Dallas Reports - RED Capital Group

Transcription

DALLAS, TEXAS
MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE
RED Capital Group | 1Q15 | July 2015
1Q15 PAYROLL TRENDS AND FORECAST
PAYROLL JOB SUMMARY
Total Payrolls
2,341.1m
Annual Change
99.1m (4.4%)
2015 Forecast
91.6m (4.0%)
2016 Forecast
79.2m (3.3%)
2017 Forecast
67.0m (2.7%)
2018 Forecast
57.2m (2.3%)
Unemployment (NSA)
3.7% (May)
OCCUPANCY RATE SUMMARY
Occupancy Rate (Reis)
RED 50 Rank
95.3%
35th
Annual Chg. (Reis)
Unchd
RCR YE15 Forecast
95.7%
RCR YE16 Forecast
96.4%
RCR YE17 Forecast
95.5%
RCR YE18 Forecast
94.6%
EFFECTIVE RENT SUMMARY
Mean Rent (Reis)
$879
Annual Change
4.6%
RED 50 Rent Change Rank
10th
RCR YE15 Forecast
4.1%
RCR YE16 Forecast
3.4%
RCR YE17 Forecast
3.0%
RCR YE18 Forecast
3.0%
TRADE & RETURN SUMMARY
$5mm+ / 80-unit+ Sales
Approx. Proceeds
Avg. Cap Rate (FNM)
Avg. Price/Unit
52
$1.5bn
6.1%
$94,143
Expected Total Return
7.6%
RED 46 ETR Rank
10th
Risk-adjusted Index
RED 46 RAI Rank
12.59
1st
The Dallas labor market continued to defy gravity during
the first quarter as establishments hired at a 99,100-job,
4.4% year-on-year pace, up from 4Q14’s 90,800-job,
4.0% performance. The trade sector was primarily responsible, generating net annual growth of 14,500 (4.0%) jobs
in 1Q, doubling 4Q’s 7,300-job advance. By the same
token, business and health care services remained the
granite foundation of Dallas’s economic colossus, collectively accounting for a 36,600 (5.7%) job y-o-y gain.
Preliminary 2Q15 data exhibited signs of “topping.” Seasonally adjusted data showed a net loss of –1,800 payroll
jobs March to May, representing the weakest three-month
period since 3Q09. Although the SA data rebounded
strongly in June (+15,600 jobs), not seasonally-adjusted
y-o-y comparisons slowed to a 90,200 (4.0%) advance.
RED Capital Research specified a 98.6% (S.E.=0.3%) adjusted-R2 econometric payroll growth forecast equation
employing U.S. payroll and personal consumption expenditure growth and the rate of change of the federal
funds rate as independent variables. The model projects
that Dallas employment will continue to grow about 2.5 3.0 times as fast as the U.S. average. Unfortunately, we
expect the U.S. average to decelerate gradually through
2018, precipitating slower expansion in Dallas as well.
1Q15 ABSORPTION AND OCCUPANCY RATE TRENDS
Apartment demand was off slightly during the winter quarter as tenants net leased 2,175 vacant units, according to
Reis, down from 3,333 and 2,614 in the prior and yearearlier quarters, respectively. Supply moderated as well,
however, as developers completed 1,660 units, allowing
average occupancy to rise to 95.3%, an equal 15-year high.
Preliminary data indicate no rate change during 2Q15.
Axiometrics surveys of 1,197 stabilized larger properties
found average occupancy of 94.7% and 94.9% during 1Q15
and 2Q15, respectively, up 50 basis points and 20 bps yearon-year, respectively. The class-B segment led the way for
the sixth consecutive quarter, averaging 95.4%. Classes
A&C trailed at 93.0% and 94.8%. Closer in suburban submarkets with predominately class-B inventories posted the
highest occupancies (Garland, Grand Prairie, South County), while supply pressures sent North White Rock (93.8%)
and Oaklawn (4.5%) to the bottom of the submarket chart.
RCR’s 95.2% ARS demand model uses vacancy, the 10-year
UST yield, inventory and payroll growth and the first derivative of rent change as independent variables. The model
foresees 13,000+ units/year absorption in 2015-16, pushing occupancy above 96% but supply pressures afterward.
1Q15 EFFECTIVE RENT TRENDS
Rapid rent growth continued during the first half 2015 as
average effective rents advanced 4.6% year-on-year during
1Q15 and asking rents soared 4.8% y-o-y in 2Q15, according to Reis. The latter metric was the fastest comparable
asking rent growth statistic recorded in fourteen years.
Axiometrics same-store comparisons were stronger still.
Unit-weighted average effective rents of 1,197 stabilized
properties were 6.8% higher y-o-y (2Q15), following 1Q15’s
stout 6.0% advance. Class B&C properties reported the
strongest 2Q15 gains, surging 7.2% and 7.3% y-o-y, respectively. The class-A segment lagged with a 4.4% advance,
notching the smallest average rent gains among classes for
the eighth consecutive quarter. South Irving submarket
posted the largest increase (9.9%), while Carrollton, South
Irving, White Rock and Far Northeast submarket reported
8% or faster gains. Conversely, Northwest, South and Oaklawn submarkets each advanced by 3% to 4% y-o-y.
RCR’s 98.0% ARS rent model employs metro payroll, home
price, U.S. payroll, GDP and income growth as independent
variables. The model projects 4%+ gains in 2015, followed
by moderately slower progress afterward. Further rapid
home price appreciation poses a downside rent risk.
1Q15 PROPERTY MARKETS AND TOTAL RETURNS
Investor interest in Dallas properties intensified during the
first half 2015. Following 4Q14’s record 56 trades valued
at $5 million or more, buyers closed on 52 transaction
during the winter quarter and at least 39 during the spring
stanza. Portfolio trades were the dominant theme as REITs
and private equity buyers consummated five property
bundles incorporating 19 Dallas assets. Based on known
pricing data sales totaled approximately $1.5 billion during
the first quarter, down slightly from 4Q14’s $2.1bn aggregate. 2Q15 sales totaled about $920mm. The average price
of traded units was $94,143 in 1Q15 and $83,893 in 2Q15,
down from 4Q14’s recent record high $117,498 level.
Institutional quality assets traded in the low– to mid-5%
range. Class-B/B– properties exchanged hands in the high
-5% to high-6% area, depending on age and location.
Class-C yields gravitated toward the 7% to 8% area.
Using a 5.75% acquisition cap rate proxy and model derived rent and occupancy forecasts, RCR estimate that an
investor would expect to achieve a 7.6% five-year unlevered total return from a Dallas investment, ranking #10
among the RED 46. Low model standard error produces
high return certainty and the #1 risk-adjusted index. Further rapid home price appreciation is the primary risk.
MARKET OVERVIEW | 1Q15 | DALLAS, TEXAS
Dallas Occupancy Rate Trends
Source: Reis History, RCR Forecasts
Average Occupancy
98%
RED 46 AVERAGE
DALLAS (REIS/RCR)
97%
98%
97%
96.4%
95.3% 95.7%
96%
95.5%
96%
94.6%
95%
95%
94.1%
94%
94%
93%
93%
2012
2013
2014
2015f
2016f
2017f
2018f
2019f
1Q20f
Dallas Absorption and Supply Trends
Units (T12 Months)
19,000
17,000
15,000
13,000
11,000
9,000
7,000
5,000
3,000
1,000
2012
ABSORPTIONS
COMPLETIONS
2013
2014
2015f
2016f
2017f
2018f
2019f
1Q20F
Dallas Cap Rate Trends
Source: eFannie.com, RCR Calculations
Average Cap Rate
7.0%
6.5%
6.8%
6.7%
6.5%
6.3%
6.8%
6.6%
6.1%
WEST SO CENT REGION
DALLAS
6.8%
6.6%
6.5%
6.3%
6.1%
6.0%
6.0%
5.8%
5.5%
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
NOTABLE TRANSACTIONS
Property Class/
Type (Constr.)
Approx. Date of
Transaction
Total Price /
(in millions)
Camino del sol Apts. (Denton County)
B- / GLR (1985)
25-Feb-2015
Residences at the Collection (Lewisville)
B+ / GLR (2012)
1-Mar-2015
Century Medical District (Northwest)
B+ / MR (2014)
3-Apr-2015
Falls at Highpoint Apts. (No. White Rock)
B- / GLR (1984)
Madison at Round Grove (Lewisville)
B / GLR (1994)
Property Name (Submarket)
Price /
per unit
Estimated
Cap Rate
$23.0
$76,531
6.1%
$45.5
$145,925
5.7%
$42.5 (Alloctd)
$147,569
5.3% (p.f.)
23-May-2015
$50.0
$70,621
6.8%
31-May-2015
$28.9 (Alloctd)
$71,481
7.4%
RED Capital Research | July 2015
Dallas Effective Rent Trends
Sources: Reis, Inc. History and RCR Forecast
5%
4.6%
RED 46 AVERAGE
5%
DALLAS (REIS/RCR)
4.1%
YoY Rent Trend
4%
4%
3.3%
3.1%
3%
2.4%
3%
2.2%
2%
2%
1%
1%
2012
2013
2014
2015f
2016f
2017f
2018f
2019f
1Q20f
Dallas Home Price Trends
Source: S&P Case-Shiller and FHFA Home Price Indices and RCR
YoY Growth Trend
12%
9.2%
9.7%
9.5%
9%
12%
8.4%
7.3%
9%
6.2%
6%
6%
3%
3%
0%
0%
U.S. FHFA HPI
-3%
2012
2013
2014
DALLAS FHFA HPI
2015f
2016f
DALLAS S&P C-S HPI
2017f
2018f
2019f
-3%
1Q20f
Dallas Payroll Employment Trends
Source: BLS, BEA Data, RCR Forecasts
YoY Growth Trend
5%
4.0%
4%
5%
3.7%
4%
3.1%
3%
2.5%
2.2%
2.2% 3%
2%
2%
1%
1%
0%
US GDP GROWTH
-1%
2012
2013
2014
2015f
US JOB GROWTH
2016f
2017f
0%
DALLAS JOB GROWTH
2018f
2019f
-1%
1Q20f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial
advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third
party sources and has not been independently verified or accepted by RED Capital Group. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors
or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any
reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your
specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED Capital Research | July 2015
SUBMARKET TRENDS (REIS)
Effective Rent
Submarket
Physical Vacancy
1Q14
Carrollton / Addison
Central Dallas
1Q15
Change
1Q14
1Q15
Change
$818
$846
3.5%
3.8%
3.9%
10 bps
$1,753
$1,845
5.2%
5.7%
9.7%
400 bps
East Dallas
$893
$963
7.9%
7.8%
7.3%
-50 bps
Far North
$834
$859
3.0%
2.4%
1.4%
-100 bps
Far Northeast
$616
$638
3.6%
6.4%
3.7%
-270 bps
Far Northwest
$704
$752
6.8%
4.3%
4.0%
-30 bps
Garland
$699
$720
3.0%
3.9%
3.9%
0 bps
Grand Prairie
$675
$696
3.1%
4.9%
3.2%
-170 bps
Lewisville
$904
$934
3.3%
6.3%
7.7%
140 bps
Mesquite / Seagoville
$696
$717
3.1%
3.5%
2.7%
-80 bps
North Dallas
$846
$879
3.9%
2.4%
2.5%
10 bps
North Irving
$881
$909
3.1%
3.7%
2.6%
-110 bps
North White Rock
$679
$703
3.6%
4.5%
4.0%
-50 bps
Northwest
$900
$954
6.1%
6.5%
9.4%
290 bps
NW Denton County
$930
$964
3.7%
6.6%
6.1%
-50 bps
Oaklawn
$1,241
$1,352
9.0%
4.3%
18.5%
1420 bps
Plano / Allen / McKinney
$991
$1,040
5.0%
4.0%
5.4%
140 bps
Richardson
$852
$873
2.4%
4.7%
3.8%
-90 bps
South Dallas
$744
$733
-1.5%
11.1%
9.3%
-180 bps
South County
$706
$722
2.3%
4.8%
3.7%
-110 bps
South Irving
$689
$714
3.7%
3.2%
2.0%
-120 bps
South White Rock / I-30
$626
$646
3.2%
6.3%
5.9%
-40 bps
Southeast Dallas
$567
$587
3.4%
5.5%
3.6%
-190 bps
Southwest Dallas
$684
$705
3.0%
6.4%
6.0%
-40 bps
$840
$879
4.6%
4.7%
4.7%
0 bps
Metro
FOR MORE INFORMATION ABOUT RED’S RESEARCH CAPABILITIES CONTACT:
Daniel J. Hogan
Director of Research
[email protected]
+1.614.857.1416 office
+1.800.837.5100 toll free
THE FACE OF LENDING
RED Capital Group, LLC  RED Mortgage Capital, LLC  RED Capital Markets, LLC (Member FINRA/SIPC)  RED Capital Partners, LLC
10 West Broad Street, Columbus, Ohio 43215
 redcapitalgroup.com  +1.800.837.5100
© 2015 RED Capital Group, LLC
DALLAS, TEXAS
MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE
RED Capital Group | 2Q14 | October 2014
2Q14 PAYROLL TRENDS AND FORECAST
PAYROLL JOB SUMMARY
Total Payrolls
2,251.6m
Annual Change
89.0m (4.1%)
2014 Forecast
83.1m (3.8%)
2015 Forecast
91.9m (4.1%)
2016 Forecast
77.7m (3.3%)
2017 Forecast
58.9m (2.4%)
Unemployment (NSA)
5.5% (Aug.)
OCCUPANCY RATE SUMMARY
RED 50 Rank
95.3%
33rd
Annual Chg. (Reis)
+0.5%
RCR YE14 Forecast
94.3%
RCR YE15 Forecast
95.1%
RCR YE16 Forecast
94.4%
RCR YE17 Forecast
93.3%
Mean Rent (Reis)
$846
Annual Change
3.9%
13th
RCR YE14 Forecast
4.0%
RCR YE15 Forecast
5.4%
RCR YE16 Forecast
4.0%
RCR YE17 Forecast
3.6%
TRADE & RETURN SUMMARY
$5mm+ Sales
43
Approx. Proceeds
$1.0bn
Avg. Cap Rate (FNM)
6.8%
Avg. Price/Unit
RED 46 ETR Rank
A degree of cooling was evident in preliminary summer numbers.
Most notably, August’s 12-month payroll comparison slowed to
74,900 jobs, smallest metric since March; and seasonally-adjusted
data were commensurate, recording a 7,200-job net gain in July
and a -1,900-job sequential month decline in August.
RED Research specified a forecast equation with a 98.9% adjusted-R2 using national payroll and metro personal income growth,
inflation and the federal funds rate as independent variables and
two lags of the dependent. Adjusting for 3Q14’s sluggish start the
model projects an 83,100-job, 3.8% net payroll gain for 2014,
which will be the largest vintage since 1998. Hiring should peak
next year with a full-year gain of 91,900 jobs, exceeded only once
before in the Dallas series (1997). Growth is likely to subside in the
out years, however, as the U.S. recovery reaches its late stage.
2Q14 ABSORPTION AND OCCUPANCY RATE TRENDS
Apartment demand was modesty lower during 2Q14, reflecting
competition from for-sale housing in the booming Dallas market.
Residents net leased 2,105 vacant units April to June, down from
2,681 and 2,331 in the prior and year-earlier quarters, respectively.
Concurrently, supply levels rebounded from the first quarter’s six
quarter low 1,580 units to 2,353. Metro occupancy was unchanged
sequentially as a result, but up 50 basis points year-over-year at
95.3%, an equal 13-year market high level.
Axiometrics surveys of 948 seasoned properties recorded a 94.8%
average 2Q14 occupancy rate, up 50 bps sequentially and 10 bps
year-on-year. Class-B properties posted the highest average
occupancy (95.1%), followed by classes-A (94.7%) and –C (93.8%).
Of 23 major submarkets only three record average occupancy
outside of a 94% - 96% range: Richardson (96.1%) South Dallas
(93.7%) and Far Northeast (90.2%). New unit lease-up appeared to
continue at a constructive pace as recent construction assets
absorbed an average of 17 units per month during the quarter.
The RCR demand model uses vacancy, supply, payroll, rent and
home price variables to achieve a 96.1% A-R2. The model projects
annual absorption of more than 10,000 units in 2014 and 2015,
keeping pace with supply. But demand is expected to lose momentum in 2016, setting the stage for a 250 bps rate drop by 2018.
2Q14 EFFECTIVE RENT TRENDS
EFFECTIVE RENT SUMMARY
RED 50 Rent Change Rank
The Dallas labor market continued to defy gravity during the
second quarter as establishments hired at the fastest rate of
growth recorded in fourteen years. Employers added workers at
an 89,000-job, 4.1% year-over-year rate, up sharply from 1Q’s
71,300-job, 3.4% advance. Faster growth was largely attributable
to expansion among construction and business services concerns.
Headcounts in the former grew at a 10,800-job, 9.7% annual pace,
up from 6,400/5.9% in 1Q14, while the latter expanded at an
incredible 25,800-job, 6.8% rate, up from 1Q’s strong 14,400-job,
3.9% performance and unequaled since 1996.
$95,333
7.6%
11th
Risk-adjusted Index (RAI)
8.80
RED 46 RAI Rank
2 nd
Reis report that metro rents increased an average of $7 (0.8%)
sequentially and $32 (3.9%) year-on-year to $846. It was the 9th
consecutive quarter of 3% or faster y-o-y growth, an accomplishment last achieved in 2001. Properties located in the north suburban submarkets were largely responsible, led by Lewisville, Denton
County, Plano and Richardson. Each posted annual effective rent
growth of 4% or more during the second quarter.
Axiometrics surveys of larger, stabilized properties produced
similar results. Same-store y-o-y rent growth among all stabilized
buildings was 3.7%. Properties continuously surveyed since 2007
posted a 4.2% y-o-y gain. North suburban submarkets were a
principal momentum source in this survey universe as well, but
suburban submarkets south of I-30 also reported strong gains;
most notably Grand Prairie, Mesquite and Southwest Dallas. Each
notched 5.9% or greater growth. By contrast, class-A assets
recorded the slowest growth (2.8%), especially in infill Oaklawn,
where luxury property rents increased less than 1% y-o-y.
The RCR rent model (R2=98.5%) employs payroll, home price,
personal income and GDP growth as independent variables, plus five
lags of the dependent variable. The model projects 3.9% compound
annual rent growth over 5 years, ranking 10th among the RED 46
and 2nd among the Growth Market group after Houston (4.2%).
2Q14 PROPERTY MARKETS AND TOTAL RETURNS
A total of 43 apartment properties of 120 units or larger were sold
during the second quarter, up from 31 transactions during 1Q14, but
short of the 74 sales recorded during the frenzied fourth quarter
last year. The average price of units sold for which price information was available was $95,333, up from $69,683 and $80,961
during 1Q14 and 4Q13, respectively. Based on the known average
price of IH14 transactions, sales proceeds approached $1.0 billion
during the second quarter, up from about $780mm in 1Q14.
Investors using third party funds focused largely on assets located
in submarkets north and west of Central Dallas, especially in the
Plano to Lewisville corridor, and in rapidly developing Rockwall.
