This year’s annual National Multifamily Housing Council’s meeting was held in San Diego two weeks ago and the overwhelming sentiment continues to be one of optimism. There appears to be no shortage of capital and most active buyers reported at least the same amount of equity available as a year ago. The biggest challenge in 2017 will be for buyers to find enough product to satisfy their appetites. Right now, the number of deals on the market are below levels that occurred over the past several years. In fact, the buzz was that this year saw the smallest number of new listings being launched at NMHC in the past decade.
“Value-add” product continues to be the most sought after product type. Dallas-Fort Worth remains among the highest levels nationally in terms of new construction, with about 29,000 units expected to be delivered between Q4 of 2016 and Q4 of 2017. The urban core remains the center of new construction, with additional new construction in the northern suburbs. We’ve seen, however, many buyers having shifted their focus to more suburban deals. Not as much equity appears to be chasing core deals—many of the core buyers can look at new construction in suburban submarkets in order to meet their return requirements.
Several buyers expressed concern about the current pipeline, wondering just how many units can be absorbed. The metro area continues to see solid employment gains, with the annual employment growth having averaged a respectable 4.2 percent. In addition, we’ve remained among the country’s fastest-growing metro areas, with a solid 10.7 percent growth from 2010 to 2015. Last year MPF Research reported that approximately 23,000 units were absorbed and another 22,000 are expected by 2017’s Q4. With the strong job growth estimate of 101,000 for 2017, this should help to overcome any supply or demand issues.
Rising interest rates have thrown a wrench into several deals, with pricing corrections (1 to 5 percent) taking place. Most deals in the market that were put under contract before the roughly 85 basis point increase in rates saw themselves being re-traded. Many sellers accepted a price reduction and proceeded to closing but others simply took their properties off the market and are waiting for interest rates to decline. Also, we continue to see more foreign capital being placed in the multifamily sector, most noticeably here in the metro area. The number of transactions might slow down a bit as both buyers and sellers are cautiously pausing to see how things shake out after the election. As long as interest rates remain in check and the job formations continue to materialize, the multifamily market should continue at a healthy pace.
Brian J. O’Boyle, Sr. is founder and vice chairman of the ARA, A Newmark Company Dallas office.