Two Out of Four Texas Metros Making Strides in Multifamily Sector

The best and the worst about Texas' multifamily markets yesterday were put to about 250 professionals--brokers, buyers, sellers and financiers--at an annual conference hosted by the newly renamed M/PF YieldStar, a leading multifamily research group and affiliate of Torto Wheaton Research. And despite the chiding for some aspects of the Dallas and Houston markets, the prevailing mood seemed clear that the roomful of pros would rather be doing deals in Texas than anyplace else.

Dallas' proclivity to build, build and build some more has analysts waving a red flag although demand is coming back, albeit very slowly. "There's nothing stopping you from building other than discipline," Greg Willett, vice president of the Carrollton, TX-based M/PF YieldStar, told the audience at the Adam's Mark in Dallas. One third to one half of the nation's other metros cut construction and they're now making headway with a recovery. Dallas/Fort Worth, he says, is just chugging along at 90% occupancy "because we're just building too much product."

But with occupancy as a barometer, it was Houston not Dallas that was under fire with an 89% level, the worst in the nation. "It's currently a disaster zone," Willett said. "And it still looks pretty poor for 2005."

The 92.8%-leased San Antonio has caught developers' eyes much like it did Toyota Corp., Nordstrom and Neiman Marcus, moves that tumbled the market into an evolutionary state as higher end product started to rise and national real estate investors moved in to buy.

Willett said Austin, though, got it right and now has a 92.4% occupancy. "They stopped building and that allowed things to get on track," he said. "Austin looks like the revenue leader for the US over the next two years."

Much of yesterday's talk focused on transactions. Year to date in Dallas/Fort Worth, $921 million of apartment assets have closed, according to Jeffrey L. Price, president of Dallas-based Apartment Group. When the year ends, he's certain it will easily beat totals of the past two years. The average sale is bringing $53,727 per door versus $48,220 in 2003. Houston rung up $367.5 million in year-to-date sales, with $18.4 million as the average transaction, said G. Craig LaFollette, senior vice president in Houston for CB Richard Ellis Inc. Last year's tally was $291.3 million with a $12.6-million average.

"The activity level in Houston has been absolutely off the charts," LaFollette said. Inside the loop prices are exceeding $100,000 per unit.

But, it's San Antonio and Austin that are on radar screens of institutional investors' attention, said Will Balthrope, senior director for Cushman & Wakefield Multi-Housing Group. "San Antonio was not a city until this year according to the statisticians," he said, adding buyers turned their backs for 17 years because the city was "slow and steady" and now those same qualities are driving sales.

Practically every institutional buyer has an appetite for Austin property, Balthrope said. "They're buying everything they can," he added.

Regardless of the metro, a deep multifamily recovery boils down to jobs, higher interest rates to halt first-time home buying and increased cap rates, said William Wheaton, principal and co-founder of Boston-based Torto Wheaton Research. "We think the Texas apartment market can recover, but the strength of the recovery," he said, "is entirely dependent on discipline."

From the financial sector, Jay Wagley, the Dallas director for Houston-based LJ Melody & Co., took the plunge with a couple predictions: Cap rates will rise by 75 basis points over the next 12 years and the 10-year Treasury will go up 100 basis points. He also believes borrowers will forego capped arms in favor of fixed-rate products and lenders will continue to rely heavily on creative structures to win deals which could be a concern. "I am not sure lenders are getting compensated for the risk they're taking in the transaction," he said.

As the pros sliced and diced the multifamily market statewide and nationwide, there were some cautionary notes for the crowd: rising insurance costs, regulatory changes in Washington, DC along with a changing of the guard in key agencies and "tax simplification" fallout. "Things are about to get real interesting in town," Sharon Dworkin Bell, senior staff vice president for the National Association of Home Builders Multifamily, said about Washington, DC. "Expect to see some tinkering with existing programs. The president's never going to be as strong again as he's going to be for the next two years."