Buyers included public and private REITs, integrated owner /
managers, private equity players and funds. Sellers included similar entities and a handful of merchant developers and pension fund
advisors. Institutional quality assets traded to 5% to 6% cap rates,
with recent construction mid-rise assets at the low-end of the
range. Class-B / B– buildings attracted a narrower audience and
commanded prices equating to initial yields in the 6% to 8% range.
RCR elected to retain a 5.5% generic cap rate for Dallas properties. Employing this purchase cap rate, model derived rent and
occupancy projections and a 6.2% terminal cap rate, we estimate
that an investor would expect to achieve a 7.6% 5-year, unlevered
IRR, 11th, highest among the RED 46 and 110 bps above the group
mean. Low model error supports #2 ranked risk-adjusted index.
Average Occupancy
97%
RED 46 AVERAGE
DALLAS (REIS/RCR)
97%
95.3%
94.3%
95%
95%
95.1%
94.4%
93%
93%
93.3%
92.7%
91%
91%
89%
89%
2010
2011
2012
2013
2014
2015f
2016f
2017f
2018f
Units (T12 Months)
17,500
ABSORPTIONS
COMPLETIONS
15,000
12,500
10,000
7,500
5,000
2,500
0
2010
2011
2012
2013
2014
2015f
2016f
2017f
2018f
Average Cap Rate
8.0%
7.5%
7.0%
WEST SO CENT REGION
6.7% 6.9%
6.8%
DALLAS
6.8%
6.3%
6.5%
6.5%
6.7%
6.6%
6.1%
6.5%
6.8%
6.8%
6.6%
6.0%
5.5%
5.8%
5.8%
5.0%
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14
Property Class/Type
(Constr.)
Approx. Date of
Transaction
Cityscape at Market Center (Far North)
A- / MR (2013)
Encore 6162 (Far Northwest)
B+ / MR (2014)
Preserve at Arbor Hills (Plano)
A- / GLR (2000)
Mission at La Villita (North Irving)
A- / GLR (2004)
Estancia at Vista Ridge (Lewisville)
B+ / GLR (2003)
Total Price /
(in millions)
Price /
per unit
14-Jun-2014
$70.1
$154,405
5.0% / 6.0% p.f.
9-Jul-2014
$36.7 (Allocated)
$127,380
6.5% pro forma.
30-Aug-2014
$41.0
$124,242
6.5%
4-Sep-2014
$48.5
$134,722
5.1%
25-Sep-2014
$42.6 (Allocated)
$142,000)
5.3%
RED Capital Research | October 2014
Estimated
Cap Rate
Dallas Effective Rent Trends
Sources: Reis, Inc., Axiometrics and RCR Forecast
6%
6%
5.4%
YoY Rent Trend
RED 46 AVERAGE
5%
DALLAS (REIS/RCR)
3.9%
5%
4.0%
4.0%
4%
3.6%
2.9%
4%
3%
3%
2%
2%
1%
1%
2011
2012
2013
2014
2015f
2016f
2017f
2018f
Source: FHFA Home Price Indices and RCR Forecasts
9.1%
YoY Growth Trend
10.0%
9.2%
9.6%
8.6%
7.9%
7.9% 10.0%
7.5%
7.5%
5.0%
5.0%
2.5%
2.5%
0.0%
0.0%
-2.5%
-2.5%
US FHFA HPI
DALLAS FHFA HPI
-5.0%
-5.0%
2011
2012
2013
2014
2015
2016
2017
2018
Source: BLS, BEA Data, RCR Forecasts
YoY Growth Trend
5%
US GDP GROWTH
4.1%
US JOB GROWTH
4%
5%
3.8%
3.9%
4%
3.2%
DALLAS JOB GROWTH
3%
2.1%
3%
1.8%
2%
2%
1%
1%
0%
0%
2011
2012
2013
2014
2015
2016
2017
2018
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been
independently verified or accepted by RED Capital Group. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information
gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to
participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED Capital Research | October 2014
SUBMARKET TRENDS (REIS, INC.)
Effective Rent
Submarket
Physical Vacancy
2Q13
Carrollton / Addison / Coppell
2Q14
Change
2Q13
2Q14
Change
$798
$824
3.3%
3.8%
3.6%
-20 bps
$1,730
$1,779
2.8%
6.4%
6.8%
40 bps
East Dallas
$868
$896
3.3%
7.0%
7.3%
30 bps
Far North
$811
$838
3.4%
3.1%
2.3%
-80 bps
Central Dallas
Far Northeast
$598
$621
3.8%
8.2%
6.1%
-210 bps
Far Northwest
$688
$708
2.8%
4.3%
3.8%
-50 bps
Garland
$680
$701
3.2%
3.6%
3.7%
10 bps
Grand Prairie
$672
$680
1.2%
5.4%
4.5%
-90 bps
Lewisville
$875
$910
4.0%
6.8%
7.3%
50 bps
$683
$703
2.8%
4.7%
3.2%
-150 bps
North
$835
$849
1.7%
3.7%
2.2%
-150 bps
North Irving
$853
$884
3.6%
3.9%
3.4%
-50 bps
North White Rock
$667
$690
3.3%
5.6%
4.8%
-80 bps
Northwest
$880
$907
3.1%
6.8%
7.7%
90 bps
Northwest Denton County
$890
$939
5.5%
6.3%
6.3%
0 bps
Oaklawn
$1,218
$1,242
1.9%
3.5%
4.3%
80 bps
$952
$998
4.8%
4.4%
4.3%
-10 bps
Richardson
$821
$856
4.2%
4.4%
4.6%
20 bps
South
$731
$739
1.1%
14.3%
10.7%
-360 bps
South County
$693
$707
2.1%
4.3%
4.5%
20 bps
South Irving
$677
$695
2.6%
4.0%
3.0%
-100 bps
South White Rock / Interstate-30
$612
$632
3.3%
8.3%
6.0%
-230 bps
Southeast Dallas
$561
$569
1.4%
7.3%
5.1%
-220 bps
Southwest Dallas
$672
$688
2.4%
7.0%
6.5%
-50 bps
$814
$846
3.9%
5.2%
4.7%
-50 bps
Dallas Metro
FOR MORE INFORMATION ABOUT RED’S RESEARCH CAPABILITIES CONTACT:
Daniel J. Hogan
James P. Hensley
[email protected]
+1.614.857.1416 office
+1.800.837.5100 toll free
Senior Managing Director
Head of Multifamily Originations
[email protected]
+1.770.753.6472 office
+1.800.837.5100 toll free
THE FACE OF LENDING
RED Capital Group, LLC  RED Mortgage Capital, LLC  RED Capital Markets, LLC (Member FINRA/SIPC)  RED Capital Partners, LLC
Two Miranova Place, Columbus, Ohio 43215
 redcapitalgroup.com  +1.800.837.5100
© 2014 RED Capital Group, LLC
RED CAPITAL GROUP® | MARKET OVERVIEW
Dallas, Texas
Multifamily Housing Update 1Q14 July 2014
Payroll Job Summary
Total Payrolls
2,198.3m
Annual Change
71.3m(3.4%)
2014 Forecast
75.5m
2015 Forecast
82.9m
2016 Forecast
78.9m
2017 Forecast
61.8m
Unemployment
5.1% (May)
1Q14 Payroll Trends and Forecast
While labor markets in much of the country suffered from cold weather and tight-fisted consumers, Dallas recorded its strongest growth of the
post-recession period. Payroll employment increased at a 71,300-job, 3.4% year-on-year rate
during 1Q14, up from 4Q13’s 57,700-job advance. Strength was derived largely from consumer driven and skilled services sectors as construction, retail trade and leisure service headcounts
surged at a 4.8% y-o-y rate and business and
health care service establishments added 22,400
workers (3.5%), up from 14,900 (2.3%) during the
Occupancy Rate Summary
1Q14 Absorption and Occupancy Rate Trends
95.3%
RED 50 Rent Chg. Rank
38th
Apartment demand was commensurate with economic performance as Dallas tenants occupied a
net of 2,460 vacant units, the third highest winter
quarter total since 2001. As developers completed only 1,242 new units, metro occupancy improved 20 basis points sequentially and 50 bps
year-on-year to 95.3% (Reis), a 13-year high. Gains
were especially strong in southern submarkets
where occupancy rates rose as much as 130 bps.
Annual Chg. (Reis)
+0.5%
RCR YE14 Forecast
94.2%
RCR YE15 Forecast
94.7%
RCR YE16 Forecast
94.8%
RCR YE17 Forecast
94.6%
Effective Rent Summary
Mean Rent (Reis)
$838
Annual Change
3.8%
RED 50 Rent Chg. Rank
14St
RCR YE14 Forecast
4.6%
RCR YE15 Forecast
4.5%
RCR YE16 Forecast
3.9%
RCR YE17 Forecast
2.5%
Trade & Return Summary
$5mm+ Sales
Approx. Proceeds
Avg. Cap Rate (FNM)
Avg. Price/Unit
34
$914mm
6.6%
$82,369
7.8%
RED 46 ETR Rank
21th
Risk-adjusted Index
5.08
RED 46 RAI Rank
5th
Axiometrics surveys of large stabilized same-store
properties recorded a 94.2% occupancy rate, un-
previous quarter. Likewise, seasonally-adjusted
data were outstanding, indicating that employers
created 37,400 payroll jobs January to March,
representing the largest quarterly gain ever recorded in the 25-year Dallas BLS data series.
RCR’s Dallas payroll model is fairly simple, relying
on two lags of the dependent variable, U.S. payroll
trends, metro income growth and 10-year UST
yields as variables. The 98.7% R2 model projects
powerful economic performance through 2016,
with only moderate deceleration to the low– to
mid-2% range during the forecast out-years.
changed sequentially but up 190 bps year-onyear. Class-B assets posted the highest occupancy (94.8%), followed by class-A (94.1%) and classC (92.8%) properties. Although Axio surveyed 41
properties still in lease-up, demand was intense
as properties absorbed an average of 16 units per
month to achieve 86.3% average occupancy,
We expect annual absorption to remain above the
10,000-unit mark through 2015, but it won’t keep
pace with vast supply. Occupancy is likely to fall
about 100bps this year before recovering in 2015.
1Q14 Effective Rent Trends
Metro sequential rent growth slowed from 3Q and
4Q13’s stellar consecutive $9 (1.1%) surges, but
continued at a brisk tempo, rising $6 (0.7%) to an
$838 average (Reis). Expressed on a year-on-year
basis, rents were 3.8% higher, representing the
fastest annual growth recorded since 4Q12. Axiometrics surveys were consistent, finding sequential and y-o-y gains of 0.6% and 3.8%, respectively.
Class B&C assets did the heavy lifting, rising 4.3%
and 5.8%, respectively, year-on-year, according to
Axiometrics. Class-A properties, by contrast, saw
rents decline sequentially and advance only 1.0%
y-o-y, reflecting developing downward price pressure due to new supply competition. Largely classA Oaklawn experienced the sharpest declines
among submarkets as average effective rents
receded –1.0% in sequential quarters.
Statistically significant variables in the RCR rent
model include metro personal income, home prices and job growth and U.S. GDP gains. The 98.5%
adj-R2 model yields a robust forecast, foreseeing
probable gains in the 4% to 5% range for 2014
and 2015, creating the preconditions for strong
total returns, irrespective of occupancy attrition.
1Q14 Property Markets and Total Returns
After closing apartment property sales at a pace
faster than one deal per business day during
4Q13, trade cooled off to a degree over the winter.
Investors acquired 34 properties of 80 or more
units during 1Q14 for proceeds of approximately
$900 million. The average price of sold units was
$82,369, up from $76,396 in the year earlier
period but down from 4Q’s record $96,148. Investors were active throughout the metro area,
but the triangle formed by Carrollton, Plano and
Richardson received the most attention with ten
large first quarter transaction recorded.
Domestic and Canadian institutional investors bid
aggressively for Dallas trophies. Cap rates for
quality infill and north suburb assets fell to the
high-4%/low-5% area, but standard class-B product continued to trade in the 6% to 7% range.
In light of intensifying competition for Dallas assets, we trimmed the generic cap rate 25 bps to
5.5%. Emloying a 6.2% terminal cap and model
derived occupancy and rent forecasts, we estimate an investor would expect to achieve a 7.8%
5-year, unlevered IRR; ranking RED 46 #21.
MARKET OVERVIEW 1Q14 | DALLAS, TEXAS
RED 46 AVERAGE
Average Occupancy Rate
96%
DA L L A S
95%
94%
95.3%
94.7%
94.2%
94.9%
94.3%
93%
93.9%
92%
91%
90%
89%
4Q09
4Q10
4Q11
4Q12
4Q13
4Q14f
4Q15f
4Q16f
4Q17f
4Q18f
Units (T12 Months)
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
-2,000
4Q09
ABSORPTIONS
4Q10
4Q11
4Q12
4Q13
4Q14f
4Q15f
COMPLETIONS
4Q16f
4Q17f
4Q18f
Average Cap Rate
7.5%
7.0%
W EST SO CENT R EGI ON
6.7%
6.8%
6.8%
6.9%
6.7%
5.8%
6.0%
6.6%
6.6%
6.5%
6.3%
6.5%
7.3%
DALLA S
6.5%
6.1%
5.8%
5.5%
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
Property Class/
Type (Constr.)
Approx. Date of
Transaction
Total Price /
<Appr. Value>
(in millions)
Price /
<Appr. Value>
per unit
Estimated
<Underwritten>
Cap Rate
B- / GLR (1983)
20-Dec-2013
$20.4
$68,890
6.4% (FNM)
A / MR (2013)
21-Dec-2013
$76.3
$214,185
4.5% p.f.
Pavilion Townplace (Northwest/Greenway) A / GLR (2001)
22-Jan-2014
$56.0
$237,288
5.0%
Soho Parkway (Plano / McKinney)
A-/ GLR (2007)
29-Mar-2014
$41.3
$108,971
4.8%
Chisholm Place (Plano / McKinney)
B / GLR (1981)
3-May-2014
$15.6
$109,528
6.2%
Creekside on the Green (Garland)
Cityville Cityplace (East Dallas / Cityplace)
RED CAPITAL Research | July 2014
Sources: Reis, Inc., Axiometrics, RCR Forecast
10%
YoY Rent Trend
8%
3.8%
6%
4.7%
4.4%
3.9%
4%
2%
2.5%
0%
-2%
RED 46 AVERAGE
DALLAS AXIOMETRICS SAME-STORE
DALLAS (REIS/RCR)
-4%
-6%
4Q09
2.4%
4Q10
4Q11
4Q12
4Q13
4Q14f
4Q15f
4Q16f
4Q17f
4Q18f
Source: FHFA Home Price Indices and RCR Forecasts
10.0%
Y-o-Y % Change
8.0%
8.2%
6.0%
4.0%
7.5%
5 . 1%
2.0%
9.3%
8.6%
4.2%
3.3%
0.0%
-2.0%
U.S.A.
9.5%
9.1%
1. 7 %
0.7%
DALLAS
-4.0%
2011
2012
2013
2014f
2015f
2016f
2017f
2018f
Source: BLS, Institute for Economic Competitiveness at UCF & RCR
4.0%
Y-o-Y % Change
3.5%
3.7%
3.0%
3.4%
2.5%
3.3%
U.S.A.
2.0%
3.7%
DALLAS
2.3%
2.3%
1.5%
1.0%
0.5%
0.0%
2011
2012
2013
2014
2015f
2016f
2017f
2018f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or
financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been
gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report.
RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party
sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to
SUBMARKET TRENDS
Submarket
Central Dallas
Effective Rent
Physical Vacancy
1Q13
1Q14
Change
1Q13
1Q14
Change
$792
$818
3.3%
4.2%
3.8%
-40 bps
$1,713
$1,753
2.3%
5.8%
5.7%
-10 bps
East Dallas
$856
$893
4.3%
7.4%
7.8%
40 bps
Far North
$806
$834
3.5%
3.2%
2.4%
-80 bps
Far Northeast
$598
$616
3.0%
7.7%
6.4%
-130 bps
Far Northwest
$681
$704
3.4%
4.5%
4.3%
-20 bps
Garland
$675
$699
3.7%
3.8%
3.9%
10 bps
Grand Prairie
$666
$675
1.3%
5.5%
4.9%
-60 bps
Lewisville
$871
$904
3.8%
6.7%
6.3%
-40 bps
Mesquite / Seagovlle
$680
$696
2.4%
5.4%
3.5%
-190 bps
North
$826
$846
2.4%
4.1%
2.4%
-170 bps
North Irving
$843
$881
4.5%
3.6%
3.7%
10 bps
North White Rock
$666
$679
2.0%
5.9%
4.5%
-140 bps
Northwest
$873
$900
3.1%
7.3%
6.5%
-80 bps
Oaklawn
$881
$930
5.5%
6.4%
6.6%
20 bps
$1,213
$1,241
2.3%
3.8%
4.3%
50 bps
$943
$991
5.0%
4.2%
4.0%
-20 bps
Richardson
$811
$852
5.0%
3.7%
4.7%
100 bps
South
$733
$744
1.5%
15.5%
11.1%
-440 bps
South County
$691
$706
2.1%
4.5%
4.8%
30 bps
South Irving
$672
$689
2.5%
4.4%
3.2%
-120 bps
$608
$626
3.0%
8.4%
6.3%
-210 bps
Southeast Dallas
$560
$567
1.4%
8.8%
5.5%
-330 bps
Southwest Dallas
$666
$684
2.7%
6.9%
6.4%
-50 bps
$807
$838
3.8%
5.2%
4.7%
-50 bps
Metro
A 10,000-iteration Monte Carlo simulation suggests that investors have only a
2.5% probability of realizing an annual
total rate of return less than 5%, hence
the strong risk-adjusted return metric.
RED CAPITAL GROUP
For more information about RED’s research capabilities contact:
Daniel J. Hogan, Director of Research
[email protected]
614.857.1416
James P. Hensley, Senior Managing Director
Head of Mortgage Origination
[email protected]
770.753.6472
Dallas, Texas
Multifamily Housing Update 3Q13 January 2014
Payroll Job Summary
Total Payrolls
2,214.3m
Annual Change
54.4(2.5%)
2014 Forecast
51.8m
2015 Forecast
69.8m
2016 Forecast
77.9m
2017 Forecast
78.6m
Unemployment
5.7% (Nov.)
After posting a 13-year best 76,200-job, 3.6%
year-over-year payroll growth metric during 3Q13,
the Dallas labor encountered a speed bump in the
fall quarter. The pace of job creation slowed to
54,400 (2.5%), representing the slowest advance
posted in almost two years. Skilled service industries were largely responsible as financial, business and health care service gains slowed from
42,500 (5.4%) during 3Q to 28,300 (3.5%) in 4Q.
The trend change in the seasonally-adjusted series was still more dramatic. After recording a
19,900-job add during 3Q13, employment growth
Powerful economic and demographic growth
trends continued to fuel exceptional space demand in 3Q13 as Dallas renters occupied a net of
2,646 (Reis) units, up from 2,340 and 1,612 in
the prior and year-earlier quarters, respectively.
