No bubbles here: a look at the DFW real estate market

Last week, we took a close look Austin’s real estate economy. This week we are going to look at the growth in Dallas-Fort Worth. We also wanted to spend some time discussing why the strong appreciation we are seeing through out Texas is indicative of a healthy market and not a real estate bubble.

The Dallas-Fort Worth Metroplex has continued to grow even amidst a recession. It’s true that job growth slowed following the recession. That said, in the last ten years this metro has had some of the best growth in the country. Its location in the middle of the country makes it an easy plane ride from either coast, which is why many companies decide to put their headquarters there. Firms such as American Airlines, Lockheed Martin, Citigroup, and AT&T all have major operations in Dallas, which has helped insulate the city somewhat from the recession. Texas now has more Fortune 500 headquarters than any other state.

According to Census Bureau estimates the Metroplex population is over 6.7 million people. Since the 2010 census DFW’s growth has been even more impressive. The population has increased by 4.3 percent, or 274,781 people. With all this robust growth there is a need for shelter.

Residential

Population and job growth has driven strong home sales. For 26 months in a row, area home sales were higher than the same month of the previous year. Median home prices in October 2013 rose 13 percent from a year ago. Through the first 10 months of 2013, pre-owned home sales are 19 percent ahead of where they were in the same period last year. And median home prices are up 10 percent from the first 10 months of 2012. In October, there were 22,656 homes listed for sale with Realtors in the roughly 50 counties included in the monthly survey. That’s 13 percent fewer houses on the market at this time last year. Currently there is only a 3.1-month supply of houses for sale in North Texas — the lowest inventory in more than a decade. As supply decreases, and demand increase, values also increase. DFW suffers the same problem the other metros have and that is not enough developed lots in desirable areas due to the downturn in development during the recession. As the market has turned this has caused a lack of inventory.

The job and population growth of the last 18+ months has helped DFW apartment owners and should allow them another secure 2 to 3 quarters before new construction begins to dictate long term performance and values at existing properties. The continued strong job creation and population growth have kept values and rents strong, allowing the lowest level of vacancies in over a dozen years. The attraction of this market has a number of equity and management groups looking to develop more units in the coming year.

With single family sales doing so well, a lack of housing inventory and continued strong demand has allowed the apartment market to deliver over 13,500+/- units with little erosion of rents currently. Another 24,000 units are under construction, which normally would make equity and analysts nervous. However, last quarter 6,355 units were leased – more than the 4,992 new units delivered. Demand is outstripping supply, which is a sign of the strength of the local rental market.

DFW leads the nation on new apartment deliveries an annual basis. Looking forward, future job growth continues to be impressive with over 8,000 new jobs at State Farm in Richardson, 1000+/- jobs at Amazon’s two fulfillment centers, and a wide mix of white collar and blue collar positions this year, which will continue to generate strong demand over all tiers in the coming months, potentially years. According to the Bureau of Labor statistics local payrolls have exceeded prerecession employment by over 150,000+ jobs, a sign of the strength of the market and continued improvement.

DFW leads the nation in both net apartment leasing and construction, according to a report released by MPF Research. The strong third-quarter performance surprised many apartment analysts. They expected Dallas-Fort Worth to do well given the strength of the local economy, but no one thought the market would see occupancy move to a 12-year high and be able to continue to add that many new units without erosion to rental income.

Most of the construction is in central Dallas, with class ‘A’ units — uptown, downtown and the Oak Lawn area. In the suburbs, building is concentrated in Lewisville, Las Colinas, the Allen-McKinney area, Frisco, Plano, and Denton. Beginning in 2014, the large number of class ‘A’ apartment community deliveries may allow ‘B’ and ‘ C’ communities growth, both in rents and potential sales as investors begin to look for new opportunities.
Couple that with some of the tightest rental conditions since 2001 and its clear that all residential should see values rise and should continue to improve for the next couple of years, barring a catastrophic event. Even though housing is on the rebound, the bounce back is stronger in more affluent neighborhoods, like the inner loop areas. The spread between cap rates and interest rates remains favorable, and most local multifamily investment groups have been trading up.

Office

The office market has experienced some of the strongest leasing activity in its history, and seems destined to tighten as job growth drives record expansions and relocations. New deliveries this year are more than double last year’s production (2.6 million square feet delivered this year compared to 1.2 million in 2012), but with strong absorption the impact on vacancy is forecast to be minimal in 2014.

The office market’s strong performance has been driven by demand from the professional services sector including insurance, IT, and financial services firms. Most analysts agree that Dallas employment growth accelerated in Q3 2013 due to the sharp increases in the financial and professional/business services sectors, which fueled the strongest quarterly office demand in over four years. As stated earlier, large corporate user activity, led by State Farm, has reduced available office space by 25%-to-30% over the past year in the Richardson/Plano and Las Colinas submarkets. North Dallas has become a draw for major office development and relocations due to the areas relatively affordable housing and quality rated schools.

