Monday Morning Scoop - Multifamily Continues To Grow In Dallas-Fort Worth Despite Industrywide Headwinds
Multifamily Continues To Grow In Dallas-Fort Worth Despite Industrywide Headwinds
By the end of 2023, the Dallas-Fort Worth multifamily market is expected to outpace all other markets in the country at 30,000 apartment deliveries. With a vacancy rate of only 5%, coupled with rental prices increasing by more than 15% since the beginning of last year, market activity remains strong in Texas’ hottest CRE market.
But like all asset classes, the DFW multifamily market is feeling the burn from the tightening of capital markets, increased borrowing costs and elevated interest rates.
“Construction financing is a big topic of discussion right now among our developer clients,” KWA Construction President Brian Webster said. “The Metroplex’s multifamily market is seeing that rents aren’t keeping up with the pace at which costs are rising, so this is posing a major obstacle for developers in addition to other supply chain issues and labor shortages that the market is facing nationwide.”
Bisnow spoke with Webster to learn more about how capital markets and pricing stabilization are impacting DFW multifamily and what it means for the projects the firm is working on this year.
Bisnow: Tell us about KWA Construction — the types of projects the team does, markets you’re most active in and your approach to each project.
Webster: KWA Construction is a Dallas-based construction firm specializing in multifamily developments. Our portfolio includes a broad range of multifamily projects, including traditional apartment projects, complex urban infill developments, student housing and luxury senior living facilities. Founded in 2004, KWA is most active in the DFW and North Texas market, although we have built projects throughout the state.
KWA looks at every project individually. Although they tend to have a lot of similarities, none are exactly the same. Every project is a large investment for that specific client and we treat them as such. KWA doesn’t apply any sort of assumptions to its projects; we specifically evaluate each project for what is included and what is required.
Bisnow: How have economic headwinds such as rising interest rates, high material prices and inflation challenged the construction industry? What role will economic volatility play in the multifamily sector for the rest of this year and onward?
Webster: There are definitely economic headwinds in the market today. The discussion has largely revolved around the rising interest rates, which has put a fair amount of strain on short-term construction financing — so owners’ borrowing costs have increased dramatically. Rents have also gone up, but now we are seeing, for the first time in many years, an outpacing of costs to rent growth and that is really the big challenge here.
Although they have escalated from where they were over the last two years, material prices seem to have started to stabilize a bit, so some of these inflation control measures seem to be working. We’ve definitely seen some signs of inflationary pressures being reduced from their all-time highs of about one year ago, but some prices are still creeping up.
A big win for the multifamily industry is that lumber prices have come down tremendously. This is specifically useful for what KWA builds, which is wood frame multifamily buildings. Prices have returned to normal levels over the past year, and our developer clients are finding this very helpful from a budget standpoint — especially as lumber and framing represents approximately 10% of overall project costs.
Bisnow: Does KWA see any signs of pricing stabilization in this market? How do supply chain issues and labor shortages play a role in this equation?
Webster: With lead time issues disrupting the supply chain, we have seen pricing stabilize a little bit, exclusive of very specific items requiring much longer lead times. For example, electrical equipment from major manufacturers is still stuck at almost a 50-week-plus lead time. Thermoplastic polyolefin roofing still has issues with long lead times as well.
These setbacks normally don’t halt our projects, but on smaller projects they can be very impactful. If you need those products before the lead times, you would need to buy them elsewhere or make some commitment before you close on the loan. However, I think we are trending in the right direction.
The other issue that we continue to deal with is our workforce, and the costs to acquire talent continues to rise, both at the general contractor level as well as the subcontractor level. The wages in the construction industry have risen, which has put pressure on general conditions and costs versus historical norms.
Bisnow: What projects does KWA have in the pipeline this year? How have economic factors, labor shortages and decreased demand impacted these projects?
Webster: KWA Construction has seven multifamily projects in progress as of June 2023, totaling about $348M under construction, including two that are HUD developments. The projects are located throughout DFW, including Frisco, North Dallas, Carrollton, Garland, Fort Worth and Richardson.
The majority of our current projects are from repeat clients who value the transparency and collaboration we bring as part of the KWA process. In our market, we have not seen much of a decrease in demand for multifamily projects.
I also think that the Federal Reserve increasing the interest rates has had a positive effect on inflation, but unfortunately has caused increased costs to the borrower, which is our client, and ultimately affecting overall project fundamentals.
Contact: Emily Lynch