Supply largely offset the gain, however, as developers completed 2,216 units, limiting the improvement in occupancy to 20 basis points (70
bps year-over-year). Axiometrics surveys found
that stabilized properties had a 94.5% occupancy
rate, up 40 bps sequentially and 190 bps y-o-y.
95.0%
RED 50 Rank
38th
Annual Chg. (Reis)
0.7%
RCR YE13 Forecast
94.6%
RCR YE14 Forecast
93.9%
RCR YE15 Forecast
94.0%
RCR YE16 Forecast
94.2%
Mean Rent (Reis)
$822
Annual Change
3.0%
RED 50 Rank
21st
RCR YE13 Forecast
3.1%
RCR YE14 Forecast
3.4%
RCR YE15 Forecast
4.0%
RCR YE16 Forecast
4.3%
$5mm+ Sales
Approx. Proceeds
Avg. Cap Rate (FNM)
Avg. Price/Unit
RED 46 ETR Rank
Risk-adjusted Index
RED 46 RAI Rank
46
$1.1bn
6.1%
$78,110
9.4%
1st
4.36
6th
slipped into the negative column in 4Q13, plunging -4,000 jobs October through December.
The RCR Dallas payroll model assigns one of the
largest coefficients to the first lag of the dependent variable. As a result of the weak 4Q13 datum,
the model projects another two quarters of below
trend (2.1%) job creation. But the model forecasts stronger conditions after mid-year, generating a FY14 outcome in line with observed 2011
and 2012 results. The out-years promise considerably more robust conditions, with annual adds
rising to 65,000 to 80,000 jobs 2016—2018.
The class-A sector was moderately stronger as
196 luxury properties were 95.3% occupied in 3Q,
against 94.8% for 784 B&C assets. Conversely,
Infill assets experienced attrition. Occupancy in
East Dallas and Oaklawn slipped 20 bps sequentially and 80 bps year-on-year to a 95.2% average.
RCR models suggest that supply will outrun demand in 4Q13 and 2014, producing a roughly
100 bps decrease in occupancy. Market conditions should stabilize in 2015, with moderate improvement in the cards thereafter.
Effective rent growth accelerated during 3Q13,
and preliminary 4Q13 data suggest that positive
momentum carried into the fall. Rents increased
$8 (1.0%) sequentially and $24 (3.0%) year-onyear (Reis), up from $7 (0.9%) and $24 in the prior
quarter. Asking rents preliminarily advanced $9
(1.0%) to $905 in 4Q13, suggesting a 1.0% - 1.1%
effective rent gain. By way of comparison, Axiometrics same-store data translate to $13 (1.4%) and
$37 (4.0%) sequential and y-o-y increases, rather
slower than 2Q’s 2.3% and 4.8% advances.
Class-A properties lagged, notching same-store
gains of just 2.8% y-o-y compared to 4.4% for B&C
assets. Infill assets posted above average gains
as East Dallas and Oaklawn properties chalked
down 1.7% and 3.5% sequential and y-o-y hikes.
Personal income, job and home price growth are
the statistical keys to Dallas rent trends. Our models are sanguine on each, producing a robust rent
forecast. We expect rents to rise 3.1% to 4.5%
annually through 2018, generating a 4.1% compound annual growth rate, RED 46 7th fastest.
Dallas was a favorite among investors as well as
RED forecasting models. Buyers acquired 46 metro assets in single property transactions during 3Q
as well as a host of others in portfolio deals. Proceeds are likely to have totaled over $1 billion,
with the average unit exchanging hands at approximately $78,110. Sales continued to accelerate in
4Q as investors transacted on 61 single-property
deals for proceeds in the $1.1bn area.
Institutional investor interest focused primarily on
North Dallas and Collin County suburban garden
projects. Prices for B+/A units hovered in the
$110,000 to $140,000 range, generating going in
yields in the mid– to high-5% area. Cap rates for
B&C assets remained in the 7.0%-8.5% range.
Employing 5.8% and 6.4% going-in and terminal
cap rate assumptions and our model derived rent
and occupancy forecasts, RCR estimate that Dallas investors may expect to achieve a 9.4% fiveyear rate of return, ranked first among the R46,
nipping Fort Worth by a few basis points. Likewise,
the risk-adjusted index is constructive at group #6.
RED 46 AVERAGE
Average Occupancy Rate
96%
Sources: Reis History, RCR Forecasts
DA L L A S (REIS HISTORY / RC R FOREC A ST)
95%
95.0%
94%
93.9%
93%
94.2% 94.3%
94.1%
94.0%
92%
91%
90%
89%
3Q 07
3Q 08
3Q 09
3Q 10
3Q 11
3Q 12
3Q 13
3Q 14
3Q 15
3Q 16
3Q 17
3Q 18
Units (T12 Months)
18,000
ABSORPTIONS
15,000
COMPLETIONS
12,000
9,000
6,000
3,000
0
3Q 07
3Q 08
3Q 09
3Q 10
3Q 11
3Q 12
3Q 13
3Q 14
3Q 15
3Q 16
3Q 17
3Q 18
Average Cap Rate
7.0%
WEST SO CENT REGION
DA L L A S
6.5%
6.0%
6 .8 %
6 .7 %
6 .9 %
6 .3 %
6 .8 %
6 .5 %
5 .8 %
6 .7 %
6 .6 %
6 .1%
6 .5 %
1Q13
2Q13
3Q13
4Q13
5 .8 %
5.5%
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
Property Class/
Type (Constr.)
Date of
Transaction
Total Price /
<Appr. Value>
(in millions)
Price /
<Appr. Value>
per unit
Estimated
<Underwritten>
Cap Rate
Greenhaven (Plano / McKinney)
B+/GLR (2009)
30-Jul-2013
$23.5
$108,796
5.9%
Bella Vida Estates (Plano / McKinney)
The Domaine (Plano / McKinney)
A- / GLR (2001)
A / GLR (1998)
20-Aug-2013
12-Sep-2013
$70.0
$38.5
$127,737
$140,511
5.5%
5.8%
The Rienzi (Oaklawn / Turtle Creek)
A+ / MR (2000)
29-Sep-2013
$48.9
$321,711
5.8%
Carrollton Garden Apt (Carrollton/Addison)
B-/GLR (1982)
Nov-2013
<$15.0>
<$58,594>
<6.1%>FNM Refi
RED CAPITAL Research | January 2014
9%
YoY Rent Trend
6%
4. 1%
3. 8%
3. 1%
4. 5%
4. 6%
3Q 17
3Q 18
3%
0%
RED 46 AVERAGE
DALLAS AXIOMETRICS SAME-STORE
DALLAS (REIS HISTORY / RCR FORECAST)
-3%
-6%
3Q 07
3Q 08
3Q 09
3Q 10
3Q 11
3Q 12
3Q 13
3Q 14
3Q 15
3Q 16
Sources: FHFA Home Price Indices and RCR Forecasts
8%
Y-o-Y % Change
6%
4%
2%
0%
-2%
U.S.A.
-4%
DALLAS
-6%
2011
2012
2013f
2014f
2015f
2016f
2017f
Sources: BLS, Institute for Economic Competitiveness at UCF & RCR
4.0%
Y-o-Y % Change
3.5%
3.0%
2.5%
U.S.A.
2.0%
DALLAS
1.5%
1.0%
0.5%
2011
2012
2013f
2014f
2015f
2016f
2017f
gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report.
RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party
sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to
SUBMARKET TRENDS
Effective Rent
Submarket
3Q12
Physical Vacancy
3Q13
Change
3Q12
3Q13
Change
$784
$819
4.5%
4.6%
4.0%
-60 bps
$1,691
$1,752
3.6%
5.6%
6.2%
60 bps
East Dallas
$835
$880
5.4%
5.1%
7.8%
270 bps
Far North
$800
$816
2.0%
3.9%
2.9%
-100 bps
Far Northeast
$591
$600
1.4%
8.8%
7.9%
-90 bps
Far Northwest
$674
$691
2.6%
5.2%
4.1%
-110 bps
Garland
$664
$675
1.7%
4.3%
3.4%
-90 bps
Grand Prairie
$657
$672
2.3%
5.1%
5.0%
-10 bps
Lewisville
$871
$882
1.4%
6.6%
6.6%
0 bps
$679
$688
1.4%
5.9%
4.4%
-150 bps
North Dallas
$814
$845
3.8%
4.4%
3.6%
-80 bps
North Irving
$834
$864
3.6%
4.6%
3.6%
-100 bps
North White Rock
$661
$672
1.6%
7.0%
5.4%
-160 bps
Northwest
$869
$892
2.7%
6.4%
7.5%
110 bps
Central Dallas
Norwest Denton County
$866
$893
3.2%
6.2%
6.0%
-20 bps
$1,221
$1,222
0.0%
5.2%
3.3%
-190 bps
Plano /Allen / McKinney
$927
$963
3.9%
4.7%
4.3%
-40 bps
Richardson
$802
$824
2.7%
4.4%
4.3%
-10 bps
South Dallas
$716
$738
3.1%
15.4%
14.0%
-140 bps
Oaklawn
South Dallas County
$695
$696
0.0%
6.4%
4.6%
-180 bps
South Irving
$666
$678
1.9%
4.1%
3.8%
-30 bps
South White Rock/I-30
$600
$614
2.3%
9.0%
7.9%
-110 bps
Southeast Dallas
$555
$565
1.8%
8.1%
6.9%
-120 bps
Southwest Dallas
Metro
$662
$678
2.4%
7.3%
6.7%
-60 bps
$798
$822
3.0%
5.7%
5.0%
-70 bps
[email protected]
614.857.1416
RED CAPITAL GROUP
James P. Hensley, Senior Managing Director
Head of Mortgage Origination
[email protected]
770.753.6472
Dallas, Texas
Multifamily Housing Update 1Q13 July 2013
Payroll Job Summary
Total Payrolls
2,148.0m
Annual Change
71.4m(3.4%)
2013 Forecast
65.0m
2014 Forecast
52.9m
2015 Forecast
57.9m
2016 Forecast
50.3m
Unemployment
6.3% (May)
Dallas employers followed 4Q12’s blistering
70,500-job, 3.4% rate of payroll expansion with a
faster 71,400-job advance during 1Q13, representing the largest over-the-year gain recorded in
13 years. Consumer spending fueled the boom as
construction, retail trade and leisure services establishments hired workers at a 29,300-job, 5.8%
annual pace, up 50% since 3Q12. At the same
time, the foundation skilled services industries
sustained a brisk rate of growth, adding 34,900
(4.3%) employees year-over-year.
Preliminary data suggest that the second quarter
Rapid job creation gave rise to powerful apartment demand. Dallas households absorbed 2,339
vacant units during the first quarter, according to
Reis, up from 1,684 and 1,871 during the prior
and year-earlier quarters, respectively. Accounting
for delivery of 1,498 new units, average occupancy increased 30 basis points sequentially and 80
bps year-over-year to 94.8%, a 12-year high.
RED 50 Rank
94.8%
39Th
Annual Chg. (Reis)
+0.8%
RCR YE13 Forecast
93.7%
RCR YE14 Forecast
93.4%
RCR YE15 Forecast
92.6%
RCR YE16 Forecast
92.6%
Mean Rent (Reis)
$807
Annual Change
3.6%
RED 50 Rank
17Th
RCR YE13 Forecast
3.9%
RCR YE14 Forecast
3.7%
RCR YE15 Forecast
3.6%
RCR YE16 Forecast
3.0%
$3mm+ Sales
Approx. Proceeds
Median Cap Rate (FNM)
Avg. Price/Unit
36
$725mm
7.0%
$73,093
8.4%
RED 46 ETR Rank
19Th
Risk-adjusted Index
3.00
RED RAI Rank
32nd
Neighborhood performance was broadly mixed as
14 of Dallas’s 24 Reis-defined submarkets posted
sequential quarter occupancy gains and nine re-
got off to a good start. Seasonally-adjusted payrolls increased by 12,500 during April and May, a
solid improvement from 1Q13’s 9,000-job gain.
The RCR Dallas payroll model is influenced by two
lags of the dependent variable, GDP growth and
the acceleration of US payroll and local personal
income growth rates. Each is a constructive factor,
contributing to a forecast for sustained job growth
in the 2.2% to 3.3% range through 2017. By the
numbers, we expect Dallas MD to produce 65,000
jobs this year, followed by 50,000- to 60,000-job
advances during each of the following four years.
ported declines. Supply was concentrated in the
infill East (435 units) and Central (456) Dallas
submarkets. Both areas enjoyed robust tenant
demand. Axiometrics data indicate that new midrise properties located in urban neighborhoods
tenanted an average of 25 to 30 units per month.
RCR models indicate that the Dallas inventory is
likely to continue to expand at a 2.2% to 2.8%
annual rate through 2017. Demand is not likely to
keep pace, causing average occupancy to decline
200 bps over the course of the 5-year forecast.
Average metro rents increased $5 (0.7%) sequentially to $807 during 1Q13, a moderate acceleration from 4Q12’s $4 (0.5%) advance. Effective
rent growth expressed on a year-over-year basis
slowed, however, increasing $28 (3.6%), down
from the prior quarter’s $31 (4.0%) increase and
the slowest growth pace in four quarters. Axiometrics same store data indicate that larger Dallas
properties recorded an average 4.2% y-o-y effective rent increase in 1Q13 following 4.7% advances in each of the prior two quarters.
Addition of new, luxury units to the Central (2.1%)
and East (1.4%) Dallas, Northwest Denton (1.3%)
and South Irving (1.1%) fueled fast average rent
growth in these submarkets. Garland, by contrast,
chalked down a 1.3% gain on a same store basis.
The RCR Dallas rent model is influenced by lags of
the dependent variable and job, income and GDP
growth. The latter three are constructive leading
the equation to forecast a reacceleration of rent
growth in 2H13 and 2014. Growth rates above
3% are foreseen throughout the five-year forecast.
Rapid sales velocity continued during the seasonally slower winter quarter as investors aggressively
accumulated Dallas multifamily real estate. At
least 36 larger properties exchanged hands for
proceeds totaling approximately $725 million.
Available data suggest that units traded at an
average price of about $73,000.
Class-A and well-located class-B properties were
priced to yields in the high-5% to low-6% area.
Cap rates for class-B assets in secondary submarkets were mostly in the mid-6% to 7% range.
Preliminary data suggest that the second quarter
was, perhaps, the most active ever. At least 65
large property transactions were closed and total
proceeds are likely to have exceeded $1.3 billion.
RCR continue to believe 6.0% now represents a
reasonable cap rate for institutional quality Dallas
assets. Using this purchase cap rate, a 6.52%
terminal cap rate and 4.2% projected annual NOI
growth, we estimate 5-year unlevered expected
returns of 8.4%, 19th among the R46. and a 3.00
risk-adjusted index ranking 32nd among the peers.
Metro Occupancy Rate Trends
Metro Occupancy Rate
97%
RED 46 AVERAGE
96%
DALLAS
95%
94%
93%
92%
91%
90%
89%
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q 12
1Q 13
1Q 14
1Q 15
1Q 16
1Q 17
Metro Cap Rate Trends
Average Cap Rate
8.0%
DA LLAS
WEST SO CENTRAL
7.0%
7. 1%
6.0%
6. 6%
6. 8%
6. 5%
6. 7%
5. 9%
5. 9%
2Q11
3Q11
4Q11
1Q12
7. 3%
7. 5%
2Q12
3Q12
6. 9%
7. 0%
4Q12
1Q13
5.0%
4Q10
1Q11
2Q13
Metro Payroll History and Forecast
Source: BLS History, RCR Forecasts
Annual Chg (000)
75
50
25
Metro Cap Rate Trends
0
-25
-50
-75
-100
DA LLA S
2008
2009
2010
2011
2012
2013f
2014f
2015f
2016f
2017f
23. 3
(82. 3)
2. 1
45. 0
57. 8
65. 0
52. 9
57. 9
50. 3
55. 2
Wellington Willow Bend (Plano / Allen)
Laguna Terrace (Far North)
4343 at the Parkway (Far North)
Heritage at Lakeside (Plano / Allen)
Ablon at Frisco Bridges (Plano / Allen)
Property Class/
Type (Constr.)
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated
Cap Rate
B+/GLR (1991)
B+/GLR (1991)
B/GLR (1998)
A+/GLR (2001)
A-/GLR (2012)
9-Feb-2013
14-Mar-2013
28-Mar-2013
3-Apr-2013
1-Jun-2013
$17.9
$17.5
$20.5
$34.9
$26.2
$92,518
$112,179
$85,417
$192,624
$143.651
6.1%
6.1%
6.4%
6.5%
6.5% p.f.
Metro Effective Rent Trends
9%
YoY Rent Trend
6%
3%
0%
-3%
RED 46 AVERAGE
-6%
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q 12
(REIS/RCR)
1Q 13
1Q 14
AXIOM
1Q 15
1Q 16
Metro Home Price Trends
15%
1Q 17
12. 0%
Source: S&P Case-Shiller Home Price Index
Y-o-Y % Change
10%
5%
7. 4%
0%
-5%
-10%
-15%
C SX - 20 METROS
DALLAS
-20%
2007
2008
2009
2010
2011
2012
2013
Metro Payroll Employment Trends
Source: BLS , Institute for Economic Competitiveness & RCR
4%
Y-o-Y % Change
3%
2%
1%
0%
-1%
U.S.A.
-2%
DALLAS
-3%
2010
2011
2012
2013f
2014f
2015f
2016f
gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations
or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot
be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under
no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any
particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel,
accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market
conditions and other factors.
SUBMARKET TRENDS
Effective Rent
Submarket
1Q12
Physical Vacancy
1Q13
Change
1Q12
1Q13
Change
$769
$792
3.0%
5.2%
4.2%
-100 bps
$1,639
$1,713
4.5%
6.6%
5.8%
-80 bps
East Dallas
$829
$856
3.3%
5.3%
7.4%
210 bps
Far North
$781
$806
3.1%
4.2%
3.2%
-100 bps
Far Northeast
$576
$598
3.7%
9.6%
7.7%
-190 bps
Far Northwest
$663
$681
2.8%
4.6%
4.5%
-10 bps
Garland
$651
$675
3.5%
4.4%
3.8%
-60 bps
Grand Prairie
$648
$666
2.7%
5.6%
5.5%
-10 bps
Lewisville
$846
$871
2.9%
6.3%
6.7%
40 bps
$665
$680
2.3%
6.4%
5.4%
-100 bps
North
$793
$826
4.2%
4.6%
4.1%
-50 bps
North Irving
$811
$843
4.0%
4.5%
3.6%
-90 bps
North White Rock
$639
$666
4.2%
7.6%
5.9%
-170 bps
Central Dallas
Northwest
$839
$873
4.1%
5.3%
7.3%
200 bps
$847
$881
4.0%
7.1%
6.4%
-70 bps
$1,222
$1,213
-0.7%
4.5%
3.8%
-70 bps
Plano /Allen / McKinney
$905
$943
4.2%
5.0%
4.2%
-80 bps
Richardson
$791
$811
2.5%
4.9%
3.7%
-120 bps
South
$709
$733
3.4%
15.5%
15.5%
Unchd
South County
$680
$691
1.6%
7.0%
4.5%
-250 bps
South Irving
$660
$672
1.8%
4.3%
4.4%
10 bps
$588
$608
3.4%
9.6%
8.4%
-120 bps
Southeast Dallas
$539
$560
3.9%
8.6%
8.8%
20 bps
Southwest Dallas
$645
$666
3.4%
7.2%
6.9%
-30 bps
$779
$807
3.6%
6.0%
5.2%
-80 bps
Oaklawn
Metro
RED CAPITAL GROUP
[email protected]
614-857-1416
Kenneth H. Bowen, President, Red Mortgage Capital, LLC
[email protected]
800-837-5100
Dallas, Texas
Multifamily Housing Update 1Q12 May 2012
Payroll Job Summary
Total Payrolls
2,076m
Annual Change
+49.2m
2012 Forecast
+48.6m
2013 Forecast
+39.9m
2014 Forecast
+48.1m
2015 Forecast
+57.1m
Vacancy Rate Summary
Vacancy Rate (Reis)
5.9%
RED 50 Rank
38th
Annual Chg (Reis)
-1.8%
RCR YE12 Forecast
5.8%
RCR YE13 Forecast
6.4%
RCR YE14 Forecast
6.6%
Mean Rent (Reis)
RED 50 Rank
$778
9th
Annual Change
3.3%
RCR YE12 Forecast
3.7%
RCR YE13 Forecast
3.4%
RCR YE14 Forecast
3.4%
$5mm+ Sales
10
Approx. Proceeds
$143mm
Median Cap Rate
5.8%
Avg. Price/Unit
$50,464
7.1%
RED 46 Rank
23rd
Payroll job growth improved in the first quarter.
