Each quarter, Ashland Greene provides investors with direct access to its top executives, who provide updates on emerging economic trends, strategic direction, and investment performance. The emerging trends highlighted below are excerpts from the 2023 Year End Wrap Up + 2024 Market Outlook, presented by Shakti C’Ganti, Founder & CEO, Tyler McWilliams, COO, and Aalok Parikh, Vice President of Investor Relations.
2024 Market Outlook & Emerging Trends
In early 2023, there were concerns about continuing inflation and the efforts of the Federal Reserve to stabilize the economy by raising interest rates. Many investors worried about a possible severe recession, with speculation about when interest rates might peak. As we approached the end of 2023, the idea of a “soft landing” in 2024 appeared more viable, supported by positive expectations and performance indicators and indications that the Federal Reserve will cut rates in 2024.
Despite the headwinds of 2023, we remain confident in the resilience of Dallas-Fort Worth multifamily real estate and are well-positioned to take advantage of market opportunities. As we strategically adapt and manage for ongoing success, we will closely monitor the challenges and favorable conditions impacting our operations.
Headwinds
“The Great Reset” A New Era in Real Estate
The Urban Land Institute, in partnership with PricewaterhouseCoopers (PwC), conducts an annual survey considered vital in the multifamily real estate industry. The survey reflects economic and real estate concerns, with respondents ranging from lenders to owner-operators. As the industry faces shifts across the spectrum, focusing on economic, financial, and real estate development issues, we are entering a new economic era, a “Great Reset”.
Economic / Financial
Notably, the top concerns for real estate investors are interest rates and the cost of capital. This aligns with ongoing discussions in the industry concerning the potential impact of rate cuts by the Federal Reserve (Fed).
Real Estate Development
Nationwide, the multifamily real estate industry is focused on managing construction labor costs, material costs, labor availability, operating expenses and property taxes. Along with the risks associated with extreme weather, especially in regions like Dallas, which has recently experienced severe storms.
Fed Policy & Inflation Trends
Recently, there has been a noticeable decline in inflation rates. In the years following the COVID crisis, core Personal Consumption Expenditures (PCE) surged to 6%, the Consumer Price Index (CPI) nearly hit 9%, and the Producer Price Index (PPI) soared to 12%. It is widely believed that the injection of stimulus, amounting to $5 trillion via the CARES Act, significantly contributed to these post-COVID inflation spikes.*
What we are witnessing is the Fed walking a tightrope. In October 2023, the ten-year treasury was at 4.96, leading to challenges in closing a deal. However, with the treasury closing at 4.06 in early February 2024, a nearly 100 basis points reduction, there’s potential for increased activity. With the Fed signaling a willingness to reduce interest rates, there’s anticipation for a softer monetary policy ahead, potentially easing concerns about inflationary pressures.
While there is a lot to consider, there are two potential scenarios: “Higher for Longer” or “Rate Cuts Sooner,” possibly as early as May or June. The Fed’s decision may hinge on a dramatic change, including job market data, potential bank failures, political climate, and pressure to act before the election. The $35 trillion debt, accounting for over 125% of GDP, only adds urgency to lower rates to ease debt servicing costs.
Multifamily Vacancies, Costs & New Construction
The multifamily sector faces challenges in the upcoming years, including elevated vacancy rates due to a surge in new supply, rising construction costs, and higher construction financing rates. The surge in new supply deliveries in 2024 raises questions about absorption. However, new projects nationwide are currently at a standstill. As discussed below, in these categories, DFW is in a league of its own.
U.S. Apartment Vacancy vs New Construction
In 2021, multifamily real estate vacancies hit an all-time low of approximately 3%, attracting many investors due to low interest rates and robust rental growth driven by the COVID-19 stimulus package. However, over the past three years, vacancy rates have surged, signaling a market softening, a trend expected to persist in 2024. With the most significant influx in history, 480,000 new units are slated for 2024 across the U.S., including nearly 10% of those in DFW. As a result, vacancy rates are anticipated to rise further.
This surge in supply, discussed at the National Multifamily Housing Council (NMHC), poses challenges for underwriting future investments. Investors in older, more affordable apartments, like those built between the 1980s and the early 2000s, may find some insulation from this trend, making them an attractive investment option because they are not directly competing for the same renter base.
Construction Material & Labor Cost Trends
Across various sectors, there has been a notable increase in prices from pre-COVID years to the present.* The Producer Price Index (PPI) indicates lumber prices surging by 16%, steel by 64%, aluminum by 52%, and concrete by 39%.* This inflationary trend is significant for plumbing, HVAC, and the construction businesses, as they witness firsthand the escalating costs. Construction expenses seldom decrease, posing a substantial challenge in the post-COVID era.
