If you’re a Realtor, your expanding waistline has already told you there’s something going on in the apartment world. Almost any day of the week, some apartment complex is hosting lunch for Realtors and apartment referral agents. The goal isn’t Christmas cheer; it’s snagging tenants for their empty apartments. The current building cycle is slowing down.
The cranes aren’t silent, but there is a curbing of new construction as banks begin to restrict financing. What makes this cycle odd is that overall demand, the typical signal of a slowdown, is not waning. No, in this case it’s an affordability problem. Little has been built that’s affordable to vast numbers of people. Apartment owners are doubling down on move-in specials; high-end complexes are offering as much as three months of free rent. The coming pause is all about waiting until salaries catch up.
I know a lot of folks think Dallas has overbuilt. It hasn’t. Nationwide, the Recession cratered residential construction in ways we still grapple with. Looking at the last 47 years, the decade with the lowest average annual housing starts was the 1990s when 1.37 million residential units were built each year. The highest was the 1970s when 1.77 million homes went up (pre-Recession was a close second at 1.74 million). New construction fell off a cliff from 2005 until 2009, when we saw 2.1 million annual housing starts plunge to 600,000. While it’s gotten better, the average from 2009 to 2016 was 850,000 new homes. That’s well shy of the historic average of 1.5 million housing starts per year needed to account for new household formation.
The U.S. Census tracks this shortfall:
During those years where housing starts were below maintenance levels, twentysomethings didn’t stop growing up and wanting places of their own. That deficit remains. Even heady 2016— with its 1.2 million housing starts—was below average, meaning we’ve yet to do anything to fill the Recession hole. Add to that Dallas being a move-to city and the problem gets worse.
And that’s just the supply side of things. Nearly every multi-family new build in Dallas has been expensive. In the high-rise condo world, the last purpose-built mid-priced buildings were in 1998 (not counting the few office and warehouse conversions in and around downtown). Since then it’s been an unbroken line of One Arts, Vendome, W Residences, Ritz, Azure, Museum Tower, Stoneleigh, and Bleu Ciel.
In Uptown, the boom has largely been in apartments (for a host of national and local reasons) and, like their condo brethren, they are expensive. But I see softening beyond Realtors’ waists.
There has been a slowing in the higher-priced home buying market. Over the past 12 to 18 months, days on market have been creeping up and prices have pulled back. What a year ago was a slowness in homes costing more than $1 million has now been creeping into the $700,000 to $800,000 range. Unsurprisingly, the sub-$300,000 market is still red-hot because that’s what people can still afford.
This is being mirrored in the apartment world, even though slightly delayed. In the Uptown market, two forces are at work. First is overall affordability. The crop has largely been creamed for twentysomethings who can afford $2.50 to $3.00 per square foot for rent. That is coupled with the realization that those rents would translate into a quite nice condo. I suspect Knox’s 22-story unfinished McKinzie, with its images of Porsches and Mercedes queuing for valet, understood this. Their marketing clearly targets an older demographic with cash to buy but who choose to rent.
When I look at bargain pricing in the Uptown apartment scene, I see three things: New buildings targeting younger tenants tend to have higher discounts and smaller units; new buildings are targeting older residents with plenty of cash who choose to rent; and older buildings tend to cost less because their sunk-costs are much less and their facilities are not as buffed as the newcomers. These older buildings have lower vacancy rates because there’s less second-year surprise as initial discounts go away.
Let’s compare a few.
Opening in 2016, The Jordan is one of the new luxe Uptown high-rises with equally luxe rent. As of this writing it has a 10 percent vacancy rate. Ten percent may not seem like much, but the average has been hovering around four. That probably explains why they’re offering up to three months of free rent—the year-old building has debt to service. Rents are anything but cheap for one-bedrooms at $2.90 per square foot for 863 feet and a rent of $2,505. The discount saves $313 per month. That’s a 12 percent discount for the first year.
A two-bedroom drops 25 percent in discounts. Imagine the sticker shock in your second year.
I’m not picking on The Jordan. Uptown is littered with new (and some not-so-new) buildings offering, on average, between one to three months of free rent.The biggest discounts tend to be in the most expensive buildings because, as I said, the crop has been creamed.
McKinney Uptown and the Mondrian Cityplace
Built in 2002, McKinney Uptown is a building that doesn’t need a lot of discounts. The population is more stable (a four percent vacancy rate) and the rents are nowhere near the top of the market. One 1,242 square foot two-bedroom unit is renting for $2,042 per month or $1.68 per square foot. A one-bedroom of 836 square feet has a rent of $1,575 per month or $1.88 per foot. The 2003-built Mondrian Cityplace knocks off the $300 to $750 deposit (this, it should be noted, is a mere convenience, not any method of significant money-saving) and offers $1.62 a square foot for its smallest one bedroom. The layouts here still benefit from the generous pre-Recession floor plans. Just like McKinney Uptown, the older Mondrian doesn’t need to knock off months of rent to lure residents—its lower prices do that already.
There are 27 square feet separating the one-bedrooms at The Jordan and McKinney Uptown, which amounts of a difference of $616 per month in rent for the first year. When the discounts expire, that gap widens to $930 per month. Yes, there are all kinds of differences between the two properties, but my point is that in a softening market, the highest-priced properties are forced to offer the highest discounts.
Since The Jordan is a little over 18 months old, I’ve been unable to confirm, but I suspect it—and buildings like it—will see more tenant churn when leases renew and the discounts expire. Tenants have been trained and paychecks are unlikely to rise enough to offset the initial discounts.
So Is Uptown Softening?
Yes. Just like the high-end purchase market, the high-end of the rental market is becoming saturated. This, and a need to lease-up properties quickly, has led to move-in discounts that range from 8- to 25-percent. If you can stand shopping and moving at the end of a lease, there are bargains to be had in the highest brackets of Uptown.
The question remains: will the rental market mirror the progressive softness that began in the high-end purchase market? I think yes. People only have so much money to spend and overbuilding at the top-end will drive discounting in lockstep with vacancy rates. And pray that The Bank of Mom & Dad doesn’t falter, because there are a lot of parents underpinning the Uptown rental market.
Once salaries catch up and Realtors start buying their own lunch, you’ll know another building cycle is about to kick off.