In what has been a remarkable bounce back year for the multifamily industry nationally, the Dallas – Fort Worth market has been the leader in both new supply and apartment demand. In this installment of the Market Spotlight series, we take a closer look at Dallas – Fort Worth (DFW) from January through September of 2021.
As a reminder, all numbers will refer to conventional properties of at least 50 units.
New Supply and Net Absorption
Just over 22,000 new units have been delivered through the first nine months of the year. This was slightly more than in the previous two years despite myriad materials and labor issues that have challenged the construction sector this year. The two submarkets where the most new supply has been located were the far-northern suburban areas on the Greater Dallas side of the metroplex.
The roughly 2,200 new units in the McKinney – Allen – Fairview region led the way, followed by about 1,700 new units delivered in the Frisco – The Colony – Little Elm submarket. Overall, approximately two-thirds of Dallas – Fort Worth submarkets added new units sometime in the first three quarters of the year.
While new supply was marginally higher than in the same portion of recent years, apartment demand has been significantly higher. Net absorption of more than 42,000 units not only more than doubled COVID-affected 2020, but nearly doubled 2019 demand as well. The result was a 3.3% increase in average occupancy to close September at 93%. At the price class level, the surge in net absorption has been observed across the spectrum.
Demand has doubled that from 2020 for both Class A and Class D properties, and Class C net absorption this year has almost tripled last year’s. Class B properties, the subset with the highest net absorption in 2020, has seen a 75% jump compared to last year. In addition to the two aforementioned submarkets in far-north Dallas, the Central Fort Worth area stood out with around 2,500 net absorbed units through September.
Average Effective Rent and Lease Concessions
As astounding as the change in apartment demand has been, the resulting rent growth has been beyond recent levels to an even greater extent. A 12% increase in average market rent through September paired with a dramatic drawdown in both lease concession availability and value has translated into a 15% average effective rent gain so far this year. For context, at the end of September in 2020 average effective rent growth stood at 0.9%, and that metric was at 3.7% at the same point in 2019.
Four submarkets, all on the Greater Dallas side of the metroplex, have managed an average effective rent increase in excess of 20% so far this year – led by the 23% jump in the Frisco – The Colony – Little Elm region. Even the relative laggards, also mostly on the Greater Dallas side, have all surpassed the market average from 2019. Southeast Dallas, with a 4.3% gain has had the lowest appreciation, followed by the Bachman Lake – Webb Chapel and Southwest Dallas – Redbird areas.
Also noteworthy, is the price class perspective. The Class B space has led the way, with average effective rent climbing by 20% so far this year. The Class A subset has been right behind at 18%. As with many areas of the country, Class C properties have performed much more closely to the Class A and Class B properties on the rent front in DFW.
A 13% gain through September for these properties was more than double the 5% mark in the Class D sector. The Class C number bears particular attention given the lack of financial flexibility many of these residents have relative to the top price tiers.
As previously mentioned, a major piece of the rent growth puzzle has been the movement in lease concessions. After a 66% decline from the start of the year, the Dallas – Fort Worth market ended September with only 11% of conventional properties offering a new lease discount. Additionally, the average discount value decreased by 31% in the period to finish at 2.5 weeks off an annual lease. Both metrics ended the third quarter significantly lower than at any point in recent years. None of the 43 ALN submarkets for Dallas – Fort Worth have seen in increase in concession availability from the start of the year, and only a handful have seen an uptick in the average concession value.
2021 has seen a generational recovery for the multifamily industry after a challenging 2020. Challenges remain, especially on the development side, but apartment demand, average occupancy, and especially average effective rent have all soared. This has been especially true in Dallas – Fort Worth. More new units have been delivered than in any market, and more net units have been absorbed than in any market. As we move through the traditionally softer fourth quarter, there is little reason to expect a dramatic drop-off in any of these trends in the short term.
Even so, despite strong fundamentals relative to many other markets around the country, there are some potential issues worth keeping in mind. Inflation and continued supply chain and labor difficulties fit the description. As does the fact that rent growth of this magnitude is so short a period of time will, at some point, begin to pressure demand. It should also be mentioned that annual rent growth approaching 20% is also likely to increase public and political scrutiny of the industry around issues of affordability.
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