The pace of year-over-year hiring accelerated from
34,300 (1.7%) net new jobs in 4Q11 to 49,200
(2.4%) in 1Q12. Likewise, seasonally-adjusted
data show that employers added 28,600 jobs in
the first three months of 2012, the largest quarterly increase observed since 2Q05 (+30,500
jobs).
But preliminary data suggest that hiring slowed in
April. Indeed, the year-over-year job growth tally
slowed from +49,200 jobs in March to only
35,700 jobs in April.
Moreover, seasonallyadjusted job counts actually declined –12,800
from March to April, the sharpest drop in 35
months.
The RCR econometric model forecast moderately
slower growth in the remainder of 2012 and into
2013. On the other hand, Economy.com predict
that job growth will accelerate to 63,770 next
year.
1Q12 Absorption and Vacancy Rate Trends
Robust job growth contributed to solid apartment
demand in the first quarter. Indeed, property
managers net leased 9,108 units in the yearended in March, including 1,922 units in the first
quarter. Moreover, subdued supply (only 723
units were completed in 1Q12) allowed the metro
vacancy rate to decline 30 basis points from 6.2%
in 4Q11 to 5.9%.
Although metro vacancy declined –180 basis
points year-over-year, improvements were not
experienced evenly in all submarkets. For exam-
ple, two of the metro’s 24 submarkets reported
rising vacancy (South County and Northwest Denton County) during the period. On the other end of
the spectrum, greater than a 350 basis point decrease was observed in two (East Dallas and
Northwest) submarkets.
Reis expect vacancy to tighten to 5.0% by year-end
2016 as apartment demand steadily outpaces
supply. But the RCR models are less optimistic,
generating a 7.0% vacancy rate for YE 2016.
1Q12 Rent Trends
Falling vacancy contributed to effective rent increases in the Dallas area. The size of the average concession package fell from 9.2% of asking
rent in 1Q11 to 8.6% in the same period this year.
As a result, the metro average effective rent advanced at a 3.3% year-over-year rate, the fastest
observed since 3Q08 (+4.4%).
Two of the metro’s 24 submarkets recorded yearover-year effective rent growth that exceeded 6%
in the first quarter. East Dallas effective rent rose
6.8% from $776 in 1Q11 to $829, partially due to
recent redevelopment activity. Oaklawn, another
close-in submarket, experienced a 6.3% year-overyear effective rent gain, including a 2.6% increase
in the first quarter alone.
RCR expect effective rent growth to accelerate to
3.7% by year-end and moderate to around 3.5%
thereafter. Reis, on the other hand, project 5.7%
effective rent growth this year, the fastest rate
recorded since 4Q99.
Loopnet.com were aware of 10 transactions involving properties priced at or above $5 million in
the first three months of 2012. Sales volume
totaled $143 million and the average price per
unit was $50,464. Additionally, the source identify 18 properties offered for-sale.
According to the February CBRE cap rate survey,
initial yields for stabilized Class-A Dallas assets
ranged from 4.5% to 6.0%, while stabilized Class-B
cap rates were between 6.5% and 7.25%. Based
on Reis rent, occupancy and expense data, RCR
calculate cap rates in the 7.5% to 8.5% for recent
Class B trades.
At an assumed 5.5% generic metro average cap
rate, RCR estimate a 7.1% expected rate of total
return, ranking 23rd among the RED 46. Moreover, above average levels of historic NOI growth
trend volatility produce a less favorable (29th highest) rank in the risk-adjusted index.
Apartment Vacancy Trends
Sources: Reis, Inc., RCR Metro Forecasts
12%
Metro Vacancy Rate
11%
DALLAS
10%
U.S.A.
9%
8%
7%
5.9%
6%
5%
4%
3%
1Q 05
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q12
1Q13
1Q14
Metro Multifamily Cap Rate Trends
Sources: Fannie, Freddie, RCR, Reis
Average Cap Rate
7.5%
7.0%
6.5%
REIS DA LLA S (T12 A VG)
6.0%
FNM A West So uth Central
5.5%
5.0%
1Q 10
2Q 10
3Q 10
4Q 10
1Q 11
2Q 11
3Q 11
4Q 11
1Q 12
Payroll Employment Growth
Sources: BLS Data & RCG Research Forecast
Annual Chg (000)
100
48.6 40.4
50
0
-50
-100
00
01
02
03
04
05
06
07
08
09
10
11
12f
13f
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated
Cap Rate
Southern Villas (Far North)
B
March 2012
$17.3
$75,932
8.0%
La Jolla at Park Blvd (Plano / Allen)
B
March 2012
$22.6
$61,481
7.6%
The Country Club (South White Rock/I-30)
B
February 2012
$13.7
$50,037
8.5%
Pinehurst Place (South White Rock/I-30)
B
February 2012
$12.0
$49,165
7.8%
RED CAPITAL Research | May 2012
YoY Rent Trend
Apartment Effective Rent Trends
Sources: Reis, Inc., RCR Metro Forecasts
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
3.3%
DALLAS
U.S.A.
1Q 05
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q12
1Q13
1Q14
Metro Median Single-Family Home Prices
Y-o-Y % Change
Source: Case-Shiller Home Price Index
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
USA
2005
2006
Dallas
2007
2008
2009
2010
2011
2012
Year-over-year Payroll Growth Rate
Sources: BLS, RCG Research Forecasts
6%
4%
Rate
2%
0%
-2%
DALLAS
USA
-4%
-6%
05
06
07
08
09
10
11
12f
13f
RED CAPITAL Research | May 2012
SUBMARKET TRENDS
Submarket
Effective Rent
Physical Vacancy
1Q11
1Q12
Change
1Q11
1Q12
$741
$1,587
$776
$752
$554
$659
$642
$631
$769
$1,639
$829
$781
$576
$663
$651
$648
3.7%
3.3%
6.8%
3.8%
4.1%
0.6%
1.5%
2.7%
6.5%
9.1%
9.0%
5.8%
12.0%
7.4%
6.1%
7.4%
5.2%
6.6%
5.3%
4.2%
9.6%
4.6%
4.4%
5.6%
-130 bps
-250 bps
-370 bps
-160 bps
-240 bps
-280 bps
-170 bps
-180 bps
Lewisville
North
North Irving
North White Rock
$817
$657
$768
$778
$628
$846
$665
$793
$811
$639
3.6%
1.2%
3.2%
4.2%
1.8%
7.3%
7.4%
6.3%
6.2%
9.8%
6.3%
6.4%
4.6%
4.5%
7.6%
-100 bps
-100 bps
-170 bps
-170 bps
-220 bps
Northwest
$822
$839
2.0%
9.0%
5.3%
-370 bps
$832
$847
1.8%
6.2%
7.1%
90 bps
Oaklawn
$1,150
$867
$1,222
$905
6.3%
4.3%
7.3%
6.5%
4.5%
5.0%
-280 bps
-150 bps
Richardson
$784
$791
1.0%
6.0%
4.9%
-110 bps
South
$704
$709
0.7%
18.3%
15.5%
-280 bps
South County
$653
$680
4.2%
6.6%
7.0%
40 bps
South Irving
$637
$660
3.6%
6.7%
4.3%
-240 bps
$574
$588
2.5%
11.0%
9.6%
-140 bps
Southeast Dallas
$522
$539
3.2%
9.8%
8.6%
-120 bps
Southwest Dallas
$624
$645
3.3%
7.6%
7.2%
-40 bps
$753
$778
3.3%
7.7%
5.9%
-180 bps
Central Dallas
East Dallas
Far North
Far Northeast
Far Northwest
Garland
Grand Prairie
Metro
Change
RED CAPITAL GROUP
Daniel J. Hogan
[email protected]
614-857-1416
Kenneth H. Bowen
President, Red Mortgage Capital, LLC
[email protected]
800-837-5100
Dallas, Texas
Multifamily Housing Update 4Q11 February 2012
Payroll Job Summary
Total Payrolls:
2,084m
Annual Change:
+34.2m
2012 Forecast
+17.9m
2013 Forecast
+20.4m
2014 Forecast
+44.9m
2015 Forecast
+63.7m
Employers in the Dallas metropolitan division continued to add workers in the fourth quarter, albeit
at a slower pace. Payroll headcounts advanced
34,200 (1.7%) year-over-year, down from the
50,300 (2.5%) job advance recorded in the previous quarter. Skilled-service sectors were partially
to blame. Administrative support service firms
added 7,200 workers in the fourth quarter, whereas the sector was responsible for a 14,300-job
monthly year-over-year gain in the first nine
months of 2011. Likewise, health care job gains
Vacancy Rate (Reis)
6.2%
RED 50 Rank
39th
Annual Chg (Reis)
-2.0%
RCR YE12 Forecast
6.6%
RCR YE13 Forecast
6.9%
Vacancy in the Dallas metropolitan division declined 50 basis points sequentially and 200 basis
points year-over-year to 6.2% in 4Q11. Restrained
development contributed to the improvement.
Only 192 units were completed during the fourth
quarter, bringing the annual total to 2,391 units.
By contrast, developers completed 13,823 units in
2009 and 7,461 units in 2010.
RCR YE14 Forecast
6.8%
The development pipeline suggests that supply
will accelerate this year. As of February, Reis were
aware of 26 apartment projects containing 7,274
4Q11 Rent Trends
Mean Rent (Reis)
$771
RED 50 Rank
8th
Annual Change
2.9%
RCR 2012 Forecast
2.4%
RCR 2013 Forecast
2.5%
RCR 2014 Forecast
3.1%
Owing to tighter vacancy, metro average effective
rent rose 2.9% year-over-year to $771 in the
fourth quarter. Rent gains were largely concentrated in the Class-A stock. Average Class-A asking rent rose 3.2% year-over-year to $1,043, outpacing the 1.4% advance recorded among Class
B/C assets. The performance of properties owned
by large publicly-held REITs was remarkable.
Same-store average rent rose 2.1% sequentially
and 7.4% year-over-year in the 13,697-unit combined portfolios.
$5mm+ Sales
14
Approx. Proceeds
$320mm
Median Cap Rate
5.6%
Avg. Price/Unit
$95,246
Loopnet.com identify 14 investor-grade transactions in the Dallas metropolitan division from October 2011 to January 2012. Sales volume totaled
$320 million and the average price per unit was
$95,246. According to CBRE, cap rates for stabilized Class-A Dallas assets ranged from 5.0% to
6.0% in August.
Expected Total Return 6.3%
RED 45 Rank
28th
The benchmark trade involved a mid-rise property
in the Central Dallas submarket. The buyer paid
$48.5 million for the 227-unit property. The asset
decelerated from 10,600 during the first nine
months to 2,900 year-over-year in 4Q11.
Economy.com expect area firms to add 37,790
workers in 2012 and 67,290 jobs in 2013. RCR
are less optimistic, given our national economic
outlook. Based on the University of Central Florida’s Institute for Economic Competitiveness GDP
forecast (1.8% in 2012 and 2.2% in 2013), our
payroll model predicts that Dallas employment will
increase 17,900 in 2012 and 20,400 in 2013.
units under construction. As a result, the service
predicts that 5,755 units will debut this year.
Moreover, Reis foresee an additional 6,489 units
in 2013.
Despite increased supply, Reis expect vacancy to
continue to trend lower. Specifically, the source
forecasts a 70 basis point vacancy rate decrease
this year and no change in 2013. By contrast,
RCR foresee weaker tenant demand to give rise to
a 70 bps increase by year-end 2013.
Reis expect annual effective rent growth to accelerate to 5.4% this year, a level not observed in
Dallas since 1999. The service expects moderately slower growth thereafter, averaging 4.5% per
year through 2016.
Owing to our employment and demand outlook,
RCR believe that rent growth is likely to decelerate
to 2.4% this year. On the other hand, our model
believes that rent growth will re-accelerate to 2.5%
in 2013 and to 3.1% in 2014.
also contains 9,080 square feet of retail space.
The buyer reported a 5.0% pro forma cap rate.
RCR estimate a 4.0% going-in yield, based on estimated multifamily NOI.
Based on an assumed 5.5% going-in yield, we
estimate a 6.3% five-year holding period expected
rate of total return, 28th highest among the RED
45. Additionally, our model produces a 2.18 riskadjusted index, 26th highest in the group.
Source: Reis, Inc., RCR Metro Forecasts
12%
Metro Vacancy Rate
11%
10%
DALLAS
U.S.A.
9%
8%
6.2%
7%
6%
5%
4%
3%
1Q 05
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q12
1Q13
1Q14
Multifamily Cap Rates
Sources: Fannie Mae, RCR
Average Cap Rate
9%
8%
7.6%
7.1%
7%
6%
7. 6%
6.5%
6.2%
5.7%
6.3%
5.6%
5.2%
5%
5. 2%
4%
Oklahoma
Arkansas
Texas
Louisiana
Dallas, TX
Source: BLS Data & RCG Research Forecast
Annual Chg (000)
100
50
17.9 20.4
0
-50
-100
00
01
02
03
04
05
06
07
08
09
10
11
12f
13f
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated
Cap Rae
Post Katy Trail (Central Dallas)
A
December 2011
$48.5
$213,656
4.0% / 5.0%
Alexan City North (Far North)
A
December 2011
$34.4
$129,717
5.5%
Arboretum Estates (Richardson)
B
December 2011
$26.3
$77,663
6.9%
RED CAPITAL Research | February 2012
Apartment Effective Rent Trends
Source: Reis, Inc., RCR Metro Forecasts
6%
2.9%
YoY Rent Trend
4%
2%
0%
DALLAS
-2%
U.S.A.
-4%
1Q 05
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q12
1Q13
1Q14
Metro Median Single-Family Home Prices
Source: FHFA Home Price Index
15%
Y-o-Y % Change
10%
5%
0%
-5%
USA
-10%
MSA
-15%
2005
2006
2007
2008
2009
2010
2011
Source: BLS, RCG Research Forecasts
6%
4%
Rate
2%
0%
-2%
-4%
DALLAS
USA
-6%
05
06
07
08
09
10
11
12f
13f
RED CAPITAL Research | February 2012
SUBMARKET TRENDS
Submarket
Effective Rent
Physical Vacancy
4Q10
4Q11
Change
4Q10
4Q11
$742
$1,568
$759
$1,621
2.3%
3.4%
7.2%
8.2%
5.2%
6.6%
-200 bps
-160 bps
East Dallas
$779
$816
4.9%
9.8%
5.5%
-430 bps
Far North
$745
$775
3.9%
5.9%
4.5%
-140 bps
Far Northeast
$544
$568
4.3%
12.6%
10.6%
-200 bps
Far Northwest
$649
$659
1.6%
8.1%
5.4%
-270 bps
Garland
$644
$651
1.2%
6.7%
4.8%
-190 bps
Grand Prairie
$632
$641
1.3%
7.4%
6.0%
-140 bps
Lewisville
$806
$844
4.8%
7.9%
6.5%
-140 bps
$655
$665
1.5%
7.9%
6.9%
-100 bps
North
$761
$787
3.5%
6.7%
5.0%
-170 bps
North Irving
$775
$804
3.8%
6.8%
4.9%
-190 bps
North White Rock
$625
$636
1.7%
10.5%
8.3%
-220 bps
Northwest
$815
$837
2.6%
10.4%
5.7%
-470 bps
Central Dallas
Change
$825
$838
1.6%
6.7%
5.6%
-110 bps
$1,158
$1,191
2.8%
8.8%
4.5%
-430 bps
$864
$892
3.2%
7.6%
5.2%
-240 bps
Richardson
$786
$793
0.9%
6.4%
5.1%
-130 bps
South
$699
$695
-0.6%
14.3%
17.0%
270 bps
South County
$654
$676
3.5%
6.4%
6.3%
-10 bps
South Irving
$635
$655
3.1%
7.3%
5.0%
-230 bps
$575
$587
2.1%
11.6%
9.8%
-180 bps
Southeast Dallas
$515
$535
3.8%
10.1%
7.8%
-230 bps
Southwest Dallas
$618
$631
2.2%
8.3%
7.2%
-110 bps
$749
$771
2.9%
8.2%
6.2%
-200 bps
Oaklawn
Metro
RED CAPITAL GROUP
Daniel J. Hogan
[email protected]
614-857-1416
Kenneth H. Bowen
President, Red Mortgage Capital, LLC
[email protected]
800-837-5100
Dallas, Texas
Multifamily Housing Update 3Q11 January 2012
Payroll Job Summary
Total Payrolls:
The Dallas economy showed no sign of cooling off
over the summer. Metro payrolls increased at a
50,300-job, 2.5% year-over-year rate, in line with
previous quarter’s 53,700-job advance. The performance was paced by exceptional growth in the
skilled services, including 6.2% and 5.5% y-o-y
surges in finance business service employment.
2,069.8m
Annual Change:
+50.3m
2011 Forecast
+49.4m
2012 Forecast
+32.5m
2013 Forecast
+49.3m
2014 Forecast
+77.0m
Unemployment
7.5% (Nov)
Conversely, 4Q11 got off to a slow start. On a seasonally-adjusted basis, payroll employment in October fell 17,600 jobs month-to-month, the largest
Vacancy Rate (Reis)
Dallas tenants absorbed more than 2,000 units
for the sixth consecutive quarter, occupying a net
of 2,416. Against 1,015 units of new supply occupancy increased 30 basis points sequentially to
93.3%, the highest rate observed in ten years.
