The industry is bracing for fewer rentals next year as apartment builders churn out record numbers of new rental units.
“We're delivering the most new apartment buildings since the 1970s,” he said, adding about 400,000 total apartment units to the U.S. this year. John S. Sebree, senior vice president of commercial real estate firm Marcus & Millichap. “The number of units we deliver in 2024 is expected to increase by 41% compared to the six-year average.”
Dallas-Fort Worth ranks at the top of the list with an estimated 26,000 units opening this year, Sebree said. “We're going to see a little bit of softness over the next few years as we deliver these units.”
In Texas' other major metropolitan areas, the construction of thousands of new apartment units is already causing rents to fall in some markets.
“You like to build,” Sebree said at the Apartment Forecast Conference in Dallas this week, hosted by Marcus & Millichap and Institutional Real Estate Advisors.
“There will continue to be more vacancies,” he said. “None of these markets, however, pose major concerns in the long term.”
The D-FW and Texas markets are leading the nation in job growth and population growth, stimulating demand for apartments.
“The fundamentals of Texas are rock solid,” Sebree said.
Apartment construction is already on the decline in Florida and across the country thanks to rising interest rates and a tough debt market.
Only 39,000 apartment units were started nationwide in the third quarter.
“This is a 75% drop in new business openings from last year's peak,” Sebree said. “We expect it to fall further in the fourth quarter, and even further in the first quarter of next year.”
Analysts and builders are predicting a shortage of rental units in three to four years as new project starts have slowed significantly.
“Within a few years, we'll reach a point where occupancy increases and rent increases really start,” Sebree said. “We're going to see a lot of units coming online over the next two years. By 2025, we're going to see even fewer units.”
North Texas has been the nation's top apartment construction market in recent years, thanks to the region's strong employment and population growth.
D-FW added more than 178,000 jobs in the year to September. And North Texas' population grew by 170,000 people last year.
This growth has increased demand for rental housing, while high mortgage interest rates have made it difficult for people to buy homes.
As of the end of September, more than 72,000 apartment units were under construction in D-FW, the most of any U.S. market.
Carl Whitaker, a real estate economist with Richardson-based RealPage, said 175,000 apartment units are planned for construction across the state.
“In fact, we're a little off from the peak of 200,000 apartment units built in Texas last year,” Whitaker said. , down 40% to 50% in most major markets in Texas.”
Still, about 27,000 new apartment units are opening in D-FW this year. And in 2024 and 2025, an estimated 44,000 rental homes will be added to the market.
Net apartment rentals in D-FW totaled 7,247 units in the most recent quarter, the highest of any U.S. market, according to RealPage. However, it fell short of the 8,170 apartments completed during the same period.
Average rents in D-FW rose only about 1% year-over-year in the third quarter, not enough to keep up with inflation.
“2024 is going to be a tough year,” Whittaker said. “2025 is starting to look better.”
Builders are hopeful that the slump in construction starts and rent increases won't last long.
“Everyone believes there will be a supply gap because of the delayed construction starts,” said Matt Brendel, senior managing director of development. Legacy Partner. “Once we hit the supply gap, rent growth will start accelerating again. Supply is still needed, especially in Texas.”
While apartment construction in D-FW is starting to slow down, Brendel said he doesn't see construction costs softening.
“We haven't seen any relief yet,” he said. “I think [contractors] I think there's still a large pipeline. They will be in for a negative surprise within the next six months. ”
Apartment brokers hope more distressed properties will come onto the market next year and sales will pick up. Investors are already preparing to buy.
In the first nine months of 2023, D-FW apartments sold for more than $6.8 billion, the most of any U.S. market. But this year's sales are down compared to 2022, when North Texas apartments traded for more than $20 billion.
“There is a huge amount of pension fund money that is currently on the sidelines,” Sebree said. “The amount of private capital on the sidelines is also near an all-time high. Everyone is waiting to see how this new construction will come to market.”
Financial firm Goldman Sachs is building a huge new regional office center just north of downtown Dallas and plans to buy apartments next year.
“We expect to raise opportunistic funding within the next 12 to 18 months,” Katie said. Mr. Bloom is a managing director at Goldman Sachs. “We've been a big seller of real estate for the past two years. Next year we're going to turn around and buy.”
Mr. Bloom said Goldman Sachs is eyeing recently constructed luxury apartment properties in downtown Dallas.
Southlake-based investor Trinity Investors has a $6.5 billion real estate portfolio and plans to stick to the multifamily market, managing director Dan Meader said.
“I have no concerns about multifamily as an investment class,” Meader said. “We don't intend to be a seller anytime soon. Real estate continues to be seen as an alternative to bonds in the high-net-worth investor market.”
But some apartment owners saddled with billions of dollars in low-interest debt due next year may have no choice but to sell. Finding funding to start a new apartment complex is difficult.
“It's expensive and it's really hard to borrow money for projects like this,” said Spencer Schley, managing director at Canyon Partners, which moved from California to the new Dallas office two years ago. “This dynamic is really slowing down the construction pipeline.”
