DALLAS, TEXAS (February 21, 2023) - Eric Stockley, senior vice president of Northmarq's Dallas investment sales team, shared his expert insights with Texas Multifamily & Affordable Business in a story titled, "Demand, Investor Hesitancy Emerges." The article polled a cross section of the region's top CRE professionals about their predictions, concerns and ideas for opportunities going into 2023.
Texas Multifamily & Affordable Housing Business (TMAHB): What do you expect the biggest investment sales story to be in 2023? What was the biggest headline in 2022? Please explain.
Stockley: Owners who have financed their communities with floating-rate debt over the past two years are going to be forced to make difficult capital decisions this year, either via refinancing, capital infusions, sales or some combination. A majority of these owners will run into these circumstances not because of property performance, but due to the debt structure and interest rate cap requirements. The 2022 headline was obviously the increase in the federal funds rate, which was the fastest that we have seen in 40 years, squeezing owners at a rapid pace.
TMAHB: Although many commercial real estate professionals were hoping for a pause in rising interest rates, the Fed indicated in December that it will continue to raise rates until inflation is significantly reduced. How will the Fed's strategy affect the multifamily market in your territory in 2023? Have you observed a slowdown in transaction velocity?
Stockley: No market has been immune to the rise since the aggressive path the Fed embarked upon in the first quarter of 2022. Where Dallas-Fort Worth stands to differ is that it has some of the strongest fundamentals in the nation in terms of job creation, population growth and a pro-business government, all of which funnels down to property-specific performance. In the Dallas-Fort Worth market, we have an occupancy rate that exceeds 96 percent. It's true that transactions have slowed, but we have remained active by getting communities under contract and bringing new opportunities to the market.
TMAHB: In the wake of the series of interest rate hikes by the Fed, have cap rates on property sales in your region increased? How do cap rates in your region compare with national averages?
Stockley: Yes, cap rates have increased in our market compared with previous years. From conversations with our other national offices and investors, cap rates in the Dallas-Fort Worth market are lower than the national average. Dallas-Fort Worth is fortunate to be buoyed by significant job growth and population growth, stabilizing the foundation for multifamily communities in the metroplex. In most communities, we are still seeing healthy lease trade-outs and high occupancy, leading to an attractive investment thesis for investors.
TMAHB: What trends in asset pricing have you observed over the past year?
Stockley: Asset pricing has fallen compared with the first quarter of 2022, mostly due to lending rates doubling in fewer than 12 months. The same yield profile is not as readily achievable with today's interest rates from lenders, while modelling yesterday's cap rates.
TMAHB: Can you assess for our readers asset performance in your region, and how does some of that data compare year-over-year or with previous quarters?
Stockley: We are still seeing strong leasing trade-outs, as high as 25 percent, on well-located, Class B communities, all while retaining high occupancy. Class A communities are seeing concessions pop up and renters less agreeable to large increases on renewals. Class C communities are still showing strong rent growth and solid occupancy. However, the performance of these communities varies by ownership and management. We have seen two adjacent Class C communities in the same area have vastly different performances.
TMAHB: Which category of buyer in your territory has been the most active over the past year? Do you anticipate any changes on that front in 2023?
Stockley: In Dallas-Fort Worth, private investors/syndicators and mid cap buyers, based both locally and nationally, have been most active recently. We anticipate institutional capital to come back into play once we have more clarity on whether the Federal Reserve will remain hawkish and for how long in 2023.
TMAHB: Heading into 2023, what do you believe to be the biggest challenge affecting the multifamily market in your territory and why?
Stockley: Floating-rate debt will be a big challenge, meaning assets that have increased top-line income by 40 percent are having cash flow pinched due to floating-rate debt obligations and loan covenants. Near-term rate cap expirations are also adding another layer of unforeseen cash flow constraints. A $20 million out-standing loan balance could be looking at an approximate cap rate expense of $1 million that originally cost the borrower $75,000. There are plenty of operators that haven't increased top-line income by 40 percent and are going to have to find a capital markets solution, or seek additional capital from investors.