At the end of 2017, it appeared as if the Dallas-Fort Worth apartment market was finally reaching a late-cycle phase. Rent growth and absorption were slowing, concessions were rising, and supply was cresting. Perhaps most importantly, the key driver of apartment demand, which is job growth, was slightly weaker than the 2015 and 2016 levels.
But after an impressive first half of 2018, the Dallas-Fort Worth apartment market is looking just as strong, if not stronger than it was at the start of the year. Job growth accelerated in early 2018, as the region added more than 120,000 jobs in the 12 months ending in May 2018. This job growth exceeded expectations and helped contribute to remarkably strong absorption in the first half of 2018. Net absorption totaled more than 12,000 units during the first two quarters of 2018, which was the best consecutive two-quarter mark this cycle. Strong absorption, combined with slightly fewer deliveries than anticipated, caused vacancies to fall to where they were in the second quarter of 2017.
Annual rent growth has cooled, but only slightly. Rents grew nearly 2.5 percent in the first six months of 2018. In comparison, rent growth was about 3 percent through the first half of 2017. However, the metro’s seasonal trend of flattening rent growth in the latter months of the year will likely persist once again in 2018, so growth expectations should be tempered.
Absorption in multi-tenant office buildings has rebounded since last year, but is still weaker than mid-cycle levels. While net absorption totaled more than 5.5 million square feet in 2017, nearly all of that came from single tenant build-to-suits. Net absorption in multi-tenant assets was essentially flat last year, compared to an annual average of nearly 4 million square feet from 2013 to 2016. Through the first half of 2018, net absorption in multi-tenant buildings was just below 1 million square feet—an improvement, but still a low figure compared to cycle norms.
Rent growth has slowed and is near the historical average. The second quarter of 2018 marked the 28th straight quarter of positive rent growth for Dallas-Fort Worth office, the most consecutive quarters of positive rent growth in the metro’s history. Despite the volatility in the market throughout most of its history, annual rent growth comes in at just above 1.5 percent historically. Current rent growth is slightly above that historical mark, which marks a slowdown compared to mid-cycle growth numbers.
It’s no secret the Dallas-Fort Worth industrial sector has performed well this cycle, and it’s difficult to overstate just how well. Despite about 100 million square feet of space delivering since 2013, vacancies have decreased in that time and are still well below the metro’s historical average. Rent growth has remained vibrant, and rents are now about 35 percent above pre-recession levels, which compares favorably to the national benchmark of 28 percent.
Net deliveries were down in the first half of 2018, but that was primarily due to the removal of the functionally obsolete facilities at the old Vought Aircraft plant, which will be redeveloped into a new industrial park. The near-term supply outlook is robust—more than 26 million square feet was under construction as of mid-year 2018 and about two-thirds of that space was speculative. That may appear to be a lot of spec construction, but considering the availability rate of under-construction properties reached as high as 80 percent a few years ago, current construction trends represent a higher proportion of build-to-suits than the recent past.
Vacancies are well below the metro’s historical average and last cycle’s trough. In DFF, industrial vacancies sit below 6 percent, which is favorable compared to the historical average and the lowest point of last cycle, both of which were around 8 percent. Even including only big-box facilities larger than 200,000 square feet, the metro’s vacancy rate is only 7 percent. Therefore, if the metro and/or national economy were to slow or enter a recession, there would be enough of a delta between current and historical vacancies to cushion a downturn.
Unlike the three other major commercial property types, the retail market has been much slower to recover from the Great Recession. However, recent trends have been positive. Vacancies are at historic lows, rent growth has accelerated and indicators like consumer spending and population growth are trending in the right direction.
While there are obvious headwinds facing the retail market on the national level, the continued demographic and economic strength of Dallas-Fort Worth makes it a solid bet to outperform the national benchmark over the next few years.
Vacancies are at historic lows and new supply is not much of a threat to fundamentals. With vacancies below 5 percent, Dallas-Fort Worth retail is tighter than ever. The metro has added more than 15 million square feet of net new supply since 2015, second only to Houston. However, absorption has far outpaced construction in recent years. Furthermore, pending supply likely won’t have much of an impact on fundamentals—as of the second quarter of 2018, less than 1 million square feet of under-construction space was available. If all of that space delivered without any additional leasing, it would represent a minuscule 0.2 percent increase in vacancies metro-wide.
Rent growth is accelerating and is significantly outpacing both the national average and the metro’s historical average. With trailing 12-month rent growth near 4 percent as of the end of June, Dallas-Fort Worth ranks in the top 10 among metros with more than 100 million square feet of retail inventory, but is first among metros with more than 200 million square feet. That mark also represents D-FW’s best annual rent growth number this cycle and is a 100 basis point uptick compared to the this time last year.
David Kahn is CoStar Group’s Senior Market Analyst covering Dallas-Fort Worth.