January 21, 2016
The multifamily sector has had a stellar year in 2015, delighting both investors and developers. The metrics tell the story. According to Axiometrics, the apartment research firm, the national annual effective rent growth in November stood at 4.6%, while occupancy was 95%.
Digging deeper, it is clear, however, that urban markets are underperforming their suburban counterparts. Axiometrics’ figures put annual effective rent growth in urban markets at 2.7%, and occupancy at 95%. By comparison, the rent growth in suburban markets was 5.2%, and occupancy was also 95%.
But the urban-suburban differential isn’t the same in all markets. For example, while the Dallas-Plano-Irving Metropolitan District in Texas mirrors national trends, the Philadelphia metrics are moving in the opposite direction. These two markets represent different opportunities for investors.
Dallas–Diverging Urban and Suburban Prospects
Overall, the Dallas metro area is enjoying consistently high job growth – 3.5% in October, according to the Bureau of Labor Statistics’ latest figures—and that means more housing demand. Developers and investors have taken up the challenge. At last count, the region has more than 34,000 units planned or under construction. Many of these are high-rise towers, and a good deal of this activity is in the urban core.
Consider Oak Lawn on Dallas’ north side. Greystar recently broke ground on the 300-unit Ascent, while Camden Realty Trust is putting the finishing touches on its 423-unit Camden Victory Park. Meanwhile, Trammell Crow Co., in conjunction with MetLife Inc., unveiled plans for Park District, a 916,000-square-foot, mixed-use project that will include apartments.
How much development Oak Lawn—and by extension the rest of urban Dallas—can absorb is clearly an open question. November annual effective rent growth was 1.6%, while occupancy was 95.0%, according to Axiometrics. Compared to the Dallas metro rent growth of 6.2%, the performance of this urban submarket is definitely sub-par.
By contrast, rent growth in the northern suburb of Richardson is much higher. One reason is that new apartments are coming online at a more sedate pace, despite the success of CityLine, a 186-acre, mixed-use, transit-oriented development that has attracted State Farm, Raytheon, and Toyota. Axiometrics has identified just 1,609 units that were delivered by the end of last year, with an additional 1,782 units slated to come online during 2016.
Not surprisingly, the rent growth numbers in Richardson have been holding steady between 4% and 6% since late 2013.
As we’ve seen, supply is the driving factor behind rent growth in both submarkets. Since 2013, Oak Lawn’s unit delivery has exploded. Richardson’s supply, in the meantime, is expanding at a more moderate pace. Until and unless the supply in Oak Lawn is absorbed, that urban core’s rent growth will continue to trail the metro average. By contrast, an investor can get in on the ground floor in Richardson, and expect a healthy ROI, especially as CityLine continues to fuel demand.
How does suburban Philadelphia compare to Dallas’ urban multifamily market? Where are investments best made when considering suburban versus urban regions? Find out the answers at the jump.