Multifamily Market Poised for Rent Gains

DALLAS-Multifamily pros in Dallas/Fort Worth are still puzzling over another near record year of sales and high occupancies--but no rent gains. With the year still fresh, bets are going down that the historical 3% to 4% rent hike will return in 2007.

"There's really not a good reason why rents aren't going up," Greg Willett, vice president for Carrollton, TX-based M/PF YieldStar, tells GlobeSt.com. Occupancy for complexes built in the past six years is 93.5%; 1990s product, 95%; 1980s construction, 92.8%; 1970s era, 91%; and pre-1970, 91.6%.

"How much better does it have to get," Willett asks. Despite high occupancies, he says it will be well into the year before the gauge starts to rise. "It won't exceed our expectations, but it will live up to our historical rent growth," he predicts. The region's average rent was $695 per month at the 2006 close, up 0.6% for the year.

Willett's research shows this year will be much like last year, except for the rent shift. The 538,500-unit inventory was 92.8% leased at yearend. Sticking close to 2006's performance, there are 10,372 units in the pipeline, with 8,200 slated to deliver this year. There were 9,590 deliveries in 2006. Ironically, the inventory dropped 5,400 units as developers bought and scraped close-in complexes to make way for new retail, multifamily or mixed use.

Area brokers say their listings are being sold on the come, driving near records for annual sales and per unit prices. A snapshot look at the brokerage community shows a minimum of $775 million in sales crossed the finish line in 2006.

"I can't say if it was a record year, but it was one of the best years that I've had," says Tom Burns, associate partner for Hendricks & Partners in Dallas. In fact, his volume of $211.3 million and the $65 million plus of only class C properties by Peter J. Harnett, also in the Hendricks & Partners' Dallas shop, helped to earn their promotions to associate partners, which went into effect Jan. 1. They and Chris Ross in San Antonio, promoted to senior investment adviser also due largely to sales volume, were the only three promotions in the Phoenix-based firm's ranks last year.

"A lot of people are banking on the fact that our market is improving," Burns says. "People are buying on marginal yields and betting on the come."

Burns explains Hendricks brokers' pro forma listings, but it's only a reflection of concession burn-off. He says four to six weeks of free rent is the most common these days, varying with the submarket. Incentives like shopping sprees and free gas have disappeared.

"DFW, in particular, is seen as still being in a recovery market condition," explains Don Ostroff, senior director for Cushman & Wakefield of Texas Inc., who closed at least $200 million of class A sales in 2006. "We still have lower effective rents than in 2001."

It's generally accepted that class A properties must first improve and then the impact will trickle down. The sector's free rent is starting to drop. Ostroff says the two months' free is being replaced by a half month, which is tantamount to an 8% to 12% increase in rent. "There are many assets, as yet, that haven't achieved that reduction," he says. "For the moment, largely we are achieving rent growth through concession reductions."

The concession shift is leverage for brokers and incentives for buyers. "Dallas has very substantial rent growth potential ahead as they move toward recovering to the level of six years ago," Ostroff adds. "And you can't say that with properties on the coasts."

Plying his trade at the other end of the spectrum, Hartnett is poised for a one-year to 18-month wait before rents go up in the class C arena. "It will have to hit very high occupancy before rents will be raised," he says. "One good thing is class A is getting full. The trickledown effect has already started with class B and C."

Hartnett's wait also could mean fewer sales in his specialty area, a trend that started to surface last late summer. "I think the number of sales will continue to taper off due to the fact that many of the buyers were from California, had 1031 exchange money and that has tapered off," he says. They are, though, being replaced by investors from Florida and the Pacific Northwest, particularly Washington and Utah.

"There's no question the California 1031 buyer is going to be out, at least for the first quarter. But, it won't hurt transactions," says Tim Speck, regional manager in Dallas for Marcus & Millichap Real Estate Investment Brokerage Co., whose shop generated at least $300 million last year in multifamily property sales, predominately class B and C product. Like Hartnett, he says there's been a spike in inquiries from Florida investors, Chicago and New York too. Last year, 82% of the local Marcus & Millichap sales were closed by out-of-state investors, up 11% from 2005.

Speck says out-of-state investors have been willing to accept lower cap rates as the market gains ground. "We have seen the first glimpse, on a consistent basis, where net incomes are starting to improve," he says. "Effective rents will go up, but concessions will remain part of the game."

Speck, like his peers, believes 2007 will mirror 2006. But his shop is adding a new twist: this year's plan of attack calls for more class A listings than ever before in all product type. Multifamily teams led by Will Balthrope and Norman Eastwood are heading into the year with more than $400 million of class A listings. Speck says Eastwood has closed $196 million in class A sales just since Jan. 2.

Speck's push to ante up the stakes for the class A market share in Dallas/Fort Worth also means additional hires at some point. "We're going to try to put the building blocks in place," he says. "We're well positioned to do that in 2007 for multifamily and the other product types will follow suit."