How Capital Markets Turmoil Impacts Multifamily in Dallas

The Sun Belt region’s multifamily market has seen record-breaking growth over the past few years, backed by in-migration and company relocations. The Dallas-Fort Worth-Arlington metro area has become one of the hot spots in the region, attracting roughly 97,000 residents between July 2020 and July 2021 — according to U.S. Census Data — and companies such as AECOM, Hall Technologies, or 5G LLC.

As a result of strong demographic and employment trends, the metroplex’s multifamily market remained steady in 2022, slightly falling behind the record gains seen in the previous year.

After falling for four consecutive months to an all-time low, vacancy rates crept higher during the second quarter of 2022, reaching 3.9%, but still remained 110 basis points below the rates recorded during the same period last year, according to Northmarq research.

Despite rising vacancy rates, the construction pipeline continued to expand, with more than 56,100 units under construction, 27% above the 2021 numbers. And while deliveries were slow during the first half of the year, the pace of new constructions is expected to pick up in the second half of 2022.

Amid the slight fluctuations in market fundamentals, rents have continued to soar. According to Northmarq, rents grew 3.8 % quarter-over-quarter and 19.3% on an annual basis, ending the second quarter at $1,489 per month. Average rents increased the most for Class A properties, reaching $2.04 per square foot over the second quarter, representing a 17.7% uptick on a year-over-year basis.

At the end of the second quarter, submarkets with the highest rent growth included Dallas-Plano-Irving, climbing 20% year-over-year, to $1,526. In the Fort Worth-Arlington area of the metroplex, rents averaged $1,374, increasing 18% year-over-year.

Multifamily Investment Dips in Dallas-Fort Worth

Although multifamily sales declined in the second quarter of 2022 — due to rising interest rates — total sales velocity during the first half of 2022 exceeded the volume recorded during the same time in 2021 by 29%. Nonetheless, overall sales activity plunged by 25% from the first quarter to the second quarter.

The dip in sales is not surprising, considering the increasingly higher cost of capital, which led to “the unusual inversion of lending rates and capitalization rates, or negative leverage,” according to a mid-year CRE outlook from EisnerAmper. At the end of the second quarter, cap rates still averaged around 3.5%, similar to the levels recorded at the end of last year and the beginning of 2022, Northmarq revealed.

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In its quest to lower inflation, the Federal Reserve announced the third consecutive interest rate rise of 75 basis points last week, pushing rates to a range of 3%-3.25%, CNBC reported. Fed officials are expected to continue the hike until rates reach 4.6% in 2023.

The higher cost of capital will continue to have a cooling effect on multifamily sales in the DFW metroplex, as buyers and sellers adjust to the new lending environment. Nonetheless, strong real estate fundamentals bolstered by positive demographic and employment trends will likely soften the blow on the property investment markets, and deals will continue to materialize.