We’re halfway through 2023 and, well, what a year it’s been so far! We’ve endured a relentless stream of rate hikes from the Federal Reserve over the course of more than a year now and are facing a situation where equity and debt markets for commercial real estate are especially challenged. This is true even in multifamily, which, unlike other asset classes like office and retail, continues to be supported by relentless tenant demand. And these circumstances are impacting even Dallas-Fort Worth, the fastest-growing metropolitan area in the country and the largest real estate market by transaction volume.
I’ve been an active real estate investor for more than 20 years now and have seen these ebbs and flows before, the most notable being in the 2008-2010 time frame. At some point, the dam breaks, investors get back to work, and the cycle begins anew. When that happens this time around is anyone’s guess. The good news is that we are already over a year into this real estate downturn, so we’ve already chopped a lot of wood and may be getting closer to the end of this malaise.
In any event, some fundamentals of the multifamily industry, specifically in DFW, will be strong in the long term and we should all be preparing now for the resumption of growth in our market once it returns. One thing is clear – thanks to in-migration, company relocations and expansions, rental demand has been on a steady upward trajectory. It may slow down in a broader economic downturn, but some major structural factors will keep this market healthy and growing in the long term. So let’s look at some positive data and focus on how to attract tenants best no matter the economic “weather”.
One big factor in the equation is the state of the current housing market. According to Pew Research Center, more U.S. households are currently renting than at any point since 1965… at the earliest. For starters, housing prices are a major deterrent as potential homebuyers continue to be priced out due to high costs, staggering interest rates and restricted mortgage conditions. The U.S. Census Bureau reported that the average home this year went from $383,000 in Q1 of 2020 to $516,900 in Q1 of 2023. Even if prices ease a bit, the monthly mortgage check has soared over the last couple of years. I think it’s safe to say that we can all understand why renting is currently the preferred option in the U.S.
This renting trend also makes developers like us excited to look into new territories to invest in DFW (and around the country). DFW has been consistently the largest real estate investment market in the country for several years, exceeding bigger cities and previous volume leaders like New York and LA. While this torrid pace has moderated sharply, DFW will clearly be one of the investor darlings once investor dollars return to commercial real estate and transaction volume resumes.
Convenience at Your Fingertips
When it comes to attracting tenants to a particular property, consumers are currently more interested in a comprehensive experience versus multiple one-stop visits at various places. Residents are more attracted to developments where they can work from home or come home after work and enjoy leisurely activities, such as playing ping pong, seeing a movie, grilling out, hitting the gym or simply relaxing outdoors with their dogs and friends. By building a myriad of amenities, developers can foster a more dynamic tenant experience and create a built-in sense of belonging while maintaining a high retention rate for lease renewals.
The most popular amenity choices we are seeing right now in Dallas include demonstration kitchens, game rooms with golf simulators, Wi-Fi business centers with private co-working spaces and conference rooms, indoor and outdoor common areas, expansive fitness studios, private dog parks with a pet spa, on-site car wash, speakeasy lounge and bar areas, resort-style pools with surrounding grilling areas and fire pits and zen courtyards, to name a few. By taking a deep dive into how we can evolve the resident experience for this growing population of renters, we can find new and creative ways to build an environment they genuinely want to spend time in. This, too, is not a one-size-fits-all solution — amenities that work for Texas residents who are exposed to sweltering heat for a big chunk of the year are most likely not going to work for New York’s frigid winters.
Let’s look at technology features specifically, as they also play a big part of the convenience factor. According to the NMHC and Grace Hill 2022 Renter Preferences Survey Report, more than 70% of respondents claimed that they were either interested in or would not rent without a smart thermostat and more than 66% were interested in water-saving systems and smart leak detection. Further, a survey from Rent.com reported that more than 82% of renters want at least one smart device or system integrated into their homes. From smart home features that give renters the ability to access lighting, lock systems or thermostats through the comfort of an app, to other offerings that help avoid the nuisance of maintenance and repairs, we should use this innovative technology to the advantage of our residents and tenants.
As mentioned above, multifamily communities with open-space common areas, outdoor facilities, co-working and private workspaces, energy-efficient features and smart-home technology are key differentiators for attracting reliable renters. In an effort to stand out in a highly-competitive market, these amenities will become the new standard due to a mix between the preferences of the millennial generation and the added convenience it provides for building management.
Embracing the Future With Open Arms
Overall, I feel guardedly optimistic on the future growth of our industry. The North Texas market has many other cities envious because of the growth we are experiencing. All of the major projects delivering and finishing construction this year and the next are seeing a significant amount of leasing activity. As always, there are still those keeping a close, skeptical eye on the overall health of the multifamily market. But it’s important to understand that it’s not solely about the latest news or ticks up or down in the market when it comes to multifamily. This is a long game, and we’re in the right place for decades to come.
John Griggs is co-founder and co-CEO of multifamily real estate investment firm Presidium.
