Multifamily Market Making Headway in North Texas

DALLAS-With no quick-fix on the horizon, a panel of well-known investment sales leaders for the multifamily industry yesterday drilled down into the dilemma of cap rates and its impact on today's marketplace.

Will Balthrope, senior director for Cushman & Wakefield of Texas Inc., says the particularly interesting outcome has been the narrowing of cap rates between newer and older properties. Despite the 5% to 6% presently hanging over the market, it's not stopped institutional investors or deep-pocketed private buyers from picking up properties in Dallas-Fort Worth. "They are buying into our future upside," he said at the monthly meeting of the DFW Apartment and Investment Brokers, held yesterday in Prestonwood Country Club at 15909 Preston Rd. in North Dallas. The panel also included Jeffrey L. Price, president of the Apartment Group; Timothy Speck, regional manager for Marcus & Millichap Real Estate Investment Brokerage Co.; and Tom Warren, senior adviser for Hendricks & Partners.

The motive for institutional investors to buy class A product with a 6% cap rate is relatively simple. "There is no place else to put their money," Warren says. "That's the quick answer. How long it lasts is a totally different question."

Price says the "pent-up demand" to place capital has many institutional investors now quietly providing equity to private buyers for product other than their traditional top-of-the-line acquisitions. "You don't know who's buying the property at times," he says.

The panel, addressing a series of hot-button issues, did provide a ray of hope that cap rates inevitably will go up and so will rent. "We're on the cusp of that now," Speck says. "It's better now than it was six months ago. We will see the majority of concessions burn off and see some real reachable rent gain."

According to Balthrope, NOI has gone up 10% since midyear. "We're seeing a real market recovery," he says.

Still, there is concern over increased operating expenses due to insurance rates, electricity costs and taxes. The undercurrent talk is appraisal districts have been pushing property values to gain more revenue for their coffers rather than hike tax rates, but the impact essentially is the same for the owner.

Nonetheless, North Texas cap rates remain the top lure for California investors, who are getting top dollar for properties with 2% and 3% returns in their home state and bringing the gain here, Warren says. With the Phoenix market closely mirroring California, its sellers too are taking the road to Texas.

Speck says the real threat to the region is what happens when, or if, the pool of California buyers dries up. As the industry is keenly aware, 1031 exchange funds have been fueling acquisitions across all classes from a buying segment that's looking more at replacement properties than cap rates. Dallas-Fort Worth at this point doesn't have a replacement pool of ready spenders, he says.