be on the cusp of a contraction in response to the changes in the market. 

“Any potential oversupply in Class-A multifamily will be short-lived,” Kramp said. 

According to Kramp, Dallas’ population is slated to increase by close to 8%, the gross metro product is to increase by about 15% and payroll in Dallas will increase by 8% over the next three-plus years. This addresses the demand problem, and over the next five years, a nosedive in permitting should check the threat of oversupply.

“The permit activity is expected to contract — and contract quite sharply — over the next five years. We are looking at permits hitting a trough, around 14,000 permits being issued by 2020, and that will only increase slightly to about 17,000 by 2022,” Kramp said.

That means the City of Dallas is right on schedule with managing permitting. The stream of deliveries is the result of pre-existing projects put in motion before these trends emerged, Kramp said. He believes the reason there is still interest in building at all is the length of the multifamily pipeline. It takes three to four years to put up a project, without factoring in the time it takes to install parking facilities, so developers are continuing to build with the long term in mind. 

“As long as the economy remains solid, Dallas will continue to produce solid results,” Denton said.