Additionally, there has been a 21% increase in the cost of construction labor. With a consistently low unemployment rate of 3.7% for the past two years, a rarity in the United States over the last fifty years, the Fed will face continued pressure to keep inflaction under control.
This tight labor market has led to significant cost increases, particularly in operating expenses and employee payroll. With 800,000 apartments in DFW, competition for workers is fierce, with on-site staff often tempted by slightly higher wages.
New Construction Financing
Labor costs, financing costs, and reduced leverage collectively contribute to higher construction project costs. New construction financing has increased, while loan to valuepercentages have decreased. While the exact cost increase varies based on factors including location and financing methods, on average, Marcus and Millichap* estimate a 25% – 50% rise in construction expenses. This presents formidable challenges for developers.
New Projects at A Standstill
The significant increases in construction costs impact builders today, and the trend will impact future deliveries. With substantial construction cost increases nationwide, developers are scaling back on new apartment community projects. Consequently, the decline in construction permits is expected to persist into 2024.
This decrease in construction activity means fewer new starts and deliveries projected for 2024 and 2025. As a result, it is expected that vacancies will decrease, occupancies will rise, and cap rates will tighten around 2025 and 2026 as the new construction pipeline remains limited. From an occupancy perspective, this is the silver lining.
Dallas-Fort Worth In A League of Its Own
Stability and growth, a positive economic outlook, prioritized infrastructure development, and employment diversification characterize the DFW market. Dallas is the leading destination for inbound population migration and has had consistent job growth since COVID-19. Despite the surge in apartment supply, Dallas anticipates complete absorption by the end of 2024, solidifying its position as the premier real estate investment market, according to Marcus and Millichap and CBRE*.
Growth
Relative to other regions, Dallas is experiencing significant growth, with an 8% to 9% increase in apartment inventory. While Dallas typically sees high apartment inventory levels, the metroplex absorbs them efficiently.
This surge in Dallas contrasts with many markets across the country, particularly those outside the Sun Belt, which witnessed a boom in apartment construction over the past five years but have yet to demonstrate the same absorption capacity.
With consistent job growth since COVID and an increasing influx of businesses and population, Dallas is poised for sustained economic expansion and continued real estate development opportunities.
Dallas is prepared to deliver approximately 52,000 units in 2024 and can absorb all of
them.* This impressive feat has earned Dallas, for the first time, the year’s #1 ranking by Marcus and Millichap* and the top ranking by CBRE for the second consecutive year.
Dallas Headwinds
The Dallas market does have its challenges. Insurance costs have surged nationwide, with Dallas experiencing a significant increase, nearly 120%, due to the frequency and severity of natural disasters. Dallas is one of the most challenging markets in the country to insure due to hail, wind, and Texas freezes, which lead to escalating claims and premiums.
Tax expenses have also risen by 40% since 2018, although millage rates have slightly decreased, providing some relief. Potential reassessments could offer further relief as property values decline, although the extent is uncertain.
While tax increases may decline, various other factors will contribute to rising costs. Rising labor and product costs and increases in expenses, including controllable expenses like payroll, marketing, and utilities, will impact the market.
Read LINK: EMERGING TRENDS: TAILWINDS
The information provided herein is for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to buy securities. This information does not constitute investment, tax, or legal advice, and potential investors are encouraged to consult with their advisers.
Sources:
* Emerging Trends in Real Estate 2024 Survey, UIL Americas. Accessed 29 February 2024. https://americas.uli.org/emerging-trends-in-real-estate-2024/ & https://knowledge.uli.org/reports/emerging-trends/2024/emerging-trends-in-real-estate-united-states-and-canada-2024
* Marcus & Millichap Research Services BES, BLS Through November 2023
* Marcus & Millichap Research Services BES, BLS Through December 2023
* Marcus & Millichap Dallas #1
* Real Page
* Real Estate Values Are ‘Bottoming,’ Blackstone Says, Co-Star, Accessed 29 February 2024 https://www.costar.com/article/512456888/real-estate-values-are-bottoming-blackstone-says
* Berkadia 2024 Forecast Dallas – Fort Worth, Accessed 29 February 2024 https://properties.berkadia.com/2024-forecast/p/9
* CBRE 2024 U.S. Investor Intentions Survey. Accessed 29 February 2024 https://www.cbre.com/insights/briefs/2024-us-investor-intentions-survey
* Marcus & Millichap Research Services BES, BLS Through December 2023
* Marcus & Millichap, 2024 U.S. Multifamily Investment Forecast, Accessed 29 February 2024. https://www.marcusmillichap.com/research/market-report/multiple-markets/2024-us-multifamily-investment-forecast
