Multifamily Market is on fire!!!
We were outbid again on a phenomenal asset in the Dallas Fort Worth (DFW) Area. It fits perfectly into our wheelhouse on every angle so we were prepared to push hard to get it.
Our initial underwriting put us at $12MM – in line with the guidance we were receiving. After some further research, we felt comfortable pushing to $12.2MM, maybe even $12.3MM if we had to. Not bad to have a few $100K to play with if need be. Our lender even mentioned we could still get 70% LTV at $12.5MM. While our returns began to take a hit at that point, it settled out in the 8% COC and 13% IRR. While that may seem a little low, you have to remember that we’re talking a home run asset in a home run market so you’re going to have to give a little with the expectation that the team and the market will allow you to outperform in the long run. Long story short the word on the street says this deal went north of $15MM before the dust settled. WOW!
With yet another crazy price in the books, we went to go back to double check our data. Are we being too conservative, are we missing opportunities with too much of a rearview mirror? We don’t think so. We think our pricing was spot on and takes into account the upside in the market. On the flip side, I also don’t think that 4-5% returns are market either (which is what the deal would have penciled at $15MM).
We’ve been tracking the market pretty closely the past few months given all the money that’s flooded into our space and have made a couple interesting observations.
First, beginning in March of this year, rental rates literally took off on a tear. We’ve been seeing healthy rental rate increases across the board for the past decade, but something happened in March to really amp that trajectory significantly. Traditionally leasing season gets underway in a serious manner around that time for southern states, but usually doesn’t get it’s stride until May or June up north. However, this trajectory was pretty consistent across all of our markets regardless of geographic location – and it’s not a small deviation, it’s massive!
Second, the spreads and rates for debt have gone to yet another record low level. Bridge debt, the more risky debt for value-add deals, which even a month ago was 4.5%, is now in the low 3% range. Lenders are practically climbing over themselves to sign up multifamily debt. While occupancy, rental rates, and collections continue to make new highs as the economy improves, we suppose it’s not too hard to understand some of the enthusiasm. This is interesting, though, considering we’re about to, hopefully, see an expiration to the eviction moratorium and potentially millions of evictions from people who have chosen not to pay rent for the past months (or year). Maybe the market has already priced in this potential downside?
In the DFW market, the average effective rent growth was 1.9% for the quarter. Yes, that’s the quarter, not the year. While Class A and B took the lions share of that rent growth, that’s still an amazing statistic. Lease concessions drove much of that increase as properties phased out previous leasing concessions that were no longer needed as demand came roaring back. We’ve seen the same in our properties as rental rates and collections reach all time highs. With new construction moderated by the inflationary situation for raw materials, this continues to bode well for stabilized assets.
All this to say, it is somewhat understandable why some buyers are throwing caution to the wind just to get their hands on a deal – especially in Dallas. And while it can be frustrating and the old FOMO (fear of missing out) can set in, we have to remind ourselves that this is a long game and these are times when it’s easy to make mistakes. We’ll continue to push forward and do the best we can to adjust our expectations (within reason) to the current market conditions, but don’t expect us to throw caution to the wind just to put another notch on the deal belt!
If you would like to learn more about Multifamily Real Estate and how to invest, please email me directly at James@jcoreinvestments.com
Why we like the Texas market
With COVID-19 cases continuing to fall and vaccination rates rising, things are beginning to feel a bit more normal. The economy is growing, and the outlook remains positive as the health crisis abates. Here’s a quick look at current conditions and our latest projections for business activity in Texas.
Texas has recovered more than one million of the nearly 1.5 million jobs lost in March and April of last year due to the pandemic. The state added 13,000 jobs in April (on a seasonally-adjusted basis) as strong gains in a few industry groups, such as leisure and hospitality and professional and business services, were partly offset by losses in construction, manufacturing, mining and logging—which in Texas is essentially oil and gas activity—and several others. The state’s unemployment rate has improved significantly, but is still above the national level. The bottom line is that while we’re moving in the right direction overall, there are still a few bumps in the road.
One issue is worker shortages, which were already a significant problem before the pandemic. Competition for knowledge workers and other skilled occupations is intense, industries such as restaurants and hospitality are having difficulty coaxing employees back, and school and childcare challenges restrain the entry of many (particularly females). Supply chain challenges also remain. The pandemic disrupted the entire global manufacturing and distribution complex, and it is quite a process to restore the relatively smooth functioning that typically supports production processes. This situation results in both cost escalation and bottlenecks that inhibit or even interrupt activity.
Our most recent forecast indicates an estimated 1.6 million net new jobs are projected to be added to the Texas economy by 2025, representing a 2.39% annual rate of growth over the period. This expansion is somewhat front loaded, as the state continues to regain the activity lost during the downturn and returns to long-term patterns. Services industries will drive job gains, with wholesale and retail trade businesses also forecast to see notable hiring. Real gross project is projected to gain $424.4 billion over the next five years, and output in all major industry groups is forecast to expand, with the mining and services segments leading the way. In particular, the energy sector is expected to continue its strong comeback.
I expect Texas to reach pre-pandemic employment levels in the next year or two. The state’s combination of natural resources, a large and growing population, and expansion in emerging industries position it well for expansion. While there are challenges ahead, such as providing the requisite education and training for future jobs and assuring the provision of essential infrastructure, Texas has the potential to remain a growth leader for the foreseeable future. Stay safe.
If you would like to learn more about Multifamily Real Estate and how to invest, please email me directly at James@jcoreinvestments.com
Why we love Dallas
Dallas Fort-Worth is one of the most resilient MSAs in the nation with a diverse economy, affordable living, and lower costs of doing business. The region is a top choice for multifamily investors due to its rapid population and job growth, leading the nation for several consecutive years. The graph below illustrates the demand for apartments in the DFW area - it's off the charts, literally!
Similarly, job losses in the DFW market have been less than any other major metro area in the country. All 12 of the nation’s largest metro areas had year-to-date job losses. Seven metros exceeded the national average of 7% - with New York and San Francisco leading the losses at over 11% each. Phoenix and Dallas were basically tied for the least job losses at 3.5% each - that's less than one-third the job losses or those two leaders and less than half the loss of the national average! Economic resiliency is key for investing in multifamily.
DFW is a leader in transportation and logistics. Dallas leads the job growth in the US. DFW has one of the most diverse economies in the country and it actually leads the country in net migration by adding over 1 million residents since 2010! I could go on and on but you get the point. We're not seeing any discounts in the Dallas market but there's a reason - the facts just don't justify it. With rates low and opportunities still in the market, we plan to continue moving forward.