Dallas Multifamily Posts Strong 2017, Eyes on Supply & Demand Balance for 2018
The Dallas multifamily market posted strong results in 2017 as rent growth continued and investment activity was high. Vacancy — driven by an influx of new supply — increased, though levels remained well below previous highs.
According to data from Reis, the average asking rent for the market finished 2017 at $1,129/unit, up 5.4% from $1,071/unit in 2016, and has increased every quarter since 2009. The asking rent for Class A properties was $1,363/unit, up 4.9% for the year, while Class B/C rents rose 4.2% to $824/unit. The highest rent among submarkets was Central Dallas at $2,271/unit. Reis forecasts asking rent in Dallas to increase 4.4% during 2018 and slow to 1.8% by 2022.
Driven by an influx of new supply, the vacancy rate finished 2017 at 4.9%, an increase compared to 3.8% in 2016. This was the highest level for the market since 2014, though it remained lower than the previous peak of 10.7% during 2009. The Class A vacancy rate was 5.9%, up from 4.7% one year ago, while Class B/C vacancy finished the year at 3.7%, up from 2.8% one year ago. Mesquite/ Seagoville had the lowest submarket vacancy rate at 1.7%. Reis forecasts that vacancy will reach 6.2% by the end of 2018 and will remain stable through 2022.
Nearly 15,400 new multifamily units were added to the Dallas market during 2017, the highest total for the market since 1999 — trailing only Houston for the U.S. lead. While demand remained healthy, it was not able to keep pace with the additional supply, as absorption totaled 9,400 units, down from 16,400 units in 2016. Plano/Allen/McKinney had the most units added for the year at 5,200, and more than 6,600 units remain under construction in the submarket.
Many Dallas multifamily projects originally expected to be completed during 2017 were delayed, suggesting an even stronger 2018 in terms of delivery. Reis forecasts more than 22,800 new units will come online during 2018 — the highest annual total on record for the market — while absorption is expected to reach 15,400 units.
Multifamily Sales Market
Dallas was the most active multifamily investment market in the U.S. during 2017, as pricing increased and cap rates remained steady. Data from Real Capital Analytics RCA showed that total volume reached $9.6 billion, falling just a hair short of 2016’s record total, and so marking the first annual volume decline since 2009.
Foreign investment accounted for $461.2 million of apartment transaction volume in Dallas during the year. Canadian investors accounted for $351.2 million in activity, followed by Switzerland with $101.0 million.
The average sales price for 2017 was $ $125,600/unit, up 14.6% as compared with $ $109,600/unit for 2016, and the highest annual average on record. The U.S. overall average sales price was $145,861/unit, up 1.0% from $144,400/unit one year ago.
The cap rate for Dallas multifamily transactions in 2017 was 6.0%, unchanged from 2016. The most recent high for the market was 8.0% during 2008. The average U.S. cap rate was 5.6%, down slightly from 5.7% one year ago.
The RCA Dallas Apartment CPPI™ increased 4.1% in 2017, compared to 12.9% for 2016 and 10.6% for the U.S. overall.
The Dallas economy has been driven by its position as a major distribution center and favorable migration trends, although housing affordability has begun to be a concern. Growth is expected to continue in 2018, although will be slowed because the business cycle is already in the late expansion phase, while above-average growth is expected over the longer-term.
According to the U.S. Bureau of Labor Statistics, employment in Dallas increased by 2.4% (representing 61,800 jobs) during 2017, higher than the 1.5% gain for the U.S. overall during that time. The largest gains over the last 12 months were in the leisure and hospitality (up 5.6%) and professional and business services (up 3.9%) sectors, while losses were measured in the information sector (down 0.7%). The unemployment rate fell to 3.1%, an improvement from 3.6% one year ago, and was lower than the U.S. overall rate of 4.1%.
The S&P Case-Shiller Home Price Index for Dallas increased 7.0% during the 12 months ending in November, marking the all-time high for the market, and outpacing the U.S. National Index (up 6.2%).