2013 has been a great year for most affiliated with the north Texas real estate business. As Dallas-Fort Worth and Houston lead the state in new construction, developers from across the country have come to Texas to try to get in on the booming market. Land prices for both multifamily and single family residential have increased, driven by market demand, but retail chains are also active, with Walmart, Target, and HEB purchasing Dallas – Fort Worth retail land while it’s still affordable.
Two main driving forces for the real estate rebound in Texas are the steep drop-off in new home and commercial property permits during the trough of the recession, and the continued in-migration into the major Texas metro areas of Dallas-Fort Worth, Houston, and Austin. In 2012, the US GDP measured 2.8% while the Texas GDP was 4.8%. As a result of the better business climate in the Lone Star state, businesses and employees are relocating to Texas in droves. And these folks all need a roof over their head. In fact, Dallas-Fort Worth added 99,000 jobs from June 2012 to June 2013, edging out Houston’s 97,700 jobs added.
The result has been limited supply and increased demand for housing – on both the “for sale” side, and the “for rent” side. D-FW home prices have risen 9-10% this year, while average rents have increased more than 3%. Along with rising rents, apartments are reporting record low vacancy rates. With very low interest rates and the forecast for inflation via the government’s over-indulgence in money printing, investors are driving up prices for apartments to record levels. In fact, some apartment sellers are receiving upwards of twenty offers. According to Brian O’Boyle, cap rates on the infill apartment complexes are between 4 percent and 4.75 percent—and suburban cap rates are ranging from 5.25 percent to 5.75 percent. He said today’s most sought-after apartment deals appear to be those with the ‘value-add’ story. Always a favorite, the product has now shifted to newer apartment communities built in the 1990s and early 2000s.
After one of the worst housing slowdowns in modern history, single-family development is finally back. Lots in affluent areas are in high demand, and developers have had to get creative to find sites that may have been zoned retail or other usage, that can be rezoned for higher density single-family development.
In 2013, single family permits are expected to total 25,425 permits in DFW, which is back to 1997, yes 1997, levels (that predate the recession that began in 2008). Dr. Jim Gaines of the Texas ATM Real Estate Center expects permits to continue to rise in 2014 and 2015 as companies and jobs continue to relocate to the Lone Star state. Looking beyond 2014, the population of the DFW metro is expected to almost double by 2035 with 11,338,930 people – another almost 5 million people. Since the average household averages 2.7 people, we’ll need to add another 1.8 million homes/townhomes/condos – or around 83,000 new homes a year!
To accommodate our rapidly growing population, multifamily construction has really ramped up. There are more than 17,000 units that will be delivered or under construction in 2013. But keep in mind, the paltry 3,700 units delivered in 2011 and 4,447 in 2012. Looking at the numbers, Steve Brown, the real estate writer for the Dallas Morning News, says he thinks we may even actually run out of housing in 2014.
According to Metrostudy, another challenge to meet our local housing supply is low lot inventory. In the 3rd quarter of 2013, builders and developers delivered approximately 3,600 lots while almost 6,000 lots were absorbed. There is a 26.5 months supply of lots, yet the most active subdivisions account for 50% of the total available lot inventory. This is pushing prices in the high-demand areas, according to David Brown, the Regional Director of Metrostudy’s Dallas-Fort Worth office. “The low lot inventory is continuing to push lot prices in the high demand locations” said Brown. “If lot inventories do not accelerate in the top submarkets during the first half of next year, the growth in starts may begin to slow due to supply constraints.” Since 75% of lots were in the road excavation stage in the 3rd quarter, and only 3,600 lots in the road paving stage, lot supply is likely to become more constrained in the coming months.
Switching to commercial construction and development, it’s also rising from the ashes. McGraw Hill Construction reported that future non-residential construction building contracts total $1.19 Billion, almost triple the 2012 numbers of $403 million. Retail and office vacancies continue to decline and rents are inching up. Overall, the Dallas-Fort Worth real estate market appears to be firing on all cylinders. But, as those who have been around a while can attest, real estate is cyclical – and the good times never last forever. So, if you’re a builder, developer or a seller, the window of opportunity is open, so now may your best time to take advantage. Because no one can predict, when it may begin to shut.
Article by Troy Corman,
Founder of t2 Real Estate LLC, a Dallas-based real estate brokerage firm specializing in residential and commercial lot and land marketing.
Charts and data courtesy of Dr. Jim Gaines, economist from the Texas ATM Real Estate Center, and Dave Brown, Regional Director of the Dallas-Fort Worth Metrostudy office.