There is a lot for a multifamily investor to like about Dallas. The metro area has benefitted from a steady influx of new companies and new jobs for the past decade, and there is no sign that this growth is letting up.
In the past five years alone, Frontier Communications (2023), Caterpillar (2022), AECOM (2021) and CBRE (2020) have all moved their corporate headquarters to Dallas, and the area has become a major U.S. financial hub, second only to New York City and Chicago.
JP Morgan Chase now has more employees in Texas than in New York; Goldman Sachs is building a $500 million corporate tower to house its second largest office; and a new Wells Fargo campus in Irving is scheduled to open by the end of 2025
The decisions by these corporate giants and thousands of smaller companies to locate in Dallas have made it the fastest-growing metro in the nation. According to the latest U.S. Census data, the Dallas-Fort Worth-Arlington metropolitan statistical area (MSA) gained almost half a million people between July 2020 and July 2023, more than any other metro area in the country.
Many companies are committed to Dallas. Google is building a new $600 million data center in Red Oak, located about 20 miles south of Dallas. It is Google’s second data center in the market. The Teachers Insurance and Annuity Association of America (TIAA) announced in August that it is moving 1,000 jobs from New York City to a new corporate office in Frisco, some 30 miles north of Dallas. And in May 2024, Subaru of America revealed plans to relocate its central regional office from Illinois to Coppell, approximately 22 miles northwest of Dallas.
Most of the employees filling these positions will likely be renters. According to financial technology company SmartAsset, monthly housing costs for homeowners are 1.6 times more than monthly rent plus utilities in Dallas, and that ratio is not expected to decline in a meaningful way soon.
Although home prices have dropped slightly in recent months from record highs, stubbornly high mortgage rates and skyrocketing insurance premiums mean that home ownership costs more than ever. These increased costs also suggest that the natural progression from renting to owning among current Dallas residents will slow, further elevating apartment demand.
Supply Surge Impacts Rent Growth
The constant stream of new development puts Dallas’ supply issues in perspective. According to RealPage, Dallas led the nation in both deliveries and absorption in calendar year 2024. The market absorbed 36,724 units, while developers brought 38,365 new apartments to the market last year.
Construction is expected to slow, but Dallas is still the most active market in the United States. According to Yardi Matrix, 62,211 units were under construction in the Dallas MSA as of September 2024, which put the region in the top spot nationally, above New York City, with 51,116 units in development.
As a result, fundamentals have softened, with the apartment vacancy rate hitting 7 percent at the end of 2024, according to Yardi Matrix, and rents declining. Operating metrics for Class B and C apartments have held up better than higher-end properties, with rent growth relatively stable at negative 0.3 percent year-over-year as of year-end 2024, compared with negative 2.5 percent for Class A product. This makes sense given that the vast majority of new deliveries has been luxury focused.
Even with additional inventory slated for delivery in 2025, excess supply should burn off within the next 12 months, as strong demand produces robust absorption. While there are numerous multifamily projects in the planning stage, the actual construction pipeline has contracted. In the past year, only the most established developers have been able to secure construction loans, given soft operating conditions and elevated construction costs.
Transactions are down from cyclical highs but relatively stable year-over-year. In Dallas, the rolling 12-month transaction volume for the fourth quarter of 2023 ($6.9 billion) decreased 4.4 percent to $6.6 billion in the fourth quarter of 2024, according to MSCI Real Capital Analytics.
Thanks to cap rates rising to the mid-5 percent range, however, the pace of transactions is already picking up. The higher the cap rate, the lower the purchase price.
With ample capital waiting in the wings, Class A properties are now joining the Class B and C properties that dominated sales earlier in the year.
From June through December 2024, for instance, 40 properties with 300-plus units have changed hands in Dallas-Fort Worth, according to MSCI Real Capital Analytics. And this is only a taste of what the market has in store. With occupancy on the way up and rents following suit, transactions should continue to pick up steam throughout 2025.
Dallas Grows Northward
Each year, North Dallas edges closer to the Oklahoma border, and the next few years will be no exception. It is certainly true that some investors are seeing the potential of office and hospitality conversions in downtown Dallas.
In 2024, developers welcomed the first tenants to The Sinclair, formerly the Energy Plaza office tower. In its new configuration, the 49-story property includes 293 luxury apartments as well as a smaller amount of high-end office space. In the fall of 2024, developers announced the conversion of the Ambassador Hotel into a 300-unit apartment community.
Nonetheless, the bulk of multifamily activity in coming years will occur in North Dallas and, increasingly, the northern reaches of North Dallas. Spurred by the relocation of the Professional Golfers’ Association (PGA) of America, Frisco now has several megaprojects going through the approval process. These projects include Firefly Park with 230 townhomes and 1,970 mid- and high-rise apartments expected to be completed by 2027; a 2024-approved 1,039-unit project being developed by Zarky Development; and The Mix, a mixed-use development that will include 3,299 multifamily units. Developers broke ground in January.
Developers are also steadily looking even farther north. In November 2024, Texas Republic Management purchased a 375-acre mixed-use tract along the planned Dallas North Tollway extension in Grayson County. Further north in the county, Texas Instruments and GlobiTech are investing billions of dollars in semiconductor chip plants. Additionally, apartment development is included in the master plan for Lake Texoma, which, as the name suggests, straddles the Oklahoma line.
Dallas is on track to absorb its excess supply in 2025, and companies with money to invest have demonstrated their conviction that it will continue to be one of the most vibrant and profitable commercial real estate markets in the country. The projected yearlong hiatus between excess inventory tailing off in 2025 and construction resuming in 2026 creates an ideal opportunity for investors to enter this attractive market at a favorable moment.
— Steve Beltran is a Texas-based managing director with Lument. He has 30 years of experience in the real estate industry, leading the financing, acquisition and management of more than 30,000 multifamily units in 24 states. This article originally appeared in the January/February issue of Texas Multifamily & Affordable Housing Business.