Texas Multifamily Financing Trends
By: Bill Jackson and Tony Gray
Multifamily financing is gaining strength in both the
Dallas-Fort Worth and Houston markets. A look at each
respective market reveals declining vacancy rates and a
brighter outlook.
Dallas - Fort Worth Metro Area
The Dallas - Fort Worth multifamily fundamentals are
strong and poised to get stronger. The improving economy
and the relative lack of new construction have allowed
vacancies to come down and rental rates to increase, and
dramatically so in some submarkets (i.e., in-town
Dallas, Far North Dallas, Plano, Las Colinas/ Coppell,
Frisco/ Prosper and in-town Fort Worth). Overall
occupancy is over 93% and climbing and the local economy
is projected to have some of the strongest job growth in
the country.
According to the third-quarter 2011 Dallas/Fort Worth
Apartment Report from MPF Research, the last 12 months
saw the delivery of 5,189 units and the forecast for the
coming twelve months is 5,333. Compared to the rest of
the country this is quite high but it is still well
below the average of around 13,000 units completed
annually since 2000 and actually represents a 16-year
low.
So, deals are getting done but not a pace to
overreach forecasted absorption. This has allowed
fundamentals to recover quite nicely and strengthened
the appetite of permanent lenders and equity providers.
Given these market factors one would think that
construction lenders would be making a number of new
construction loans in DFW. And in some cases they are,
but the transaction has to be the right deal and with
the right sponsor who has few legacy issues. Banks have
been cautious as we have exited the “great recession,”
which will likely allow for an even longer period for
fundamentals recover. Multifamily construction loans are
either being limited to best-in-class sponsors and
locations or low-leverage deals (usually all of the
above).
Permanent Lenders, especially with Freddie Mac and
Fannie Mae, are closing large production loan volumes
during 2011, in the North Texas Multifamily market. Life
Insurance companies have been very active as well as
competing with the agencies and winning their fair share
of business. In many cases the life companies are
beating the agencies on multifamily deals they want.
Both Freddie Mac and Fannie Mae are staffing up for
the future. They like what they see in the multifamily
market and especially the Dallas-Fort Worth market.
Coupled with their positive outlook is their equally
attractive cost of funds. These two government sponsored
entities have the luxury of having the implicit guaranty
of the federal government so they can sell
mortgage-backed securities (MBS) at tighter spreads over
the corresponding treasury than Wall Street can. And
both companies have taken advantage of this and moved
away from a model that focused on balance sheet lending
to a model that focuses on securitized lending. So, CMBS
is back—at least with Freddie and Fannie.
The CMBS 2.0 business model also seems to be
stabilizing after the S&P rating snafu and market
meltdown of several months ago. They have money
available and are attempting to rejoin the competition
for multifamily mortgages. CMBS 2.0, as it is now
referred, is back to where we were in the early 2000s
with the main problem of “not knowing the final loan
terms until several days prior to closing.” Although
CMBS 2.0 is back, all-in rates are 50 to up to 200 basis
points higher than the agencies and life companies, so
they are not competitive at the moment.
Houston Metro Area
Last year’s green shoots have turned into towering trees
in the Houston multifamily market. REIS estimates that
Houston Metro vacancy has decreased from 12% market-wide
during the darkest days of 2009 recession to 9.7% today.
REIS has projected that vacancy rates will fall below 9%
market-wide by year end, trending to 7.8% by 2015.
As vacancy trends have remained highly favorable,
rental rates have followed suit: REIS estimates that
Houston Metro rents have increased approximately 6%
since mid-2009, and rents are expected to increase
approximately 3% per annum through 2015. These steady
rent and occupancy trends have been fueled by robust
supply and demand factors: REIS estimates that Houston
has seen 14,200 units of absorption in the past 12
months. REIS also forecasts absorption of more than
6,200 units per annum through 2015, which will further
decrease vacancy rates and provide a platform for
further sustainable rental rate growth. All of these
positive trends have opened the door to a wave of new
multifamily development.
2011 should be anointed as “Houston’s Year of New
Development.” Many recently-announced multifamily
developments are already under construction and will
begin delivering units to the Houston marketplace in
mid-2012. The institutional investment community has
determined that Houston represents one of the country’s
“best bets” for new development, especially within the
multifamily sector. Houston’s robust job growth has been
the city’s calling card to attract capital from the
institutional investment community. The Greater Houston
Partnership estimates that Houston added more than
65,000 jobs between August 2010 and August 2011 alone.
The first round of new development is being led by a
“Who’s Who” of multifamily developers with a national
footprint including Greystar Residential, Alliance
Residential, and Mill Creek Residential. This
developmental renaissance is also being fueled by top
local developers including Grayco Partners, The
Dinerstein Companies, The Morgan Group, and Martin Fein
Interests. Developers are drawn to the Houston market
because they can achieve proforma returns on cost
ranging from 7% to 8%, creating a 200 basis point lift
over current Class A selling cap rates of 5% to 6%.
Class B projects are generally trading hands at
stabilized cap rates of 6% to 7%. Given the lack of new
multifamily deliveries over the past 24 months and the
limited delivery expected over the next 12 months,
Houston apartment owners should continue to enjoy
increasing rents, declining vacancy, and a sustainable
multifamily market in Houston.
__________________________________________________________________________________________________
This information first appeared in the October 2011
issue of
Texas Real Estate Business Magazine.
Bill Jackson is senior vice president-managing
director in NorthMarq's Dallas office.
Tony Gray is a vice president in NorthMarq's
Houston office.