Dallas-Fort Worth– Come for the Steaks, Stay for the Multifamily

by Carl Pankratz

Downtown Dallas Skyline From Viaduct

Have you heard that Texas changed its state bird?  It’s now the construction crane.  OK, it’s an old joke, but the fact is that the Texas Economy is booming. You can see the signs not only in new buildings but in job growth, too. Employers have come in droves seeking the low tax, business-friendly regulatory environment found in Texas. This boom in job growth naturally leads to an increased demand for value-add multifamily real estate, making it an exciting time to invest.

As of September 26, 2019, the unemployment rate remains at the historic low of 3.4 percent. The State saw job gains of 3.0 percent in August and 1.8 percent in July. Unlike other economic booms fueled by speculation, this economy is fueled by true job growth.  Even more remarkable is the fact that the growth is in spite of a cool down in the energy sector.  Energy saw jobs decline at an annualized rate of 1.6% year to date and 7.3% over the past two months. With a pickup in energy prices, Texas could have even more room to grow! Moving forward, the Dallas Federal Reserve forecasts, “The outlook for the Texas economy remains positive, and the employment forecast still calls for above-trend growth through year-end.”

The Dallas-Fort Worth Region is fueling the boom.  In September, the unemployment rate fell to 3.1% in Dallas and 3.2% in Fort Worth. Both are better than the state average. Office space saw an increase in the construction pipeline of 5.4 million square feet in the third quarter, with vacancy ticking down and rents ticking up. In the industrial sector, the product type has seen a net absorption of 15.9 million square feet over the first nine months of 2019, pushing vacancy to 5.6%, well below the historical average per the Dallas Federal Reserve Bank. Both industries are indicators of jobs and companies coming to the region. For anyone that hasn’t been to Dallas-Fort Worth in the last five years, the landscape would look fundamentally different. Frisco, formerly a small suburb, is now home to the PGA Headquarters. Richardson is home to State Farm. Charles Schwab, Liberty Mutual, Toyota, TD Ameritrade, and Uber now call the region their home, as well.

The low tax and low regulatory environment make Texas an attractive place to do business.  In California, Governor Gavin Newsom signed a rent control law that will reduce the amount of rent allowable for an apartment owner to charge. New York and Oregon have quickly followed suit, with other states considering other measures. From an investment standpoint, the ramifications could be disastrous. When investors buy apartment properties, they typically do so on three to five-year projections called Pro Formas. Pro Formas are an investor’s budget/forecast, determining where they can: push rents, achieve additional income, and how they can reduce expenses. More importantly, these pro formas determine the quality of a potential investment, including determining how well investors can expect to profit.

Think about everyone that invested in these states based on the ability to raise rents, only to have that ability taken away. Think about other regulations that can have similar effects and how it affects your choices as an investor. It can fundamentally impact your returns. Contrast that with Texas! There is currently a ballot measure to make it more difficult for the State to ever allow income tax to be levied on the future. The State Legislature only meets every two years. The climate of personal responsibility and self-reliance promotes an environment that rewards achievement. As an investor, Texas provides stability. As other states push anti-business measures, Texas focuses on how it can be more business friendly. This respect for business, leads to a better place to invest.

New residents following this job growth from other parts of the country, or current Texans benefitting from it, create exciting opportunities for multifamily investment. According to University of North Texas Economist John Baen, the US will need 4.6 million new units by 2030, and Dallas-Fort Worth alone will need at least 475,000 units. Higher student loan debt, low wage growth in relation to inflation, and several other socio-economic factors push many of these new Texas Residents to become renters. Complicating matters are the headwinds that affect the ability to build more units. Construction costs continue to rise, finding suitable labor will remain a challenge, and cities will restrict zoning to prohibit the amount of growth. All these validate the current investment opportunities in value-add multifamily. As these properties are already on the ground, in areas that likely prevent future buildout, with rents lower than what is required for newly built properties, value-add multifamily real estate continues to hold a promising future. Unlike retail, industrial, or office, multifamily is unique given its that it provides for a basic human need, a place to live. All these factors prove the potential Dallas Fort Worth Multifamily provides investors looking for exciting investment opportunities.

Texas is booming. Dallas-Fort Worth is booming. For investors looking for a place to investment, Dallas-Fort Worth proves very exciting.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

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