6.7%
RED 50 Rank
37th
Annual Chg (Reis)
-2.3%
Reis YE11 Forecast
6.3%
Reis YE12 Forecast
6.1%
Reis YE13 Forecast
6.2%
Occupancy gains were common among submarkets as only one — North Dallas — suffered net
tenant losses. Infill submarkets posted the fastest
sequential quarter occupancy rate gains, especially East Dallas and Oaklawn, where rates surged
190 and 100 bps, respectively. Northern crescent
3Q11 Rent Trends
Mean Rent (Reis)
$765
Annual Change
2.7%
RED 50 Rank
16th
Reis 2011 Forecast
3.0%
Average asking and effective rents increased $7
sequentially to $841 (0.8%) and $765 (0.9%),
respectively. The latter figure ranked 9th fastest
among the RED 50 markets for the period. Expressed on a year-on-year basis, effective rents
increased 2.7%, 16th highest among the group.
Reis 2012 Forecast
3.1%
Reis 2013 Forecast
3.4%
CAGR 2011 –15 3.7% (22nd)
Only two submarkets suffered sequential rent
declines: Far Northwest and Southeast Dallas. By
contrast, rents in popular Northern tier and infill
Dallas submarkets chalked down substantial
$5mm+ Sales
Real Capital Analytics report that investors closed
on 27 acquisitions valued at $2.5mm or more in
3Q11, totaling $478.9mm in proceeds. These
statistics compare to 37 transactions valued at
$618.0mm ($63,424/unit) closed during the second quarter. The average cap rate of 3Q trades
was 5.4% compared to 7.4% in the prior period.
Approx. Proceeds
Median Cap Rate
Avg. Price/Unit
Expt. Total Return:
RED 46 Rank
27
$478.9mm
5.3%
87,343
6.3% (DFW)
24th
Cap Rate Assumpt: 5.5% / 6.6%
Top tier properties traded in the low-5% cap rate
range, about 100—150 bps above the levels observed in most U.S. primary markets. The median
sequential dip in at least 22 years. Deteriorating
trends in health care and hospitality services and
government appear to be the principal causes.
Weak October data notwithstanding, RCR expect
Dallas/Fort Worth job growth to proceed at nearly
twice the national average rate through 2014. Our
models indicate that Dallas headcounts will increase by about 32,500 jobs next year, followed
by accelerating gains in 2013 and 2014 to nearly
50,000 and 80,000 jobs, respectively.
suburbs attracted hundreds of relocating households as Lewisville, Plano and Richardson combined to net lease nearly 900 units during 3Q.
Reis expect tenants to absorb more than 2,500
units in 4Q11, exceeding anticipated supply
trends by 1,500 units and trimming another 40
bps from the vacancy rate to 6.3% by year-end.
Supply is likely to catch up to demand in 2012
and 2013, however, and metro occupancy trends
should level off to the low-93% range following a
meteoric 460 bps gain over the past two years.
gains, as Carrolton, Lewisville and Plano in the
former category and Oaklawn, Garland, Mesquite
and East Dallas in the latter posted 1%+ hikes.
Reis expect rents to rise 3.0% in 2011, followed by
3.1% and 3.4% gains in 2012 and 2013. For the
four-year period ranging from YE11 to YE15 the
service projects a compound growth rate of 3.7%,
representing the 22nd fastest rate of growth
among the RED 50. The service foresees rent
growth of 4.5% in 2015, near the R50 top rank.
DFW cap rate was 6.4%, in line with the 6.3% median observed in the top U.S. metro markets.
Employing an 5.5% acquisition cap rate, RCR estimate that the expected five-year un-levered total
return for generic DFW assets is about 6.3%, 24th
highest among the RED 46 markets. The below
average figure is attributable in part to our forecast of weaker occupancy in 2012-13 due to supply and a projected 110 basis point holding period
increase in the cap rate to 6.6%.
Source: Reis, Inc.
Metro Vacancy Rate
11%
10%
9%
8%
6.3%
7%
6.1%
6.2%
6%
5%
DALLAS METRO DIVISION
FORECAST
U.S. TOP 82 METRO AVG.
4%
3%
1Q 05
1Q 06
1Q 07
1Q 08
5. 3%
1Q 09
1Q 10
1Q 11
4. 9%
1Q 12
4. 9%
1Q 13
Capitalization Rate Trends
Average Cap Rate
9%
Sources: Fannie Mae / Freddie Mac & Reis, Inc.
F NM / F MC U S
F NM / F MC WEST SO CENTR R EGI ON
R EI S DALLA S T6M M EDI A N
8%
7%
6%
5%
2Q 07 3Q 07 4Q 07 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q11
Pa y r o l l Em pl o y me nt Gr o wth
A nn ua l Ch g (000)
60
30
0
- 30
- 60
- 90
DA LLAS MD
2001
2002 2003
2004
9. 6
(60. 5) (33. 0) 20. 3
2005 2006
2007
2008 2009
2010 2011f 2012f 2013f 2014f
47. 6
58. 8
23. 1
2. 6
66. 4
(82. 6)
49. 4
32. 5
49. 3
77. 0
Cityville Southwestern (Northwest)
Lakeside Villas (South Irving)
Ansley at Park (North Dallas)
Riachi at One21 PH I & II (Plano)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated
Cap Rate
A
B+
AA
Sep-2011
Aug-2011
Aug-2011
Sep-2011
$33.0
$27.0
$51.5
$40.9
$118,705
$77,143
$105,102
$106,592
5.1%
7.0%
5.5%
6.0%
Metro Rent Trends
Source: Reis, Inc., RCG Forecasts
YoY Rent Trend
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
TOP 82 METRO AVG.
FORECAST
DALLAS
FORECAST
1Q 05
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q 12
1Q 13
Metro Home Price Trends
Source: S&P Case-Shiller Index
Y-o-Y % Change
5%
0%
-5%
-10%
-15%
CSX-20
DALLAS
-20%
Jan- Apr07
07
Jul-
Oct-
07
07
Jan- Apr08
08
Jul-
Oct-
08
08
Jan- Apr09
09
Jul-
Oct-
09
09
Jan- Apr10
10
Jul-
Oct-
10
10
Jan- Apr11
11
Jul-
Oct-
11
11
Source: BLS, RCG Research Forecasts
4%
Rate
2%
0%
-2%
DALLAS
-4%
USA
-6%
2007
2008
2009
2010
2011f
2012f
2013f
2014f
SUBMARKET TRENDS
Effective Rent
Submarket
Central Dallas
Physical Vacancy
3Q10
3Q11
Change
3Q10
3Q11
$1,549
$1,623
4.8%
8.3%
7.3%
Change
-100 bps
$736
$754
2.5%
8.2%
5.5%
-270 bps
East Dallas
$770
$798
3.8%
10.9%
6.6%
-430 bps
Far North
Far Northeast
$736
$553
$763
$558
3.6%
1.0%
6.7%
14.3%
5.1%
11.0%
-160 bps
-330 bps
Far Northwest
$657
$658
0.1%
7.9%
6.4%
-150 bps
Garland
$638
$656
2.7%
7.8%
5.0%
-280 bps
Grand Prairie
$623
$639
2.6%
8.1%
7.0%
-110 bps
Lewisville
$791
$840
6.2%
8.7%
6.4%
-230 bps
$656
$668
1.8%
7.1%
6.5%
-60 bps
North White Rock
North Dallas
$624
$759
$634
$779
1.6%
2.7%
11.1%
7.0%
9.3%
5.7%
-180 bps
-130 bps
North Irving
$772
$786
1.8%
8.5%
5.4%
-310 bps
Northwest
$814
$829
$832
$841
2.2%
1.5%
12.5%
7.6%
7.6%
5.7%
-490 bps
-190 bps
Oaklawn
$1,146
$862
$1,162
$885
1.4%
2.7%
12.5%
9.1%
5.3%
5.5%
-720 bps
-360 bps
Richardson
$779
$790
1.5%
6.8%
5.9%
-90 bps
$573
$578
0.8%
12.9%
10.4%
-250 bps
South
$700
$712
1.7%
13.8%
17.1%
330 bps
South County
$653
$674
3.2%
7.4%
5.5%
-190 bps
South Irving
$643
$643
-0.1%
8.5%
5.8%
-270 bps
Southeast Dallas
$517
$525
1.7%
10.2%
8.0%
-220 bps
Southwest Dallas
$612
$631
3.2%
9.2%
6.6%
-260 bps
$745
$765
2.7%
9.0%
6.7%
-230 bps
Metro
RED CAPITAL GROUP®
Market Overview
Dallas,Texas
Multifamily Housing Update
February 2011
EXECUTIVE SUMMARY
T
he Dallas economic recovery
proceeded at a measured pace
in late 2010, producing moderate payroll job gains and slow and
steady business activity expansion.
Metro establishments added workers
to payrolls at a 29,500-job year-onyear pace in 4Q10, a 1.5% advance,
up from a 22,600-job, 1.1% gain recorded in the prior quarter.
Although the 4Q10 results were the
strongest recorded in nearly two
years, the data contained a few sour
notes. First, the y-o-y payroll comparison in December fell sequentially
from 32,000 jobs in the 12 months
ended in November to 28,400, a sharp
contrast from the solid positive momentum observed nationally. Moreover, payroll job creation expressed
on a seasonally-adjusted basis disappeared after mid-year, as Dallas payrolls actually declined 1,500 positions
from June to December after adding
29,300 during the year’s first half.
The Dallas Fed’s Business Cycle Index mirrored the foregoing trends.
The index improved steadily in the
first half of 2010, rising 1% from December 2009 to June, but declined
moderately during the summer and
advanced without conviction in 4Q.
Likewise, the 11th District Fed’s
January Beige Book comments were
cautious, reporting firmer manufacturing and retail conditions but largely
stagnant labor markets and persistent
weakness in home sales, prices and
construction in the district.
RED Research’s econometric payroll
model projects modest acceleration
this year but stronger conditions developing in 2012. By the numbers, the
model yields a forecast of 38,900
(1.9%) net jobs in 2011, followed by
robust 60,000 and 69,000 job adds
during the following two years.
Although home sales velocity was
sluggish, demand for rental housing
SNAP SHOT
remained exceptionally strong. Reis
report that tenants net leased 4,035
units during the seasonally-weak
fourth quarter, representing the
strongest October-to-December demand recorded in five years. By the
same token, 4Q10 supply levels slid
to a 5-year one-quarter low 227 units,
allowing average market occupancy
to surge 90 basis points sequentially
to 91.9%, a two-year series high.
Demand was concentrated in the
northwest Dallas Co. quadrant as the
Northwest and North Irving submarkets chalked down 2.1% and 1.7%
sequential quarter gains. Interest in
urban living didn’t wane as Oaklawn
properties enjoyed a robust 370 bps
quarter-to-quarter advance. Only one
of Dallas’s 24 Reis-defined submarkets recorded a net occupancy rate
decrease (Far NW/Farmers Branch).
Leasing agents took advantage of
tighter markets to push rents higher.
Average asking rents rose $4 (0.5%)
sequentially to $825, up from 3Q’s $1
advance and one of the largest fourth
quarter moves ever registered in this
market. Moreover, concession burnoff continued for the fourth consecutive quarter, allowing average effective rents to rise $5 (0.7%) sequentially and $15 (1.9%) y-o-y to $749.
Rent trends remained weak in some
suburban submarkets with older apartment stock: Far Northeast, Far NW
and South Irving recorded –1% or
larger sequential effective rent setbacks. Conversely, substantial gains
were recorded in infill and north suburban submarkets: Central and East
Dallas and Oaklawn posted 1%+
hikes and Carrollton, Richardson and
Lewisville advanced 90 bps or more.
Investment momentum accelerated.
Loopnet report that at least 10 institutional quality trades closed during 4Q,
accounting for total proceeds of approximately $320 million.
Vacancy
(8.1% - 4Q10)
Effective
Rents
Y-o-y
Projected
change
2011
2.6%
0.5%
1.9%
3.9%
100bps
25 bps
29.5m
38.9m
($749 - 4Q10)
Cap Rate
(6.0% - 4Q10)
Employment
(2,045.1m - 4Q10)
KEY POINTS
 Dallas households expressed
strong demand
for rental housing options during the fourth
quarter. Reis report that apartment properties
absorbed 4,035 units during the period,
raising occupancy 90 bps sequentially to a
91.9% average metropolitan area average.
 Enhanced
pricing power developed with
tighter markets. Leasing agents improved on
3Q10’s modest $1 sequential quarter average
effective rent hike with a useful $5 (0.7%)
quarter-to-quarter advance during 4Q10.
 Reis expect rents to rise $29 (3.9%) in 2011
and $28 (3.6%) in 2012 and foresees further
occupancy improvement, too, but at a much
slower pace than 2010’s 260 bps surge.
 The Dallas economy made measured gains in
the fourth quarter. Establishments added
payroll employees at a 29,500-job annual
rate, up from 3Q’s 22,600-job gain. The
unemployment rate remained at an elevated
level, however, standing at 8.0% in
December, unchanged from 2009.
 Institutional
investors exhibited a healthy
appetite for Dallas-area trophies. At least 6
projects of 1998 vintage or younger traded
during 4Q at cap rates between 5.5%-6.5%.
Dallas - Plano - Irving, Texas Metropolitan Division - Q4 2010
VACANCY TRENDS
 Professionally-managed metro properties capped off a sterling leasing
 Eleven submarkets posted 100 bps sequential occupancy gains or more,
including two (Oaklawn, Northwest) that added 200 bps or more.
 Publicly-traded
REIT posted mixed results in 4Q. Three of six
companies recorded sequential gains and three declined. On a unit
weighted average basis, DFW occupancy increased 10 bps to 95.2%.
Metro Vacancy Rate
season by filling a net of 4,035 units during 4Q10, raising calendar
2010 absorption to a 21-year high 16,493 units. As supply numbered
only 1,889 units after June, average occupancy increased 190 bps in
the second half to 91.9%, including a 90 bps surge in quarter four.
Source: Reis, Inc.
12%
10.7%
10%
8.1%
8%
6%
6.6%
4%
DALLAS
U.S.A.
2%
 Reis expect absorption of 4,891 units and delivery of 2,991 in 2011,
0%
4Q 04 4Q 05 4Q 06 4Q 07 4Q 08 4Q 09 4Q 10
producing a 92.4% year-end occupancy rate; up 50 bps year-on-year.
RANK: 40th out of 50
RENT TRENDS
Metro Rent Trends
Source: Reis, Inc.
 Reis
surveys indicate that average metro asking rents increased $4
(0.5%) sequentially and $11 (1.4%) year-on-year to $825.
5%
4%
 Concession
 Average rents at properties owned by public apartment trusts advanced
$3.89 (0.5%) sequentially, but remained below water (-$12.26/-1.5%)
when expressed on a year-over-year basis.
 Reis forecast 3.9% effective rent growth in 2011, followed by 3.6%
3%
YoY Rent Trend
burn-off allowed effective rents to rise at a faster rate.
Average effective rents increased $5 (0.7%) sequentially and $15
(2.0%) year-on-year to $749.
2.0%
2%
1%
0%
compound annual growth through 2015. The comparable mean
statistics for the 80 largest U.S. markets are 4.0% and 3.6%.
1.4%
Asking
Effective
-1%
-2%
4Q 04 4Q 05 4Q 06 4Q 07 4Q 08 4Q 09 4Q 10
Metro Multifamily Cap Rate Trend
PROPERTY MARKET & CAP RATE TRENDS
Source: Reis Sales Comp Median
 Institutional
 At
least 10 institutional quality garden projects exchanged hands
during 4Q10. Buyers focused on class-A and class-B+ projects in the
Irving, Plano and Addison areas. Cap rates were in the mid-5% to
mid-6% range. Prices for recent construction class-A properties
equated to $110,000 to $120,000 per unit, while late-90s product
traded in the $70,000 to $100,000 per unit area.
8.5%
8.0%
7.5%
Cap Rate
investors took a second look at Metroplex investment
opportunities and apparently liked what they saw. After closing on 29
deals for $459mm in the first half of 2010, buyers acquired 59
properties between July and December for gross proceeds of $1 billion,
according to data published by Real Capital Analytics in January.
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
COMMENT: Based on an 6.0% generic purchase cap rate assumption and Reis
rent and occupancy forecasts, RCR estimate expected Dallas 5-year holding period
total returns to be 10.1%, 13th highest among the RED 50.
08 09 09 09 09 10 10 10 10
Property Name
Bella Casita (North Irving)
Dakota Hills (North Irving)
Giovanna Homes PHI (Plano)
Giovanna Homes PHII (Plano)
RED CAPITAL Research
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
AB
B+
16-Dec-2010
27-Oct-2010
02-Nov-2010
23-Nov-2010
$29.5
$36.1
$25.1
$35.0
$110,075
$71,627
$73,676
$97,222
6.5%
6.7%
6.0%
5.5%
Metro Median Single Family Home Prices
DEMOGRAPHICS & HOUSING MARKET
Source: FHFA Home Price Index
 Recently
6%
-2%
released Census 2010 data indicate that last decade
population growth rates in the three largest Dallas MSAD counties
were slower than previously reported. Dallas, Collin and Denton
county populations in 2010 were 2,368,139, 782,341 and 662,614,
respectively. The Census previously estimated 2009 county
populations of 2,451,730, 791,631 and 658,616. In aggregate, the
Census count was 88,883 below the previously released 2009 estimate.
-4%
 The median price of a Metroplex home sold in 4Q10 was $138,300,
-6%
according to N.A.R. reports, representing a –0.2% decline from the
comparable period of 2009. According to MoveVantage, the average
price of a Dallas MSAD house sold in December 2010 was $235,400,
up 15.8% from $203,200 in the year earlier period.
DALLAS
Y-o-Y % Change
4%
US
2%
0%
-8%
4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q
06
07
07
08
08
09
09
10
10
 RealtyTrac report that 1.72% of D/FW households received a notice of default
or foreclosure in 2010, the 98th highest rate among the 206 largest MSA.
EMPLOYMENT TRENDS
Non-Seasonally Adjusted
69.3
100
Annual Chg (000)
60.0
to December 2010 period, up 29,500 (1.5%) from the comparable
period of 2009. The same comparison showed a 22,600-job, 1.1%
increase in 3Q10. Over the previous 10 years, Dallas MSAD created
only 44,700 net jobs, representing a 2.2% absolute increase.
38.9
50
0
 Sequential quarter gains were largely attributable to improved conditions in the construction sector. After posting a 6,200-job, -5.6%
annual rate of decline in 3Q, sector payrolls increased at a 1,700-job,
1.6% pace in 4Q, representing a 7,900-job quarterly turnaround.
-50
 The third quarter’s strong headcount growth in durable goods manu-
-100
00 01 02 03 04 05 06 07 08 09 10 11f12f13f
2009 but down 30 bps from November, according to the BLS Household Survey. The same survey showed total employment up 30,365
y-o-y in 4Q, down from a cycle peak gain of 46,055 during 2Q10
Source: BLS
6%
DALLAS
USA
4%
facturing subsided in 4Q. Makers of long lasting goods expanded at a
3,200-job, 2.7% annual rate in 4Q10, down from a 5,700-job gain
record in the third quarter.
