Kevin Leamy Featured in REBusiness Online: Lenders Continue to Fuel Multifamily Development Boom in North Dallas Suburbs

DALLAS, TEXAS (October 14, 2022) – Dallas-Fort Worth (DFW) has been one of the hottest multifamily markets in the nation for the past five years. And as the region’s growth pushes further north, developers and investors are finding plenty of cash to support deals.

The northern suburb of DFW has seen a huge influx of people over the past few years. Growth to suburbs such as Addison, Richardson, Plano, Frisco and McKinney has gained even more traction during the pandemic.

An increasingly diverse employer base and corresponding job growth is attracting people and driving demand for homes for sale and multi-family units. Instead of taking a long drive to downtown Dallas or Fort Worth, several large North Dallas employers are now offering
quality jobs.

A major catalyst for the expansion was the opening of Toyota’s North American headquarters in Plano five years ago. The 100-acre campus is home to over 4,000 employees. Other major businesses followed, including the new regional headquarters of JP Morgan Chase. Another factor attracting new residents to the area is the strength of the schools, including the reputation of some of the best elementary and secondary schools in the country.

Multi-family developers have seized on the growing demand and are following the Dallas North Tollway and US Highway 75 north in pursuit of new developments. Merchant builders build these projects in 18 to 24 months, stabilize rents and then sell after 36 months.

Behind them is a large pool of investors, often with longer-term holding strategies. Whether developers are looking for short-term construction and turnaround financing or long-term fixed-rate debt, there are many options available.

Strong appetite for lenders
Lenders see the same strong fundamentals as developers and investors, and they have a healthy appetite to execute trades in the market.

Despite recent interest rate hikes, borrowers are still finding plenty of cash. Banks provide finance, as do life insurance companies and debt funds. In particular, Fannie Mae, Freddie Mac and FHA/HUD represent the most efficient and least expensive sources of capital.

The agencies have all been very active in financing multi-family projects in these North Dallas markets. In fact, Fannie Mae moved its own regional headquarters to Plano in late 2017. Agencies operate across the spectrum of properties, from market rates to more mission-focused affordable products.

Overall, the agencies are focused on creating balanced portfolios and they lend for all types of multi-family subcategories and at all stages of the project life cycle in these northern suburbs.

For example, Northmarq recently arranged agency financing for a multifamily property in North Dallas. The borrower had a long-term strategy and opted for a fixed-rate, full-rate loan. The asset was located in an excellent school district and close to an abundance of employers.

In the third quarter of 2021, Northmarq also closed the financing of a four-property multi-family portfolio which includes two assets in Allen. The transaction involved an institutional buyer, with financing provided by a major New York-based debt fund. The deal highlights the growing interest of large institutions and coastal capital to not only enter the Sun Belt region and the Texas market, but specifically North Dallas.

We find that some market transactions occur with negative leverage or at cap rates below the overall cost of borrowing. Investors still see this value proposition with multifamily investments, especially if those assets are in markets like North Dallas or other parts of the Sun Belt.

Fundamentals have remained strong, allowing for above-average rental growth, which reassures buyers and investors when analyzing a potential acquisition with negative leverage.

That said, many transactions take place with funding costs that are still below the cap rates in place. We see investors and buyers using floating rate debt coupled with the purchase of aggressive interest rate caps that limit their overall rate exposure.

More growth to come
The DFW multifamily market continues to perform well, with vacancy rates of 3.9% in the second quarter and rental growth approaching nearly 20% year-over-year, according to Market Research. Northmark. Landlords in the northern crown are experiencing much the same phenomenon, with new projects that are renting quickly.

Another factor contributing to this strong rental demand is the presence of high barriers for home buyers. The median cost of a single-family home in North Dallas now exceeds $600,000. So even though rental rates have jumped, there is still a big discount between renting and owning a home in the market.

Higher mortgage rates following Fed rate hikes are making home ownership more expensive for buyers and will likely drive more multi-family development in the northern part of the metroplex.

The majority of new developments are garden-style apartments with surface parking. Developers are also taking advantage of tax incentives to include affordability elements in new projects. Builders can get tax breaks if they keep 20% of housing units affordable with rents below 80% of the area median income (AMI).

Additionally, there are more wrap, podium, and Class A high-rise properties being built just north of The Star in Frisco. The Star is the 91-acre headquarters and training facility for the Dallas Cowboys, and builders are designing projects that cater to the strong demographics of the Stonebriar and Starwood neighborhoods.

So far, new developments are seeing very successful lettings and strong tenant profiles, and developers are easily hitting their pro forma rents. Double-digit rent growth is expected to normalize at some point, although Northmarq expects rent growth to continue in the 3-10% range for the foreseeable future.

Lenders are watching one of the biggest risks in the market – the potential for oversupply due to abundant land and low barriers to entry. However, the short-term outlook remains incredibly positive, with huge numbers of people moving to the northern suburbs and driving demand for all types of
lodging.

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