Our Perspective 5/ 17/ 2021

Local and out-of-state investors flood Dallas-Fort Worth multifamily market to compete for properties

Buyers with pent-up capital are eager to close apartment deals, resulting in a boom in transaction activity since the beginning of the year.

Multifamily sales transaction volume picked up significantly in the Dallas-Fort Worth market in the first quarter of 2021, after dipping in 2020 due to the impacts of the COVID-19 pandemic. In fact, apartment sales volume has rebounded and is now as robust as it has ever been.

An insatiable appetite from local buyers and a hefty increase in activity from out-of-state investors are intersecting, as buyers recognize the market’s immense growth opportunities. Many new investors are looking to get out of the more rent-restricted, challenging apartment markets in cities like New York and San Francisco and focus on more business-friendly environments like Dallas-Fort Worth.

NorthMarq has closed $750 million worth of apartment transactions in the market in the first quarter alone; these sales included 18 properties totaling nearly 7,200 units. Additionally, the company has $1.7 billion in multifamily properties totaling another 14,000 units under contract or in active listings.

One of the largest properties that traded is Brooklyn Apartments in North Dallas, which boasts nearly 1,500 units. A local group owning multiple assets in the market acquired the property as it looks to grow its portfolio. Historically, this submarket has a lot of workforce housing, which offers strong rent growth metrics. The buyer is planning a massive renovation to turn the property around and boost rents.

Why accelerated investor activity now?
Once the 2020 election was over and the vaccine rollout picked up momentum, multifamily sales activity spiked. Large amounts of pent-up capital are looking to be placed from transactions that did not occur in 2020 due to the pandemic.

The bridge market remains active. Debt funds are becoming more aggressive and have plenty of capital. Debt funds were really out of the game for much of 2020. Now that they have so much pent-up capital, they have gotten extremely aggressive on rates. Debt funds are doing 75 to 85 percent loans. Couple that with investors’ confidence in the Dallas-Fort Worth market, and it becomes clear why there is an acceleration in the number of deals. Although rent growth was relatively flat for much of 2020 due to COVID-19, demand drivers are forecast to support rent growth of approximately 3 percent in 2021, according to NorthMarq’s 4Q 2020 Dallas-Fort Worth Multifamily report.

Larger buyer pool: Out-of-town competition heats up
NorthMarq has approximately 50 apartment deals in the market or under contract that will close by mid-year. Historically, 2021 is expected to be one of the best years ever in apartment transaction volume in Dallas-Fort Worth. Investors continue to be attracted to the market’s strong absorption, favorable employment and in-migration trends, and steady supply of new apartments.

While robust demand from local buyers continues, competition is heating up as a huge influx of out-of-town investors has entered the market. These new buyers have significant amounts of capital to put to work and are getting aggressive and winning deals.

There are many more buyers today than Dallas-Fort Worth saw in 2020, and many are coming from inferior business climates or rent-restricted markets including California and New York. Many are seeking to diversify into Dallas due to its healthy business climate. In October 2020, a survey of corporate executives ranked Texas as the best state for business for the eighth time in a row.

Because of this pro-business stance, more corporations are relocating to Dallas-Fort Worth, including giant financial services firm Charles Schwab, which acquired TD Ameritrade. The company relocated its San Francisco headquarters to a $100 million campus in Dallas-Fort Worth earlier this year.

Meanwhile, Dallas-Fort Worth’s population continues to explode as more people are moving there from more expensive cities like San Francisco, Los Angeles and New York, which is a boon for the local apartment and single-family housing markets. In fact, the media is calling the DFW housing market “superheated,” as sellers are receiving multiple offers within hours of putting their homes on the market.

New investor seeks to diversify
NorthMarq recently closed a large sale with a buyer from New York in a Dallas multifamily acquisition; it was the investment group’s first acquisition in Texas. It is a seven-property sale throughout the Dallas metro. The seven properties total more than 2,800 units. They are the Amp and Current at the Grid and Residence at Lamar in Arlington, Forty200 and Annex Apartments in Mesquite, Hangar Apartments in Cedar Hill, and Sierra Park Apartments in Dallas.

Not only is this buyer new to the Dallas market, but it is diversifying more into multifamily, which is another big trend. Historically, this investor focused primarily on the senior housing/nursing home sector and is now diversifying and growing its apartment portfolio. Apartments have outperformed compared to other real estate sectors during the pandemic.

Investors who have been heavily weighted in hotel, office, senior housing and/or retail – all sectors that have struggled since the onset of COVID-19 — are looking to diversify their portfolios into the multifamily sector, particularly in the healthy Dallas-Fort Worth market.

More demand than available product
There is clearly more investor demand for apartments than available product in the market. Fewer deals came to market at the beginning of the year due to the National Multi Housing Council (NMHC) Convention being rescheduled. Typically, a large number of assets are launched to the market during this conference. Additionally, there are multifamily owners who have been hit by COVID-19 that are working to improve their operations and plan to go to market later in 2021.

Accelerated activity occurring in secondary markets
Another trend is there is significant activity occurring in secondary and tertiary markets, just outside of Dallas-Fort Worth. Cap rates have moved so far down in the DFW market that investors are going to areas like Tyler, Longview, Wichita Falls, Sherman, Abilene and Waco as they chase better yield (in the range of 50 to 75 basis points higher).

NorthMarq has roughly 12 transactions it is working on in these secondary and tertiary markets. The company recently closed on transactions in Wichita Falls (called Forest Glen), Sherman (called Turtle Creek Village) and Tyler (called Hollytree).

While investors who historically would not acquire properties in these smaller markets with populations of 50,000 to 100,000, they are investing there now in search of yield and for assets that have seen less improvements compared to Dallas/Fort Worth.