 The unemployment rate stood at 8.0% in December, unchanged from
Seasonally-Adjusted
 Seasonally-adjusted
2%
Rate
 An average of 2.045 million workers held payroll jobs in the October
data also pointed to a 2H10 slowdown. After
posting net job growth of 29,200 positions in the first half, total payrolls slipped by 1,500 jobs in the second. A steeper decline was
averted by an anomalistic 13,500-job gain recorded in October.
0%
-2%
Forecast
-4%
 Our
econometric forecast model project steady, moderate improvement to evolve during 2011, contributing to creation of a point estimate of 38,900 new jobs. The pace should continue to gain momentum through 2012 when about 60,000 jobs are expected.
-6%
03 04 05 06 07 08 09 10 11f 12f
RED Estimated Generic Unlevered Asset Total Return Probabilities
15%
10%
6.5%
D A LLA S ( R A I = 3 . 6 9 )
H O U ( R A I = 3 . 3 3 ) 8.6%
5.9%
8.2%
10.0%
9.8%
11.5%
11.3%
13.4%
13.5%
5%
0%
90%
70%
50%
30%
10%
P ro ba bilit y o f A c hie v ing S t a t e d R e t urn o r G re a t e r
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
Central Dallas
East Dallas
Far North
Far Northeast
Far Northwest
Garland
Grand Prairie
Lewisville
North White Rock
North
North Irving
Northwest
Oaklawn
Richardson
South Dallas
South Dallas County
South Irving
Southeast Dallas
Southwest Dallas
Metro
4Q09
4Q10
Change
4Q09
4Q10
Change
$1,551
$740
$744
$732
$554
$643
$644
$617
$789
$654
$610
$759
$781
$783
$799
$1,089
$841
$760
$555
$660
$654
$617
$513
$605
$1,568
$742
$779
$745
$544
$649
$644
$632
$806
$655
$625
$761
$775
$815
$825
$1,158
$864
$786
$575
$699
$654
$635
$515
$618
1.1%
0.3%
4.6%
1.8%
-1.8%
0.9%
-0.1%
2.5%
2.1%
0.1%
2.4%
0.2%
-0.8%
4.1%
3.2%
6.4%
2.7%
3.4%
3.6%
6.0%
-0.1%
3.0%
0.4%
2.1%
14.0%
8.9%
11.6%
8.6%
15.8%
8.7%
10.0%
10.5%
8.8%
9.6%
11.8%
10.1%
9.4%
19.5%
7.9%
12.8%
12.0%
9.1%
13.6%
16.1%
9.9%
9.7%
10.5%
10.9%
8.2%
7.2%
9.8%
5.9%
12.6%
8.1%
6.7%
7.4%
7.9%
7.9%
10.5%
6.7%
6.8%
10.4%
6.7%
8.8%
7.6%
6.4%
11.6%
14.3%
6.4%
7.3%
10.1%
8.3%
-580 bps
-170 bps
-180 bps
-270 bps
-320 bps
-60 bps
-330 bps
-310 bps
-90 bps
-170 bps
-130 bps
-340 bps
-260 bps
-910 bps
-120 bps
-400 bps
-440 bps
-270 bps
-200 bps
-180 bps
-350 bps
-240 bps
-40 bps
-260 bps
$734
$749
2.0%
10.7%
8.1%
-260 bps
SUPPLY TRENDS
Completions and Absorption
 Reis record one delivery during 4Q:
 A
228-unit mid-rise was added to the Arts District (Central Dallas
submarket) inventory in July. The property was reportedly 80%
occupied at rents averaging $1,674 in December. Occupancy among
submarket buildings delivered from 2007 to 2009 averaged 91.3%.
 After
leasing for about nine months a 420-unit garden project near
McKinney was 80% occupied in December at $902 average rents.
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
Business Development
[email protected]
614-857-1499
20,000
Source: Reis, Inc
Completions
Absorption
15,000
Units
a 227-unit infill courtyard style
mid-rise in the Central Dallas submarket. Rents at the property range
from $1,060 to $2,035, equating to $1.70 to $1.71 per square foot. The
service also report the completion of a 334-unit garden property in
Rockwall beyond the boundaries of the service’s coverage area.
10,000
5,000
0
04 05 06 07 08 09 10 11f 12f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
www.redcapitalgroup.com
800.837.5100
©2010 RED CAPITAL GROUP
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to
buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented
in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon
this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are
subject to change without notice due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Dallas,Texas
December 2010
EXECUTIVE SUMMARY
E
conomic conditions in the
Dallas-Plano-Irving metropolitan area improved over
the past year. Indeed, payroll headcounts increased 22,600 (1.1%) yearover-year in 3Q10, comparing favorably to the –100,600 (-4.8%) jobs lost
during the same period last year. Increased demand for manufactured
goods was partially responsible the
improvement.
Manufacturing employment rose 5,300 y-o-y in 3Q10,
marking the second consecutive quarterly y-o-y gain. Similarly, business,
education and health service employers added 32,400 positions to payrolls
y-o-y in 3Q10.
Total employment, based on the
BLS’s household survey, surged
37,162 (1.9%) in the twelve-month
period ended in September. As a result, the metro unemployment rate fell
from 8.3% in September 2009 to
7.9% in the same month this year.
On a seasonally-adjusted basis, headline payroll headcounts advanced
18,200 in the first ten months of 2010.
In the first half of the year, employers
added 29,300 jobs but payroll levels
fell –14,100 from July to October.
The Manpower Employment Outlook
Survey suggests that growth will rebound in the 4Q10 and 1Q11. In
bother quarters, the percentage of
firms that plan to add workers (20%
in 4Q10 and 15% in 1Q11) outpaced
the share of companies that plan to
shed jobs (9% in 4Q10 and 6% in
1Q11).
RED CAPITAL Research (RCR)
expect annual job trends to continue
to improve. Our econometric model
produces point estimates of 6,600
(0.3%) new jobs this year followed by
gains of 35,600 (1.8%) and 67,400
(3.3%) in 2011 and 2012, respectively. Economy.com are more optimistic, projecting job growth of
50,320 in 2011 and 74,770 in 2012.
SNAP SHOT
Home price trends were mixed during
the third quarter. According to the
National Association of Realtors, the
median price of a single-family home
in the Dallas-Fort Worth-Arlington
MSA increased 14.2% y-o-y in 3Q10,
comparing favorably to the modest
2.1% y-o-y advance recorded in
2Q10. But price indices employing a
repeat-sales approach show that price
trends were weaker in the third quarter. The Dallas MSA Case-Shiller
home price index fell –1.8% y-o-y in
June and –2.6% y-o-y in 3Q10. Similarly, the Federal Housing Finance
Agency’s purchase-only home price
index rose 2.6% y-o-y in 2Q10 but
only 0.5% y-o-y in 3Q10.
Apartment managers net leased 5,384
units during the third quarter, outpacing the 1,662 units added to the rental
inventory. As a result, the metro occupancy rate surged 100 basis points
from 90.0% in 2Q10 to 91.0% in
3Q10. Based on the Economy.com
employment growth projections, Reis
are optimistic about near-term leasing
trends. As a result, the service predicts that occupancy will rise to
91.4% next year.
Face rents rose 0.3% y-o-y in 3Q10
but effective rent growth averaged
0.7%. Falling concessions were partially responsible as the size of the
average package fell from 9.6% of
gross rent in 3Q09 to 9.3%. On the
other hand, the pace of sequential
asking and effective rent growth was
sluggish. Effective rent advanced
0.9% sequentially in 2Q10 and only
0.3% in 3Q10. Likewise, asking rent
growth slowed from 0.7% to 0.1%.
Real Capital Analytics calculate that
Dallas/Fort Worth sales volume totaled $898 million in the first ten
months of 2010. Furthermore, the
source observed a $61,221 average
price per unit and estimated a 7.3%
average cap rate.
Y-o-y
change
Vacancy
(9.0% - 3Q10)
Effective
Rents
100bps
Projected
2010
Unchg
0.7%
2.4%
22.6m
6.6m
($744 - 3Q10)
Cap Rate
(7.8% - 3Q10)
Employment
(2,020.5m - 3Q10)
KEY POINTS
 The
metro vacancy rate declined 100 basis
points sequentially to 9.0% as property
managers net leased 5,384 units and
developers completed only 1,662 units from
July to September.
 Effective
rent advanced 0.3% sequentially
and 0.7% year-over-year in 3Q10.
 Measured
on a same-store basis, ALN
Apartment Data report that occupancy
surged 250 basis points year-over-year to
90.7% in November.
The source also
calculates a 0.9% increase in effective rent
owing to falling concessions.
 According to the FHFA purchase-only home
price index, Dallas-Plano-Irving home
values rose 0.5% year-over-year in 3Q10,
slower than the 2.6% annual gain observed
in the previous quarter.
 At
an assumed 6.5 going-in yield, RCR
calculate an 8.6% expected rate of total
return and a 2.89 risk-adjusted return index.
Although the expected return is above the
8.2% RED 50 average, elevated NOI growth
trend volatility produces the 18th lowest
measure of risk-adjusted return in the group.
Dallas-Plano-Irving, Texas Metropolitan Division - Q3 2010
VACANCY TRENDS
 Property
 Same-store data also show that occupancy improved over the past year.
Publicly-traded REIT occupancy increased 80 basis points year-overyear to 95.2% in 3Q10 and ALN Apartment Data calculate a 250 basis
point year-over-year improvement in occupancy (90.7%) in the twelvemonth period ended in November.
Source: Reis, Inc.
12%
9.6% 9.0%
10%
Metro Vacancy Rate
managers net leased 5,384 units from July to September,
giving rise to a 100 basis point sequential decrease in vacancy from
10.0% in 2Q10 to 9.0% in 3Q10. By comparison, developers
completed only 1,662 units during the quarter, down from a 2,907-unit
quarterly average in the previous seven quarters.
8%
6%
4%
Dallas
U.S.A.
2%
0%
 Reis believe that vacancy will decline to 7.1% in 2014 as development
3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q
slows from 13,598 units over the last four quarters to a 3,344-unit per
year average.
00 01 02 03 04 05 06 07 08 09 10
RANK: 42nd out of 50
Metro Rent Trends
RENT TRENDS
Source: Reis, Inc.
 The pace of sequential asking rent growth decelerated from 0.7% in
 Same-store
rent trends were mixed. According to ALN Apartment
Data, the average effective rent increased 0.9% year-over-year to $756
in November. But REIT disclosure data show a –2.2% year-over-year
decline from $838 in 3Q09 to $819 in 3Q10.
 Reis
YoY Rent Trend
2Q10 to only 0.1% in 3Q10. Sequential effective rent growth also
slowed despite lower concessions. Conversely, annual rent growth
accelerated. The average asking rent advanced 0.3% and the average
effective rent increased 0.7% year-over-year in 3Q10. The latter
represented the fastest increase since 2Q09.
6%
Asking
Effective
4%
2%
0.7%
0%
0.3%
-2%
-4%
expect effective rent to advance 1.0% sequentially to $752 in
4Q10.
3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q
00 01 02 03 04 05 06 07 08 09 10
nd
RANK: 32 out of 50
Source: Reis, Inc.
 Real
8.0%
Capital Analytics were aware of 61 investor-grade Dallas-Fort
Worth transactions in the first ten months of 2010. Sales volume
totaled $898 million and the average price per unit was $61,221.
$10 million in the Dallas metropolitan division. By comparison, the
source was aware of only two Fort Worth-Arlington metro division
assets on the market.
7.0%
Cap Rate
 Loopnet.com identify seven listings for properties priced at or above
7.5%
 RCR calculate an 8.6% generic metro average expected rate of total
return, based on a 6.5% assumed going-in yield. Although the
expected return compares favorably to the 8.2% RED 50 average,
elevated levels of historic NOI growth trend volatility produce only the
33rd highest-ranked risk-adjusted return.
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
08 08 09 09 09 09 10 10 10
Property Name
Dakota Hills Apartments
Mosiac (Distressed Sale)
Times Square at Craig Ranch (Distressed Sale)
Property
Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated
Cap Rate
A
A
A
August 2010
August 2010
August 2010
$36.1
$63.0
$31.3
$71,627
$143,183
$99,840
7.5%
N/A
N/A
Dallas-Plano-Irving, Texas Metropolitan Division - Q3 2010
Source: National Association of Realtors
$200
$180
 According to the National Association of Realtors, the median price of
MSA
$220
Prices (000)
 The
population of the Dallas-Plano-Irving metropolitan division
increased 2.4% in 2009, up slightly from 2.3% in the previous year.
Additionally, Dallas-area growth outpaced the 2.3% advance recorded
in the Fort Worth-Arlington metro division.
$240
US
a single-family home in the Dallas-Fort Worth-Arlington MSA
advanced 14.2% year-over-year from $150,200 in 3Q09 to $171,500 in
3Q10. Conversely, the MSA registered a –2.6% year-over-year decline
in the Case-Shiller home price index in September, comparing
unfavorably to the 0.6% increase in the composite index of the top 20
US metro markets.
$160
$140
$120
$100
07
08
09
Y
Y
Y
 Dallas-Plano-Irving metropolitan division home values rose 0.5% year-
3Q 4Q 1Q 2Q 3Q
09
09
10
10
10
over-year in 3Q10, down slightly from the 2.6% advance recorded in
the second quarter.
EMPLOYMENT TRENDS
100
Annual Chg (000)
67.4
35.6
50
marking the second consecutive quarterly year-over-year advance.
Employment rose 8,300 (0.4%) year-over-year in 2Q10.
 A rebound in manufacturing activity was partially responsible for the
6.6
improvement. As recently as 1Q10 manufacturing payrolls were
down -9,600 jobs year-over-year. But employers added 800 workers
year-over-year in 2Q10 and 5,300 jobs year-over-year in 3Q10.
0
-50
 Similarly,
business service firms added 19,400 workers year-overyear in 3Q10 as compared to a –29,900-job year-over-year decline
observed during 3Q09.
-100
00 01 02 03 04 05 06 07 08 09 10f 11f 12f
Source: BLS
6%
Dallas
 Based on the BLS’s household survey, total employment increased
37,162 (1.9%) in the twelve-month period ended in September. As a
result, the metro unemployment rate fell from 8.3% in September
2009 to 7.9% in the same month this year.
Seasonally-Adjusted
 On
USA
a seasonally-adjusted basis, employers eliminated –16,100 jobs
during the third quarter, following a gain of 38,300 jobs over the previous nine month period.
4%
2%
Rate
 Metro payroll headcounts rose 22,600 (1.1%) year-over-year in 3Q10,
Forecast
0%
 RCR expect Dallas payroll headcounts to advance 6,600 (0.3%) this
-2%
year, following the steep –82,800 (-3.9%) job decrease in 2009.
Moreover, our econometric model predicts that employers will add
35,600 (1.8%) jobs in 2011 and 67,400 (3.3%) jobs in 2012.
-4%
-6%
 Economy.com are more optimistic as 50,320 jobs are added in 2011
99 00 01 02 03 04 05 06 07 08 09 10
and 74,770 jobs are created in 2012.
RANK: 4th out of 50
15%
Dallas
10%
5%
5.0%
4.5%
Fort Worth
7.0%
7.6%
8.5%
9.2%
10.0%
10.8%
12.2%
13.0%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
Garland
South County
Southwest Dallas
Grand Prairie
North Irving
South Irving
Far North
Far Northeast
North White Rock
East Dallas
Southeast Dallas
South
Richardson
Far Northwest / Farmers Branch
Lewisville
Northwest
Central Dallas
Oaklawn
North
Metro
3Q09
3Q10
Change
3Q09
3Q10
$651
$656
$664
$610
$639
$787
$612
$735
$556
$614
$558
$762
$517
$688
$781
$636
$737
$793
$851
$715
$816
$1,607
$1,119
$756
$739
$639
$659
$656
$614
$622
$772
$641
$740
$553
$624
$574
$771
$518
$701
$782
$658
$733
$792
$862
$817
$827
$1,548
$1,152
$758
$744
-1.9%
0.4%
-1.2%
0.6%
-2.6%
-1.9%
4.8%
0.6%
-0.5%
1.7%
2.9%
1.2%
0.1%
1.8%
0.2%
3.5%
-0.5%
-0.1%
1.2%
14.3%
1.3%
-3.7%
2.9%
0.2%
0.7%
7.6%
8.2%
8.6%
9.8%
9.5%
9.5%
8.6%
7.1%
14.0%
11.1%
12.6%
11.6%
10.7%
14.4%
8.0%
8.5%
7.4%
9.0%
10.6%
12.2%
6.5%
14.2%
13.3%
8.2%
9.6%
7.8%
7.1%
7.4%
9.2%
8.1%
8.5%
8.5%
6.7%
14.3%
11.1%
12.9%
10.9%
10.2%
13.8%
6.8%
7.9%
8.2%
8.7%
9.1%
12.5%
7.6%
8.3%
12.5%
7.1%
9.0%
20 bps
-110 bps
-120 bps
-60 bps
-140 bps
-100 bps
-10 bps
-40 bps
30 bps
Uncgh
30 bps
-70 bps
-50 bps
-60 bps
-120 bps
-60 bps
80 bps
-30 bps
-150 bps
30 bps
110 bps
-590 bps
-80 bps
-110 bps
-60 bps
SUPPLY TRENDS
Source: Reis, Inc
 Developers completed 13,823 apartment units in 2009, representing a
 Developers were most active this year in the Plano / Allen / McKinney
(1,382 units) and Lewisville (1,015 units) submarkets.
 Reis predict supply will wane next year.
As of November, the service
was aware of only 1,270 apartment units under construction. Although
Reis identify 13,519 units in the planned pipeline, estimated delivery
dates area available for only 1,573 units.
 Four condo properties were under construction in November.
Only one
is expected to open by year-end 2011, adding 170 units to the market.
William T. Hinga
[email protected]
614-857-1499
Units
3.5% increase in the rental stock. But supply was slower so far this
year. According to Reis, 6,411 apartment units were completed in the
first 11 months of 2010 and no units are expected to come online in
December.
Daniel J. Hogan
[email protected]
614-857-1416
Change
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
-2,000
-4,000
Completions
Absorption
02 03 04 05 06 07 08 09 10f 11f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or
sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED
CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED
cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and
exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice
due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Dallas,Texas
August 2010
EXECUTIVE SUMMARY
B
ig “D” employers created
8,300 (0.4%) jobs yearover-year in 2Q10, marking
the first annual increase since 3Q08.
An improvement among manufacturing and business service firms was
largely responsible.
The sectors
added a combined 11,300 workers yo-y in 2Q10 as compared to the
-9,900-job decrease observed in the
first quarter. Similarly, education and
health service establishments added
15,800 positions to payrolls y-o-y in
1Q10 and 16,400 y-o-y in 2Q10.
On a seasonally-adjusted basis, the
pace of payroll job creation accelerated from 2,800 new jobs in 1Q10 to
26,500 new jobs in 2Q10. Moreover,
results from the Manpower Employment Outlook Survey (covering the
Dallas - Fort Worth - Arlington MSA)
suggest that the pace of hiring will
accelerate in the third quarter. Indeed, the percentage of surveyed
firms that plan to add workers rose
from 9% in March (regarding 2Q10
hiring plans) to 13% in June.
