Over 300 investors, developers, lenders, property managers, and vendors came together in Addison, TX on September 17, 2015 to discuss Multifamily Trends in TX over the past year and what they see happening in the next year. Below are 6 trends that came up repeatedly at the Interface Multifamily TX Conference:
1) Demographic shifts: Millennials delaying marriage and declining homeownership rate
Millennials are waiting longer to get married and thus remaining single and childless for longer periods. There has not been a change in preference (married couples with kids are still buying homes) but a change in timing. Absorption of new apartment supply is being driven by millennials who are staying renters longer than previous generations.
At the peak the homeownership rate was close to 69% and today it is closer to 64%. Every 1% decline is approximately another 1M renters.
2) Focus on yield not per unit- Investors in search of 10% Cash on Cash
Investors are in search of yield for their investment dollars. You can no longer buy Class C in DFW for $25K/unit like you could in 2009 or 2010. There is a new normal in terms of price per unit and investors are focusing on yield, which is driven simply by NOI/purchase price. Rents have increased and so has NOI to drive the higher price per unit of Class C apartments. Many investors want to see 10% cash on cash year over year with a forecast of achieving 50% of return from cash flow and 50% from residual sale.
3) Secondary/Tertiary Markets becoming expensive
Panelists are not seeing significant yield premiums (only 1% in cap rates) between primary markets of TX (Houston, Austin, San Antonio, and DFW) compared to secondary markets such as Corpus Christi or Waco as investors are aggressively bidding for these assets. Jay Rippeto with Juniper Investment Group noted that in these smaller tertiary markets, it is very difficult to remove the “stain” on a poorly run property vs. in primary markets you can typically rebrand a property and update interiors/amenities with a new image within a year. Secondary and Tertiary markets are not as deep in terms of renter pool and typically lack the long term employment drivers that primary markets have.
4) Property Tax Increases
Unlike other commercial property types like retail, office, and industrial, property taxes are not reimbursed by the tenant thus the landlord takes on the full burden of any increase in this expense. As property values have risen in TX markets, property tax assessed values have risen right behind them. Unlike California with caps on maximum property tax increases, Texas markets can have double digit percentage increases year over year. Conservative investors are underwriting increased assessed values to at least 80-85% of purchase price.
5) Wage increases not keeping up with rental increases
Something has to give. Wages have been flat over the past couple years, while rents continue to increase by at least 5%/year the past 3-4 years here in DFW. While the typical gauge of affordability is 30% of income on monthly rent, this is becoming harder and harder for tenants to qualify. Either tenants are going to have to allocate more of their income to rent (40% like on the coasts) or rent growth will start to be flat until incomes can catch up. Conservative underwriters has turned down future annual rents increases from 4% to 2-3% in DFW.
6) Interest rates rising
It is a matter of when not if interest rates will rise. Everybody is well aware that interest rates are at historical lows, and investors with assets they want to hold long-term are refinancing and locking in 10 year debt on their assets. John Griggs with Presidium is holding assets based on submarkets with long-term positive employment drivers that will drive strong rental demand in the foreseeable future. While cap rates do not move exactly in lock step with the 10 year treasury, increase in interest rates will put pressure on aggressive exit cap rates.
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