No sign yet of D-FW’s expected decline in apartment construction

No sign yet of D-FW’s expected decline in apartment construction
No sign yet of D-FW’s expected decline in apartment construction

With higher interest rates and rising construction costs, real estate analysts are predicting a cooling in Dallas-Fort Worth’s red-hot housing market.

But developers are already working on plans for thousands of new D-FW rental units coming this year.

North Texas leads the nation in apartment construction, with more than 65,000 rental units in the construction pipeline at the start of the year. This figure is over 70% higher than what was underway just four years ago.

With a credit crunch making it harder to finance new apartment starts, all real estate industry forecasters expect fewer new rental projects to break ground this year in D-FW and nationwide.

“Startups will definitely slow down this year, but they won’t fall off the cliff,” said Jay Parsons, chief economist at Richardson-based RealPage. “Construction loans are becoming more difficult to obtain, as some lenders have been overallocated, and deals that do occur often require a lower loan-to-value ratio and therefore more equity.

“However, these trends do not affect all developers equally,” Parsons said. “It’s thinning the pool, but it’s not like 2009 when the start basically evaporated.”

The National Association of Housing Manufacturers also warns of a decline in a nationwide block of flats.

Frisco developer Homz is raising $50 million to build large apartment communities

“We continue to see a significant decline in multifamily starts due to the largest number of apartments under construction since 1973,” said Robert Dietz, chief economist at the building materials group. “We see a 28% pullback for multifamily starts in 2023.”

The supply of D-FW rental units on the road remains staggering. More than 36,000 new apartments are scheduled to open here in 2023.

See also  John Mayer goes acoustic for final tour with stop in Dallas

In the first two months of the year alone, local developers announced plans for an additional 9,200 rental units in nearly 30 projects.

Still, most developers say they expect fewer D-FW condo starts this year — even as new developments begin.

New apartment community underway for Forney

“We’re starting to see declines in permit applications,” said Tyler Sibley, vice president at developer Kairoi Residential. “I suspect you’ll start hearing more about projects over the next six to 12 months that were planned and have now been put on hold or cancelled. There is a lot of pressure on why deals are struggling to move forward.”

More than 65,000 apartments are being built in North Texas, including the Modera St. Paul apartment tower in downtown Dallas.(Tom Fox/Staff Photographer)

The factors that come into play

Coupled with higher financing costs caused by the Federal Reserve’s rate hikes, lenders have tightened credit standards and are pulling back from making some loans, builders say. At the same time, economic costs are rising and the costs of building materials, land and labor continue to rise, Sibley said.

“Labor resources are still very scarce in the market,” he said.

As single-family home construction slowed in North Texas, condo builders had hoped to see lower costs for some building materials.

“We haven’t seen any pullback yet,” Sibley said. “We have actually seen continued expansion in various parts of the construction budget.”

North Texas’ busiest apartment builder is Irving-based JPI, which recently announced plans to build 11 new D-FW communities. JPI senior vice president Miller Sylvan said putting the deals together required more effort and time because of credit market hurdles and higher costs.

“We have not been immune to these challenges,” Sylvan said. “But luckily we are still able to get deals done in this environment because of our track record.

“Last year we started 13 communities, which was just over 4,300 units,” he said. “Looking to 2023, we expect to start construction on roughly the same number of communities of about 4,500 homes in the D-FW area.”

New apartment project coming for Allen’s downtown district

The pace of cost increases for condo builders has slowed, Sylvan said, but prices are still rising.

“Over the last five years, our construction costs have grown between 75% and 80%,” he said. “Class A rents have grown by 40%. That leaves a gap that makes it more challenging to get deals done.”

In recent months, D-FW average apartment rents have actually seen a modest retreat from recent highs. Concessions – free rent and other perks to lure tenants to new projects – are widespread.

“Cost increases have outpaced rent increases and capital costs have gone up,” Sylvan said.

Despite the greater challenges of building, Sylvan said demand for new apartments in North Texas continues to grow.

“There’s obviously a housing shortage everywhere in D-FW — we’re undersupplied in multifamily and single-family homes,” he said. “We continue to see an influx of people into this area renting out our units. And the income we see from our tenants continues to increase.”

JPI is changing the mix of what it builds to include more moderately priced rental units. Many of these projects are planned as public-private partnerships with support from local communities.

“We’re looking at doing five or six of these fellowships this year in D-FW,” Sylvan said. “There will be approximately 1,000 units of affordable housing.”

JPI also makes several joint ventures with investors and landowners on new projects.

“More discerning and risk-averse”

Even with all the recent condo development announcements, Sylvan expects some developers to cut back on startups.

“As capital is more discerning and risk-averse, the smaller shops may have a harder time capitalizing their deals and getting them done,” he said. “We’re seeing some deals being dropped. It feels like we’re going to see a reduction in supply.”

Michael Blackwell, senior managing director at developer Mill Creek Residential, expects the number of D-FW apartment projects to drop.

“When the year is up and we count the number of actual starts, I think those numbers are going to be way down,” Blackwell said. “There is a remarkable volume of deals being dropped. Debt financing is a big problem.”

Mill Creek is building apartment communities in a downtown Dallas tower, on the banks of the Trinity River in West Dallas, near White Rock Lake and west of Fort Worth. The developer has another project underway in north McKinney.

“We’ve been fortunate with our pipeline and timing,” Blackwell said.

While condo starts in North Texas are likely to decline this year, Blackwell said he believes they will rebound due to continued economic growth in D-FW.

“At the end of the day, the mood isn’t going to be Chicken Little for long,” he said. “I think 2024 is going to be a pretty significant recovery year.”

Leave a Reply

Your email address will not be published. Required fields are marked *