Total employment data, from the
BLS’s household survey, reveal faster
job growth. According to the source,
area employment surged 36,581
(1.9%) y-o-y in 1Q10 and 46,640
(2.4%) y-o-y in 2Q10. But the unemployment rate remained elevated
(8.3%) as labor force growth (+3.0%)
outpaced employment growth in the
second quarter.
foresee solid job growth over the next
few years. Specifically, our econometric model produces point estimates of 13,400 (0.7%) net new jobs
this year, 56,800 (2.8%) new jobs in
2011 and 87,800 (4.3%) new jobs in
2012. Economy.com hold a similar
outlook, predicting payroll growth of
37,640 in 2010, 56,310 in 2011, and
81,560 in 2012.
SNAP SHOT
Housing market conditions improved
year-to-date. The Real Estate Center
at Texas A&M University count
26,513 home sales in the first seven
months of 2010, up 0.7% from the
same period of 2009. Likewise, the
metro division registered a 3.4% y-oy gain in the Federal Housing Finance
Agency’s purchase-only home price
index in 2Q10.
The improved job market gave rise to
strong apartment demand from April
to June. Property managers net leased
4,544 units during the period, up from
the 1,671-unit quarterly average recorded from 3Q09 to 1Q10. As a
result, the metro occupancy rate increased 40 basis points sequentially to
90.0% in 2Q10, after reaching a low
of 89.3% in December 2009. Marcus
& Millichap report that tenant demand was particularly strong among
Class-A properties, leading to a 120
basis point increase in occupancy
during 1H10. By comparison, the
source calculates that Class B/C occupancy rose only 40 basis points.
Effective rent advanced 0.8% sequentially from $736 in 1Q10 to $742 in
2Q10. As a result, annual effective
rent trends turned positive (+0.4%) in
the second quarter, following two
consecutive periods of decline. ALN
Apartment Data estimate that 62% of
Dallas/Fort Worth properties offered
rent concessions in July, down from
about 69% in the same month last
year.
According to Real Capital Analytics
sales volume totaled $451 million and
the average price per unit was
$67,709 in 1H10. CB Richard Ellis
conclude that stabilized Class-A cap
rates ranged from 6.5% to 7.0% in
August. Based on an assumed 6.5%
cap rate, RCR calculate an 8.0% expected rate of total return, above the
7.4% RED 50 average.
Y-o-y
change
Vacancy
(10.0% - 2Q10)
60bps
Effective
Rents
0.4%
Projected
YE 2010
10bps
1.8%
($742 - 2Q10)
Cap Rate
(6.3% - 2Q10)
140bps
Employment
(2,025.5m - 2Q10)
8.3m
13.4m
KEY POINTS
•
As of August, Reis were aware of 7,076
apartment units completed year-to-date. But
supply will slow as only 1,831 apartment
units were under construction in August.
•
Despite elevated supply -- 4,522 units were
delivered in 1H10 -- the metro vacancy rate
fell 70 basis points from 10.7% in December
to 10.0% in June. Stout tenant demand was
responsible. Positive net absorption totaled
7,090 units in the first half. By comparison,
property managers net lease only 1,730 units
in calendar 2009.
•
The average effective rent rose 0.8%
sequentially in 2Q10, marking the second
consecutive quarterly gain. As a result,
annual effective rent growth rebounded from
-0.7% in 1Q10 to 0.4% in 2Q10.
•
REIT disclosure data show an average D/FW
occupancy rate of 94.9% in 2Q10. Measured
on a same-store basis, the figure was up 10
basis points sequentially and 50 basis points
year-over-year. Asking rent, on the other
hand, declined 0.4% sequentially and -4.6%
year-over-year to $781 in the second quarter.
Same-store net operating income rose 2.3%
sequentially.
VACANCY TRENDS
•
•
Apartment demand surged in the second quarter as property managers
net leased 4,544 units from April to June, outpacing the 3,069 units
completed during the period. As a result, the average metro vacancy
rate fell 40 basis points sequentially to 10.0%. On the other hand,
vacancy increased 60 basis points year-on-year as developers delivered
13,326 units in the twelve-month period ended in June.
According to ALN Apartment Data same-store occupancy in the
Dallas-Fort Worth metro area increased 80 basis points year-over-year
to 90.3% in July. Similarly, REIT disclosure data show that metro
occupancy advanced 10 basis points sequentially and 50 basis points
year-over-year to 94.9%.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
8%
6%
4%
Dallas
U.S.A.
2%
0%
2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q
Reis predict that vacancy will decrease to 9.9% by year-end.
00 01 02 03 04 05 06 07 08 09 10
RANK: 41st out of 50
RENT TRENDS
•
•
•
Metro Rent Trends
Effective rent increased 0.8% sequentially in 2Q10, marking the
second consecutive quarterly gain. As a result, effective rent advanced
at a 0.4% year-over-year rate in the second quarter, following a -0.7%
drop observed in the first quarter.
ALN Apartment Data report an average effective rent of $751 ($0.86
per square foot) in July, down -2.1% from the same month of 2009.
Moreover, the source estimates that 62.0% of rental properties offered
concessions in July.
Source: Reis, Inc.
6%
YoY Rent Trend
•
10.0%
9.4%
10%
REIT disclosure data reveal that same-store average rent fell -0.4%
sequentially to $781.
Asking
Effective
4%
0.4%
0.1%
2%
0%
-2%
-4%
2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q
Reis expect that effective rent will increase 1.7% annually in 2011,
slightly slower than the 1.8% annual advance predicted for 4Q10.
00 01 02 03 04 05 06 07 08 09 10
RANK: 23rd out of 50
•
•
•
Real Capital Analytics identified 29 transactions in 1H10, totaling
$451 million in sales proceeds. The source calculates a $67,709
average price per unit.
CB Richard Ellis report that cap rates for stabilized Class-A properties
ranged from 6.5% to 7.0% in August. By comparison, market clearing
yields for stabilized Class-B assets ranged from 7.75% to 8.5%.
6.5%
7.5%
7.0%
Cap Rate
•
Source: Reis, Inc.
8.0%
6.0%
5.5%
Marcus & Millichap calculate similar Class-A cap rates as the source
identified a 6.75% to 7.25% range in the year-ended in June.
5.0%
Based on a 6.5% assumed going-in yield, RCR calculate an 8.0%
expected rate of total return, above the 7.4% RED 50 average. But
above average historic NOI growth volatility gives rise to the 35th
ranked measure of risk-adjusted return.
4.0%
4.5%
2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
08
08 08
09
09 09
09 10
10
Property Name
Colonia Grand @ Valley Ranch
Alexan Fitzhugh
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
Class-A
Class-A
July 2010
June 2010
$25.4
$49.8
$64,141
$110,066
8.5%
6.5%
$240
MSA
Prices (000)
$220
•
US
•
$200
$180
$160
$140
$120
•
$100
07
08
09
Y
Y
Y
2Q 3Q 4Q 1Q 2Q
09
09
09
10
10
•
Annual Chg (000)
56.8
50
13.4
0
•
-50
-100
99 00 01 02 03 04 05 06 07 08 09 10f 11f
USA
Payroll employment trends turned positive in the second quarter as
area establishments added 8,300 (0.4%) workers year-over-year, the
first over-the-year gain observed since 3Q08 (+21,000). Moreover,
26,100 (1.3%) positions were added to payrolls in the twelve-month
period ended in July.
Business service firms contributed to the turnaround, hiring 19,100
workers year-over-year in July, following a -30,300-job year-overyear decrease in the same month of 2009. Likewise, year-over-year
hiring among area manufacturers turned positive in May (+1,300
jobs) and accelerated in June.
The impact from temporary Census workers continued to wane in
July. Based on preliminary BLS data, there were roughly 3,100 Census workers remaining in July, down from the peak of 7,300 workers
recorded in May.
Data from BLS’s household survey reveal a more robust recovery in
the second quarter as total employment surged 46,640 (2.4%) yearover-year.
Seasonally-Adjusted
•
2%
Rate
•
•
Source: BLS
Dallas
The Dallas - Plano - Irving metropolitan division registered a 3.4%
year-over-year gain in the FHFA purchase-only home price index in
2Q10. Similarly, the seasonally-adjusted index increased 1.5%
sequentially.
100
4%
According to the National Association of Realtors, the median price of
a single-family home in the Dallas - Forth Worth - Arlington MSA
increased 2.1% year-over-year from $131,900 in 2Q09 to $134,700 in
2Q10. Similarly, the Dallas MSA posted a 2.9% year-over-year
increase in the Case-Shiller home price index in May, ranking 10th
among the 20 markets tracked by the source.
EMPLOYMENT TRENDS
6%
The population of the Dallas - Plano - Irving metropolitan division
increased 2.4% in 2009, moderately faster than the 2.3% growth rate
recorded in the previous year.
0%
On a seasonally-adjusted basis, employers created 26,500 jobs in the
second quarter, much better than the 2,800 job advance recorded in
1Q10.
-2%
Forecast
-4%
•
-6%
99 00 01 02 03 04 05 06 07 08 09 10
Based on optimistic domestic economic growth assumptions, RCR
predict that payroll headcounts in Dallas will increase 13,400 (0.7%)
this year, 56,800 (2.8%) in 2011 and 87,800 (4.3%) in 2012.
RANK: 3rd out of 50
15%
10%
5%
Dallas
4.2%
3.7%
Houston
6.3%
6.9%
7.9%
8.6%
9.5%
10.2%
11.7%
12.5%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Submarket
Effective Rent
2Q09
2Q10
Physical Vacancy
Change
2Q09
$675
$643
-4.8%
6.9%
8.6%
170 bps
$669
$652
-2.5%
6.7%
8.2%
150 bps
South County
$656
$652
-0.6%
8.7%
8.5%
-20 bps
Southwest Dallas
$611
$606
-0.9%
8.7%
10.5%
180 bps
Grand Prairie
$627
$616
-1.7%
10.5%
9.1%
-140 bps
North Irving
$776
$780
0.6%
8.0%
9.9%
190 bps
South Irving
$618
$622
0.7%
5.8%
9.5%
370 bps
Far North
$751
$745
-0.7%
5.3%
7.9%
260 bps
Far Northeast
$552
$559
1.3%
12.3%
16.6%
430 bps
North White Rock
$605
$633
4.6%
9.1%
12.1%
300 bps
$565
$568
0.6%
11.0%
13.3%
230 bps
East Dallas
$745
$765
2.7%
10.3%
12.2%
190 bps
Southeast Dallas
$513
$518
0.9%
10.2%
10.8%
60 bps
South
$669
$684
2.2%
12.8%
14.7%
190 bps
Richardson
$770
$774
0.5%
6.3%
7.9%
160 bps
Far Northwest
$634
$648
2.2%
6.5%
9.3%
280 bps
$748
$745
-0.5%
5.8%
7.8%
200 bps
Lewisville
$809
$793
-2.0%
6.5%
8.0%
150 bps
$863
$859
-0.5%
8.5%
10.0%
150 bps
Northwest
$719
$815
13.4%
8.3%
15.8%
750 bps
$805
$816
1.4%
5.8%
7.9%
210 bps
Central Dallas
$1,626
$1,497
-7.9%
13.5%
9.3%
-420 bps
Oaklawn
$1,091
$1,118
2.5%
5.5%
14.4%
890 bps
North
$780
$758
-2.8%
6.0%
8.5%
250 bps
Metro
$739
$742
0.4%
9.4%
10.0%
60 bps
•
•
Source: Reis, Inc
Apartment developers remained active this year. According to Reis,
7,076 units were completed in the first eight months of 2010. The
largest additions to inventory were recorded in the Plano / Allen /
McKinney (1,382 units) and Lewisville (1,015 units) submarkets.
As of August, Reis were aware of only 1,831 apartment units under
construction, boding well for near-term occupancy rates. On the other
hand, the planned / proposed pipeline is stout, containing 25,865
apartment units.
Leasing conditions were strong. Absorption rates among properties
that were delivered late last year ranged from 16 units per month to 37
units per month.
Reis were aware of six condo properties, totaling 616 units, under
construction in August.
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
Units
•
Change
Garland
SUPPLY TRENDS
•
2Q10
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
-2,000
-4,000
Completions
Absorption
02 03 04 05 06 07 08 09 10f 11f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
RED CAPITAL GROUP®
Market Overview
Dallas,Texas
June 2010
EXECUTIVE SUMMARY
C
onventional wisdom had it
that Dallas would have an
easier go of it than the Nation during the Great Recession, owing
to its stable housing market and diversified, service-oriented economy. But
like many instances lately, the CW
was off target. The Dallas economy
struggled mightily last year, hemorrhaging 82,800 (-3.9%) jobs, including
a 103,600-job, -4.9% plunge during
the 12-month period ended in August.
The story may have a happy ending
though as the Big D labor market rebounded in early 2010 with greater
force than the country at large. Yearover-year payroll declines slowed to a
34,800-job, -1.7% pace in 1Q10, up
sharply from 4Q’s 77,400-job, -3.4%
drop, and annual comparisons approached parity in April with a small
8,200-job, -0.4% decline. By contrast,
U.S. payrolls fell –2.4% and –1.0% in
1Q10 and April, respectively.
First quarter gains were largely attributable to hiring in manufacturing and
business services. Y-o-y losses in the
foregoing industries declined to the
9,900-job level from 34,100 jobs in
4Q09. The progress continued in April
as annual comparisons turned positive,
propelled by a 7,900-job advance in
the business service segment.
Retail-oriented sectors also showed
renewed life as consumer sentiment
heated up with the spring sun. Demand for housing spurred the fastest 1family building permit issue in two
years in March and April, while more
robust consumer spending boosted
Neiman Marcus same-store sales 7.8%
in May and generated the strongest yo-y payroll comparisons in the retail
sector in 18 months.
Seasonally-adjusted payroll data also
were constructive. On this basis, metro
payrolls increased in every month December to April, adding to a 10,500job gain for the period. That’s consistent with our latest econometric fore-
SNAP SHOT
cast for a net add of 12,100 jobs this
year, with y-o-y growth emerging as
early as May. Gains are projected to
accelerate rapidly thereafter, generating a projected 73,000 (3.6%) jobs in
2011, and 95,900 (4.6%) in 2012.
The improved jobs outlook prompted a
host of residents to vacate their parents’ basements and bid roommates
adieu. Metro projects posted the highest quarterly absorption total (2,385
units) in nearly three years and the
highest first quarter figure in ten years.
Although 1,276 units were added to
the metro inventory, the average occupancy rate increased 30 basis points to
89.6%, the first sequential quarter advance recorded in 18 months. Submarkets popular with young professional singles (Central and East Dallas) and families (Plano/Allen) led the
way, combining to lease 1,680 units.
Increased demand gave rise to firmer
rent trends. Average asking rents were
unchanged sequentially, but concession levels declined. As a result, average effective rents increased $2 (0.3%)
to $736. Seven submarkets posted
sequential gains of 1% or more, mostly
areas consisting substantially of classB&C properties with average rents
below $700. Plano/Allen was the principal exception: effective rents there
increased 1.3% q-o-q to $852.
Reis are optimistic with respect to unit
demand — the service forecasts steadily improving occupancy through 2014
(to 91.7%) — but less so as regards
rent trends. After rising 1.0% in 2010,
the service expects rents to increase at
a 2.3% compound annual rate to 2014,
30 bps below the U.S. top metro average. Consequently, the RCR estimate
of 5-year generic total returns is limited to 7.1%, only 10 bps above the
RED 50 mean, despite the useful occupancy advance and above average
6.5% cap rate assumption. Moreover,
volatility produces a 2.24 risk-adjusted
index, below the 2.44 RED 50 mean.
Y-o-y
change
Projected
YE 2010
180bps
40 bps
0.7%
1.0%
120bps
Unchd
Vacancy
(10.4% - 1Q10)
Effective
Rents
($736 - 1Q10)
Median Cap Rate
(6.3% - 1Q10)
Employment
(1,991.3m - 1Q10)
34.8m
12.1m
KEY POINTS
•
If BLS seasonally-adjusted payroll data can
be taken at face value, Dallas establishments
started to create jobs in December and
continued to add to payrolls through April,
net hiring 10,500 workers over the period.
•
RED Research econometric models indicate
that job creation will gain strength through
year-end, contributing to a 12,100 net job
add this year, with gains of 73,000 and
95,900 jobs in store for 2011 and 2012.
•
Improving labor markets gave more potential
tenants the wherewithal and confidence to
establish independent households. As a
result, owners net leased the most units in a
first quarter (2,385) since 2000, allowing
average occupancy to rise 30 basis points
quarter-to-quarter to 89.6%.
•
The rush of young people to establish initial
households over the winter supported rent
trends at older, lower-rent properties. The
class-A segment continued to discount rents
to enhance occupancy. Overall, effective
rents rose $2 (0.3%) to an average of $736.
•
Property trade was steady in 1Q10. Buyers
closed on 14 properties for about $102mm,
up from 8 for about $108mm in 1Q09.
VACANCY TRENDS
•
•
Owners net leased 2,385 units in 1Q, by Reis’s count, raising average
occupancy 30 basis points sequentially to 89.6%. The rate in the yearearlier period was 91.4%. M/PF report net absorption of 4,000 units,
with properties in lease-up accounting for the lion’s share. This service
reported average occupancy at 89.4%.
Submarkets with new units in lease up garnered the largest net
absorption gains, especially East and Central Dallas (infill) and Plano/
Allen (Collin County suburban). The improving job market served to
staunch the outflow of tenants at lower tier properties.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
Heavy supply levels will persist through year-end, exerting downward
occupancy pressure. Reis expect developers to deliver 5,366 units
from April through December, pushing occupancy down 40 bps.
10.4%
10%
8%
6%
8.0%
4%
DALLAS
U.S.A.
2%
0%
1Q 04 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10
RENT TRENDS
•
•
Reis surveys found that asking rents were stable across the Dallas
metro area in the first quarter, holding steady sequentially at $814.
Effective rents rose from $734 to $736 (+0.3%), by virtue of a small
recession of rent concessions, but remained $5 (-0.7%) below yearearlier levels. M/PF Research report, on the other hand, report that
effective rents fell -1.1% sequentially and -4.9% year-over-year.
Soft pricing persisted at the high-end of the market. Rents in Central
Dallas (average $1,527) and Oaklawn ($1,082) declined sequentially
by –1.5% and –0.7%, respectively, underperforming the metro mean.
Source: Reis, Inc.
6%
5%
YoY Rent Trend
•
Metro Rent Trends
By contrast, lower-tier submarkets delivered relatively health rent
gains. For example, submarkets where effective rents averaged less
than $650 increased by an average of 0.6% sequentially.
4%
3%
2%
0%
-1%
•
Recent trade leads RCR to conclude that typical institutional quality Dallas
assets will trade at a roughly 6.5% going-in yield. Using this level, we estimate
that a typical Dallas asset will generate a 7.1% 5-year unlevered total return, 10
bps above the RED 50 mean. On the other hand, high historical NOI volatility
in this market holds risk-adjusted returns below the group average. Dallas riskadjusted index is 2.24 versus a RED 50 mean of 2.45.
-0.1%
-3%
1Q 04 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10
Source: Reis, Inc.
