Storm Clouds Threaten To Rain On DFW's Multifamily Parade

A rush of new residents moving to Texas paired with soaring home prices have positioned multifamily as one of Dallas-Fort Worth’s strongest asset classes, but several headwinds threaten to slow momentum if not swiftly addressed.

Developers, builders, investors and other stakeholders discussed industry highs and lows during Bisnow’s DFW Multifamily Annual Conference, held Sept. 27 at Fairmont Dallas. While bullish on multifamily, they say systemic issues — including a growing current of NIMBYism and extensive permitting delays — could derail long-term success.

“Our biggest advantage as a region is housing, and that’s eroding, largely because we can’t put enough units on the ground because we can’t get them approved,” Trammell Crow Co. Managing Director Joel Behrens said. “It’s only going to get worse and that goes beyond just the multifamily industry — that translates to office and other industries, because we have to have housing.”

Over the past several months, permitting delays in the city of Dallas have ballooned out of control. The issue became so severe that City Manager T.C. Broadnax almost lost his job and an emergency task force was formed to come up with solutions.

Some progress has since been made, but for many developers, it is too little too late. Most of the multifamily development outside of the urban core is in response to skyrocketing population growth, but some companies are intentionally skipping over Dallas simply to avoid permitting delays.

“The city holding you hostage makes you not want to do business in Dallas,” Omniplan principal Jeff Slajer said. “That’s something we have to do better on.”

Development in the outer ring suburbs often involves less bureaucratic red tape, but it is not without its challenges. Some of the most extreme forms of NIMBYism can be found in communities outside of Dallas, where housing is urgently needed to address an influx of new residents.

“Density is an evil word in most of the suburbs I’ve bumped into north of Downtown,” J Street Cos. Director of Real Estate Shea Byers said. “Multifamily is a four-letter word.”

Tackling the stigmas around rentership comes down to a better understanding not just of the type of person who rents, but also of the strong bottom-line impact multifamily has to offer, Gensler principal Barry Hand said.

“The appraisals on a 350-unit, multifamily wrap are about the highest appraised real estate you will find,” he said. “We’ve got $60M, $70M, $100M wraps sitting on 3, 4, 5 acres of land. You would be hard-pressed as a city manager to find an appraisal that is higher than that.”

For some developers, building multifamily in these communities is not worth the battle. The pervasiveness of NIMBYism is one of the reasons why apartment development is booming in burgeoning communities on DFW’s periphery, where city leaders are grateful for business of any kind, ZOM Living Senior Vice President Jason Haun said.

“There’s a lot of [NIMBY] momentum in some areas that you likely aren’t going to overcome, and those just aren’t the balls we are willing to swing at,” he said. “We move on to other places.”

Anti-apartment sentiment is also behind an acceleration of the build-to-rent trend, JPI Vice President of Pre-Construction David Blanton said. His company has started building hybrid communities that include traditional apartments with a BTR buffer, which he said makes the development more palatable to nearby residents and elected officials.

“It plays nicer with the neighbors,” Blanton said.

Ingrained issues like permitting delays and NIMBYism have been temporarily overshadowed by transitory challenges, including inflation and rising interest rates. Increased cost of capital is causing some multifamily investors to take a step back, but after a record year of activity in 2021, this may not be such a bad thing, Haun said.

“Multifamily is a great asset class, but turbulence from a capital markets perspective is making deals more difficult,” he said. “There will be a slowdown in starts in the immediate future, which I think is positive from an organic perspective.”

Over the past few months, rental rate growth has also begun to cool. The three-month trailing average at the end of August was 11.7%, which is significantly lower than the 19% average growth seen during 2021, but still much higher than the long-term average of 6%, according to ApartmentData.com.

“Everyone says the sky is falling because we are not seeing what we saw in 2021,” TruAmerica Multifamily Senior Director of Acquisitions Ammanuel Metta said. “But you’re still setting above-average historical rent growth, and you’re still seeing strong demand and low supply. Multi[family]’s fundamentals from an operational standpoint still have a lot of legroom.”

One of the Metroplex’s biggest areas of opportunity when it comes to multifamily is in the affordable and workforce housing sector. 

An influx of new residents fleeing more expensive coastal markets has driven up prices in DFW and beyond, which has made housing less attainable for a growing number of families.

Texans need to accept that the bar has been raised, Greystar Senior Managing Director Joanne Broadway said.

“We’ve got to get our Texas folks understanding that they are probably going to pay more, a third of what they make in rent,” she said. “You’re passing on [rent increases of] $300-$400, and they are accepting those, and the delinquency isn’t out of control, which tells you they can pay for it. It’s just a mind shift.”

The city of Dallas estimates it is short about 200,000 affordable units, a recent Racial Equity Audit found. This has created a sense of urgency among those who understand that housing for residents at all income levels is critical to the region’s overall economic success.

“Twenty percent [rent] growth is affordable to some, but those who are from here and whose base of income is a lot less, it’s not affordable to them,” Innovan Neighborhoods Managing Partner and founder Maggie Parker said. “We have to look at how to address this across income spans.”

Partnerships with the public sector and nonprofits are an important piece of the puzzle when it comes to tackling affordability, Builders of Hope President and CEO James Armstrong III said, but private developers must take the lead.

“If the affordable housing crisis is going to be solved, it’s going to be solved by the people in this room,” he said. “We have to bring the solutions, we have to bring the product, we have to bring the plan, because we are the subject matter experts … We’re not going to close the gap through city hall first.”

Demand will always be high for multifamily because housing is indispensable, Highmark Residential President Steve Lamberti said. While it is not immune to a downturn, DFW as a metro has the right fundamentals to weather the challenges it will encounter, he added.

“We'll have some bumps along the way, but there’s no other place I’d rather be than here,” Lamberti said. “Everybody needs a place to live — the market will adjust, rents will adjust, capital will adjust and the flows will come through.”