Bobby Weinberg, NorthMarq’s senior vice president – Debt & Equity in Dallas, recently authored the following perspective for the June 2021 edition of Texas Real Estate Business.
Employment growth is providing a powerful tailwind for the Dallas-Fort Worth (DFW) commercial real estate market. And while Dallas may be the
headline name that is attracting employers and investment capital to the metroplex, Fort Worth is commanding attention as a formidable market in its own right.
DFW embodies a classic story of a high tide raising all boats. The metro has been a national leader in terms of employment growth for several years, and the region is expected to add another 150,000 jobs this year.
Employers that are looking to tap into that workforce are finding that Fort Worth checks all the right boxes. It has an educated labor pool with colleges and universities that include Texas Christian University and the nearby University of Texas-Arlington, among others. Furthermore, the city has a business-friendly government.
An important third leg to that stool involves the affordable cost of living for workers. Fort Worth offers a multitude of workforce housing options — both in its single-family residential and its growing multifamily sector — that provide lifestyle choices for workers that employers like.
Investors are discovering that there is not a big delineation in yields, cap rates, and return on costs between commercial investment opportunities in Dallas and Fort Worth. Rents might be different from submarket to submarket, but overall, investors view Fort Worth very favorably and are aggressively deploying capital into the market.
In fact, the Dallas office of NorthMarq originated a record-high volume of loans in the metroplex in the first quarter. That activity speaks to the strong appetite from investors, as well as the real estate investment opportunities that exist across the board in development, acquisitions, and property repositioning.
It is no surprise that industrial and multifamily are the favored property sectors, and both have robust development pipelines. The established submarkets of Alliance, the Great Southwest, and South Fort Worth continue to attract tenants as fast as developers can build product.
Growing pockets in areas with strong household demographics have emerged as hotspots of activity. For example, Lone Star Commerce Center, located north of Lockheed Martin’s headquarters, is seeing a flurry of activity from developers and tenants alike, driven by strong fundamentals.
Developers are responding to continued growth in demand for e-commerce fulfillment and logistics services. Among the notable deals that fit this profile executed in Fort Worth during the first six months of 2021 were DHL’s renewal of 1.4 million square feet in North Fort Worth, and Walmart’s signing of a lease for 1 million square feet.
Amazon also continues to add more capacity in and around Fort Worth to
serve the growing population in the DFW metroplex. The e-commerce behemoth has also announced that it will significantly grow its technology workforce across six major markets in 2021 with 600 new positions expected to be added in the metroplex.
Multifamily development has been active for the past several years and shows no signs of slowing. According to NorthMarq’s DFW multifamily research report for the first quarter of this year, there were an estimated 37,334 units under construction at the end of the first quarter, with 6,951 units delivered during the first three months of the year.
Although rent growth slowed to 0.9 percent as landlords focused on tenant retention, absorption of those units has remained strong. A market-wide vacancy rate that rose 60 basis points to 6 percent in the first quarter is expected to tighten by the end of 2021. Based on deals we have sold and financed in the second quarter, we anticipate further compression in vacancy and significant organic rent growth.
On the acquisition side, there is a very healthy amount of capital for all different types of multifamily assets, from ground-up Class A projects to workforce housing. Multifamily cap rates in the DFW compressed further over the past year to average 4.3 percent in the first quarter. Prices generally have continued on an upward trajectory driven by rent and growth in net operating income.
Diversity of Capital
A combination of significant liquidity from a large variety of established and new investors and extremely competitive financing rates is driving demand for product. In the multifamily sector, for example, sponsors are able to secure financing at 75 to 80 percent loan-to-value ratios with rates in the low- to mid-3 percent range. Lower-leverage deals for agency or life insurance money tend to price in the mid- to high-2 percent range.
Our investment sales team in Dallas has sold 16 multifamily properties in Tarrant County totaling over 5,500 units. On the capital markets side, we
have arranged debt and equity financing for 20-plus transactions with another 20 in the pipeline. This speaks to the strength of the market not only in terms of rent growth and demographics, but also with regard to investor interest in the Fort Worth market.
Recently, concerns about rising inflation and higher interest rates are stirring up the classic conversation of weighing floating-rate debt versus fixed-rate. Commercial real estate has traditionally been viewed as a good inflation hedge because of the ability to increase rents, but is less of a hedge if a property has floating-rate debt in a rising interest rate environment.
It remains to be seen how sticky some of the recent inflation pressure will be and how it might impact yields and investment strategies over the short term. The bond market has largely shrugged off inflation fears and continues to push long-term treasury yields lower.
Overall, the capital sources targeting commercial and multifamily real estate investments in Fort Worth span a diverse group, ranging from\ institutions and foreign buyers to high-net-worth individuals. We continue to see new investment groups entering the market on almost a weekly basis.
We remain bullish on long-term fundamentals of North Texas as job growth
fuels economic expansion that will continue to benefit the commercial real estate sector and, in particular, industrial and multifamily asset performance.