Office sales improved dramatically because of the amount of developed unused contiguous space in the DFW area. Office sales improved 40+% compared to the previous 12 months, with smaller (50,000 square feet or less) accounting for approximately 50% of transactions in the markets. The large properties that have been purchased are being acquired for redevelopment or repositioning. A good example is the old Texas Instruments site, which is being considered for mixed-use residential (previously it was industrial).

Retail

As the other channels, retail has been spurred by all this economic growth, adding 2.6 million square feet of retail space, up 200,000 square feet from 2012. Vacancy has risen slightly but rent values have remained strong. Most existing strip centers over the last two years have seen improvement with large blocks of space being absorbed. Vacancy at area shopping centers peaked at near 15% in 2010 and have continued to improve through this quarter.

2014 should be stronger for retail, particularly with grocery retailers expanding with 5 percent sales growth in the metro area. The concern of overbuilding of retail in the DFW market in 2010 has given equity some great opportunities. Those opportunities will be a challenge to find through 2014.

As you can see, Texas metros continue to be the bright spot in the nation’s economy, but come with their challenges. Each metro continues to have challenged submarkets that may take years to fully recover, but all in all Texas real estate continues to improve and grow.

Most importantly, inmigration is not slowing down. We are seeing significant domestic migration, but international migration is right up there as well. We have people moving here from all over the country and all over the world. College graduates and job seekers are moving to areas with greater economic opportunities, and Texas is high on most lists. Part of that is employment, but you also have the economics of the low cost of living in Texas.

Being the center of the nation’s energy sector has helped, fueling growth across Texas and the nation. Most analysts and economists understand that we are in the midst of an energy boom unlike anything we’ve seen since the 1970s, and this time it is not just in Texas, Oklahoma, and the Southwest. It’s all over the country. Wherever there is drilling and production of oil and gas from shale plays, you are seeing significant population and job growth.

The continued strength of this market, along with the tax and financial advantages of Texas should continue to bode well for this area through 2014.

Are we in a new real estate bubble?

This week Trulia published Bubble Watch, a quarterly report that tracks whether home prices nationally and in the 100 largest metros are under or overvalued.

“Nationally, home prices were 4% undervalued, but home prices at the metro level are above their fundamental value in 17 of the 100 largest metros. Most of these overvalued metros are only slightly so: of the 17 overvalued metros, just two – Orange County and Los Angeles – look at least 10% overvalued. Meanwhile, home values are on the high end and are actually 10% overvalued in Austin.”

What is a bubble? Bubbles have characterized recent economic history, as institutional and other major investors have sought high-return, low-risk investments. These investments have turned into speculative manias that eventually come crashing down. The last decade alone has seen the telecom bubble, the nearly simultaneous dot-com bubble, the housing bubble, and most recently, the oil bubble. Of all of them, the housing bubble seems to be the most significant and far reaching.

Four things have to be available for a housing bubble: tight supply, demand, restrictive regulation, and easy financing. Statewide, only tight supply and demand are present; only in Austin does regulation come into play. Financing is still a challenge in today’s environment. When looking at local markets, it is good to look first to job creation, population growth, and lack of inventory available. These basics are not taken into account when looking at naming these ‘bubble markets’. No, the Texas markets are not bubble markets. The current appreciation is driven by demand, not speculation. Supply will take 2 to 3 years to catch up to demand, until then we will see higher values for real estate.

Where do I have concerns about real estate bubbles presently? Markets like Orange County and Phoenix have seen land escalate 30+% in the last year. I would think that level of appreciation would be bubble driven.

For a more complete discussion, I recommend checking out the March 29th edition of the Independence Voice on the Independence Title blog.

I think highly of Jed Kolko, the Trulia economist. However this is one of those releases that doesn’t fully understand the local markets and their trends.
The caveat with Zillow, Trulia, and other similar websites is that all information needs to be verified if you are serious about a property or community. Information on the website is not always 100% accurate. Estimates provided by Zillow as “Zestimates” are just that – estimations, not promises, and not verified. Rremember, Texas is a non-disclosure state. Your own valuation, with the help of a qualified Realtor through the MLS, will almost always arrive at different numbers that are vastly more valid and reliable.

These websites are amazingly useful tools for real estate investors, provided they are used with understanding of their pros and cons. These are great sites to begin to educate yourself on your local market. The level of information makes an investor’s job much faster and more efficient. But the information should not be relied on as gospel – these sites typically have a disclaimer that actual values can be 25% +/- the actual value. Check official records and verify the information you intend to rely on for your real estate investing decisions.

Should you or your customers have any questions, please let us know.

MS

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