8.0%
7.5%
7.0%
Cap Rate
Winter trade was dominated by aging class-B- properties as
repositioning plays and a few over-levered younger assets moving to
deeper-pocketed ownership. But institutional investors became more
active in the spring. A money manager that has been the most
aggressive buyer of U.S. trophy properties acquired a stabilized newconstruction class-AA Cochrane Park mid-rise located in close
proximity to trendy Oaklawn and Turtle Creek. The attractive going-in
yield could increase materially if rents in the neighborhoods converge.
Also, a major insurer bought a distressed, 20-story tower in Oaklawn at
an undisclosed price.
Asking
Effective
-2%
•
-0.7%
1%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
2Q
4Q
2Q
4Q
2Q
4Q
2Q
07
07
08
08
09
09
10
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
A
01-Jun-2010
21-May-2010
N/A
$49.8 (contract)
N/A
$110,122
Distrsd. Asset
6.5%
Bella Ruscello (South County)
A
24-Mar-2010
$17.2 (closed)
$79,630
6.9% / 7.5% pf
Forest Estates (Far Northeast)
B-
17-Mar-2010
$5.2
$18,841
12.0% pf
Property Name
Mondrian CityPlace (Oaklawn)
Fitzhugh (East / Central Dallas)
Year-over-year Home Value Change
Source: S&P Case-Shiller Index, RCR
Appreciation
5%
DALLAS
•
CSX20
0%
-5%
•
-10%
-15%
•
-20%
Mar-
Jul-
08
08
Nov- Mar08
09
Jul09
Nov- Mar09
•
10
Annual Chg (000)
•
95.9
73.0
12.1
0
•
-50
•
-100
00 01 02 03 04 05 06 07 08 09 10f 11f12f
•
HousingTracker.net report that the median listing price of Dallas
homes was $199,650 in June, down –2.1% from the prior year period.
The pace of the Dallas - Plano - Irving M.D. economic recovery
gained steam in the spring. After plunging at a nearly -5% annual rate
as recently as last August, year-over-year payroll comparisons were
nearly at parity in April. Stronger results were largely attributable to
a technology-led manufacturing resurgence and faster hiring in government and financial and business service sectors.
In 4Q09, payrolls declined at a combined 46,900-job year-on-year
rate in the manufacturing, retail trade and financial and business service sectors. In April, these industries generated a 1,400-job advance.
Attrition in once robust telecom industry persisted at a steady pace.
Losses averaged 1,900 (-5.5%) jobs year-on-year in 4Q09 and 1Q10,
before accelerating to a 2,400-job, -7.7% y-o-y pace in April.
Unemployment averaged 8.2% in April, 150 bps below the U.S. average. The Dallas rate was 7.1% in the year-earlier period.
Seasonally-Adjusted
Source: BLS, Woodley Park Research, RCR
•
6%
4%
•
2%
Rate
Dallas M.D. population increased by 99,700 (1.3%) persons in 2009,
up from 95,525 in 2008.
150
50
According to the N.A.R., the median price of a Dallas-Fort Worth
home sold in 1Q10 was $141,900, up 0.6% year-over-year. The
comparable U.S. median for the period was $166,100, down –0.7%.
EMPLOYMENT TRENDS
100
Dallas home values were considerably less volatile than the national
average over the past decade. Using the Case-Shiller index as the
benchmark, metro prices appreciated only 23.7% from January 2000 to
December 2006, compared to 103.3% for the C-S 20-Metro Index.
Likewise on the way down. Dallas prices declined only -3.9% from
December 2006 to December 2009, while the CSX20 fell –28.2%.
0%
Dallas payrolls increased in each month from December to April,
rising 10,500 jobs overall and 3,600 jobs during April alone.
April 2010 payrolls remained -99,000 jobs below the February 2008
peak level, however, representing a decline of –4.7%.
Forecast
-2%
•
DALL ACTUAL
DALL FORECAST
USA ACTUAL
USA FORECAST
-4%
-6%
03 04 05 06 07 08 09 10 11f 12f
15%
10%
5%
Dallas’s competitive operating cost environment and businessfriendly attitudes usually contribute to above average growth during
economic recoveries and booms. RED Research expect this pattern
to repeat itself as the U.S. economy emerges from the Great Recession. Our econometric payroll model projects that the metro will create 12,100 net jobs this year before shifting into high gear in 2011 and
2012, when gains are forecast at 73,000 and 95,900 jobs, respectively.
DAL (RAI=2.24)
2.8%
2.7%
FW (RAI=2.16)
5.4%
5.3%
7.0%
7.1%
8.6%
8.7%
10.9%
11.2%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Submarket
Effective Rent
1Q09
1Q10
Change
1Q09
1Q10
Garland
South County
$ 670
$ 656
$ 652
$ 653
$ 653
$ 654
-2.6%
-0.4%
7.5%
7.5%
9.3%
9.2%
0.2%
8.2%
9.5%
180 bps
170 bps
130 bps
Southwest Dallas
Grand Prairie
North Irving
South Irving
Far North
Far Northeast
North White Rock
East Dallas
Southeast Dallas
South
Richardson
Far Northwest
Lewisville
Northwest
Central Dallas
Oaklawn
North
Metro
$ 612
$ 630
$ 775
$ 615
$ 755
$ 556
$ 617
$ 563
$ 769
$ 525
$ 687
$ 769
$ 631
$ 748
$ 801
$ 856
$ 719
$ 813
$1,645
$1,090
$ 771
$ 741
$ 608
$ 624
$ 775
$ 621
$ 735
$ 560
$ 620
$ 556
$ 750
$ 512
$ 673
$ 767
$ 648
$ 732
$ 786
$ 852
$ 791
$ 805
$1,527
$1,082
$ 756
$ 736
-0.7%
-0.9%
0.0%
0.9%
-2.7%
0.6%
0.5%
-1.3%
-2.4%
-2.4%
-2.0%
-0.3%
2.7%
-2.1%
-1.9%
-0.5%
10.0%
-0.9%
-7.2%
-0.8%
-1.9%
-0.7%
9.4%
9.3%
9.3%
6.7%
5.8%
12.4%
10.2%
12.2%
13.5%
9.3%
11.4%
7.0%
8.1%
6.1%
7.5%
8.3%
9.7%
6.2%
12.7%
6.5%
6.8%
8.6%
11.2%
10.1%
9.2%
10.0%
9.0%
14.4%
12.6%
13.3%
11.4%
10.2%
15.9%
8.7%
8.5%
8.6%
7.8%
11.1%
16.7%
10.3%
11.3%
11.7%
9.5%
10.4%
180 bps
80 bps
-10 bps
330 bps
320 bps
200 bps
240 bps
110 bps
-210 bps
90 bps
450 bps
170 bps
40 bps
250 bps
30 bps
280 bps
700 bps
410 bps
-140 bps
520 bps
270 bps
180 bps
SUPPLY TRENDS
•
•
•
Physical Vacancy
•
Heavy supply expected in 2010 will hamper efforts to stabilize
occupancy and improve pricing traction. In early June, 14
projects were underway encompassing a total of 4,629 units.
Ten apartments with 3,300 units are projected to be delivered by
the end of the year.
Fifteen apartment complexes with 3,895 units were completed
during the year’s first five months, although 892 units in Colin
and Ellis Counties are not located within a Reis submarket.
There are plenty of deals on the shelf ready to break ground
when demand recovers. Nearly 50 deals are permitted but not
started, incorporating a total of 14,150 units.
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
•
•
•
Change
MP/F Research estimate the number of units to be
competed between April and December at 7,300.
A 2009-vintage Cochrane Park asset acquired in May
was 93% occupied in March, according to Reis. It
entered the Reis inventory in February 2009.
A 375-unit, 21-story repurposed condo tower on
McKinnon Street in Central Dallas was 72% occupied in
March after leasing nearly one year. Asking rents
averaged $2,111.
A 316-unit Oaklawn mid-rise was 63% occupied after a
nine-month lease-up period. Face rents averaged $1,867.
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to
buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented
in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon
this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are
subject to change without notice due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Dallas,Texas
February 2010
EXECUTIVE SUMMARY
R
ecent data indicate that the
Dallas economy is poised
for a quick recovery. The
Federal Reserve’s December 2nd
Beige Book noted increased business
activity, particularly among high-tech
manufacturing, paper, petrochemicals,
staffing services, housing and energy
firms in the Fed’s Eleventh District.
Moreover, the Dallas Fed’s Business
Cycle Index that covers the Dallas Plano - Irving metro division rebounded from the September 2009
cyclical low of 196.9 to 197.1 in December. Likewise, the seasonallyadjusted payroll employment series
produced by the Dallas Fed revealed
that employers added 9,200 jobs during 4Q09, following an average quarterly loss of -30,700 jobs from 1Q09
to 3Q09.
Non-seasonally adjusted BLS payroll
employment figures improved modestly in 4Q09. Following a -49,300
(-2.4%) job year-over-year decrease
in 3Q09, employers cut -44,900
(-2.1%) workers y-o-y in 4Q09.
Slower attrition among business service providers was largely responsible. Super-sector establishments cut a
modest -13,700 jobs y-o-y in 4Q09, as
compared to the severe -21,700-job
decrease in the previous period.
Business sentiment improved dramatically. According to the December Manpower Employment Outlook
Survey, 17% of area firms planned to
add workers in 1Q10, significantly
higher than the 8% share that expected to reduce staffs. By comparison, respondents to the September
survey (regarding 4Q09 hiring plans)
were pessimistic. More businesses
(16%) anticipated cut-backs than foresaw expansion (12%).
envisage a robust recovery in Dallas.
Our econometric model produces
point estimates of 21,800 (1.1%) new
SNAP SHOT
jobs this year and a 58,400 (2.8%) job
gain in 2011. Economy.com are more
bullish, forecasting a gain of 46,220
(2.2%) net new jobs in 2010 and a
63,820 (3.0%) job advance in 2011.
Housing market conditions also rebounded in 4Q09. The National Association of Realtors estimate that the
median price of a single-family home
in the DFW metro area increased
3.0% y-o-y to $142,100. Similarly,
the Real Estate Center at Texas A&M
University calculate that the median
price of a Dallas metro division home
advanced 3.2% in the twelve-month
period ended in December.
Apartment property managers net
leased 452 units in 4Q09, marking the
second consecutive quarter with positive net absorption. Nonetheless, occupancy plunged 110 basis points
sequentially to 89.3%, owing to supply. Twenty-one apartment complexes, containing 5,387 units, came
on-line in 4Q09, a 1.3% increase in
the rental stock.
Measured on an annual basis, fourth
quarter effective rent growth was
negative (-0.8%) for first time since
1Q05. Increased concessions were
partially to blame as the size of the
average concession package rose from
9.0% of asking rent in 4Q08 to 9.8%
in 4Q09.
Real Capital Analytics calculate a
-65% decrease in apartment sales volume from $1,848 million in 2008 to
$648 million in 2009. The average
price per unit was $53,666 and the
weighted average cap rate was 7.2%
in calendar 2009. Based on an assumed 7.0% cap rate, RCR calculate
a slightly above average 6.8% expected rate of total return. But higher
than average historic NOI growth
volatility produces the 36th highest
measure of risk-adjusted return in the
RED 50.
Y-o-y
change
Projected
2010
270bps
60bps
0.8%
0.1%
Vacancy
(10.7% - 4Q09)
Effective
Rents
($734 - 4Q09)
Cap Rate
(N/A - 4Q09)
N/A
Employment
(2,071.7m - 4Q09)
44.9m
21.8m
KEY POINTS
•
Vacancy rose 110 basis points sequentially
and 270 basis points year-over-year to 10.7%
in 4Q09. Supply was to blame. Developers
completed 13,823 units in 2009 (including
5,387 units in 4Q), outpacing tenant demand
of 908 units.
•
Asking and effective rent weakened in the
fourth quarter. The average asking rent
decreased -0.5% and effective rent dipped
-0.7% sequentially.
•
According to supplemental earnings releases,
the average DFW REIT occupancy rate was
93.1% in 4Q09. Measured on a same-store
basis, the figure was down 60 basis points
sequentially and 140 basis points year-overyear. Likewise the average rent and net
operating income declined -4.7% and -8.3%
year-over-year, respectively.
•
As of February, Reis predict that supply will
total roughly 6,000 units this year, less than
half of the 2009 vintage. Still, the service
predicts that vacancy will rise 60 basis points
to 11.3% by year-end. Conversely, Reis
forecast a 0.1% increase in effective rent this
year, followed by average annual growth of
2.1% from 2011 to 2014.
Dallas - Plano - Irving, Texas Metropolitan Division - 4Q 2009
VACANCY TRENDS
•
•
Apartment vacancy soared 110 basis points sequentially from 9.6% in
3Q09 to 10.7% in 4Q09, due to supply. Developers completed 5,387
units from October to December, outpacing tenant demand of 452
units. Moreover, supply totaled 12,869 units in 2009, producing a 270
basis points increase in vacancy year-over-year.
Based on REIT disclosure data, covering nearly 18,000 apartment units
in the Dallas - Fort Worth metro area, same-store occupancy fell 60
basis points sequentially and 140 basis points year-over-year to 93.1%
in 4Q09.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
10.7%
10%
8.0%
8%
6%
4%
Dallas
U.S.A.
2%
Reis forecast a 60 basis point increase in vacancy this year, despite
receding supply pressure. The service was aware of 289 units that
were completed in January and another 6,579 units under construction
and scheduled to open this year.
0%
4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q
99 00 01 02 03 04 05 06 07 08 09
Metro Rent Trends
RENT TRENDS
•
•
Effective rent decreased -0.7% sequentially to $734, despite the
delivery of 4,800 Class-A rental units in the fourth quarter.
Additionally, the average Class-A asking rent declined -1.0% from
$1,007 in 3Q09 to $997 in 4Q09.
Same-store rent trends were worse. Based on REIT Dallas - Fort
Worth data, same-store average rent decreased -1.6% sequentially and
-4.7% year-over-year. Likewise, ALN Apartment Data reveal that
same-store effective rent in Dallas decreased -3.9% in the twelvemonth period ended in November, versus the -3.4% decrease recorded
in the overall market (including properties in lease-up).
Reis project a slight improvement in 2010.
effective rent to rise 0.1% to $735 this year.
Source: Reis, Inc.
8%
6%
YoY Rent Trend
•
Asking
Effective
4%
0%
-0.8%
-2%
-4%
-6%
The service expects
4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q
99 00 01 02 03 04 05 06 07 08 09
th
RANK: 14 out of 50
•
•
Source: Reis, Inc.
Real Capital Analytics identified 42 DFW transactions involving
properties priced at or above $5 million in 2009. The source estimates
that sales volume totaled $648 million, down -65% from 2008. RCA
calculate a $53,666 average price per unit and a 7.2% mean cap rate.
RCR identified a listing for a 1982-vintage Dallas asset located south
of the DFW International Airport. Based on the asking price and
annualized NOI from September, the asset is offered at an 8.2% goingin yield.
Based on an assumed 7.0% going-in yield, RCR calculate a 6.8%
expected rate of total return. The figure was slightly higher than the
6.7% RED 50 average. On the other hand, above average historic NOI
growth volatility gave rise to the 36th highest measure of risk-adjusted
return.
8.0%
7.5%
7.0%
Cap Rate
•
0.1%
2%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
07 08 08 08 08 09 09 09 08
Property Name
Bella Ruscello (SW Dallas)
Sienna Springs (Far NE)
Andora (Far Northwest)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
BB-
December 2009
November 2009
November 2009
$17.4 (in contract)
$14.5
$2.9
$80,556
$13,495
$19,333
7.5%
8.5%
12.5%
Dallas - Plano - Irving, Texas Metropolitan Division - 4Q 2009
$240
MSA
Prices (000)
$220
•
US
$200
$180
$160
•
$140
$120
$100
07
08
09
Y
Y
Y
•
4Q 1Q 2Q 3Q 4Q
08
09
09
09
09
58.4
60
Annual Chg (000)
RealtyTrac.com calculate a 1.5% Dallas - Fort Worth foreclosure rate
in 2009, ranking 94th highest among the 203 markets tracked by the
source.
Establishment Survey
80
21.8
•
•
20
0
-20
-40
-60
•
-80
99 00 01 02 03 04 05 06 07 08 09 10f 11f
•
Source: BLS
Area employers eliminated -44,900 (-2.1%) jobs year-over-year in
4Q09, moderately better than the -49,300 (-2.4%) job loss recorded in
the previous period.
The turnaround was most evident in the business service super-sector.
Indeed, the sector trimmed -21,700 jobs year-over-year in 3Q09 and
only -13,700 jobs year-over-year in 4Q09. To a lesser extent, manufacturing and retail trade firms improved in the fourth quarter. Following a combined -16,200-job year-over-year decrease in 3Q09, the
sectors trimmed -13,200 jobs year-over-year in 4Q09.
Conversely, conditions in the construction, transportation, utilities and
information sectors deteriorated as firms cut a combined -17,700 positions from payrolls year-over-year in 4Q09, as compared to the
-13,200-job decrease year-over-year in 3Q09.
Health care establishment added staffs at a faster pace in the fourth
quarter, hiring a net of 15,100 workers year-over-year.
6%
Household Survey
4%
•
2%
Rate
On the other hand, sales activity decelerated last year. A total of
45,544 homes were sold in 2009, down -10.4% from the 50,848 home
tally from 2008.
EMPLOYMENT TRENDS
40
Home price trends improved this year. According to the National
Association of Realtors, the median price of a single-family home in
the Dallas - Fort Worth MSA increased 3.0% year-over-year from
$138,000 in 4Q08 to $142,100 in 4Q09. Likewise, the Real Estate
Center at Texas A&M University report that the median home price in
the Dallas Metropolitan Division advanced 3.2% to $152,300 in the
twelve-month period ended in December.
0%
-2%
-4%
Forecast
Dallas (Establishmet)
USA
Dallas (Household)
-6%
Data from the BLS’s household survey portray a healthier economy.
According to the source, the pace of annual job attrition decelerated
sharply from a monthly average of -32,027 (-1.6%) jobs year-overyear in 1H09 to -15,191 (-0.8%) year-over-year in 2H09. Moreover,
only -1,019 (-0.1%) jobs were eliminated in the twelve-month period
ended in December.
•
99 00 01 02 03 04 05 06 07 08 09 10
RCR predict that Dallas employers will add 21,800 (1.1%) workers
this year and an additional 58,400 (2.8%) employees in 2011.
15%
10%
5%
Dallas
2.9%
2.4%
Fort Worth
5.0%
5.6%
6.7%
7.4%
8.4%
9.2%
10.7%
11.6%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Submarket
Effective Rent
4Q08
4Q09
Physical Vacancy
Change
•
Change
$675
$645
-4.4%
6.9%
10.0%
310 bps
$669
$654
-2.2%
6.7%
9.6%
290 bps
South County
$656
$655
-0.1%
8.7%
9.9%
120 bps
Southwest Dallas
$611
$604
-1.2%
8.7%
10.9%
220 bps
Grand Prairie
$627
$615
-1.9%
10.5%
10.5%
unchg
North Irving
$776
$781
0.7%
8.0%
9.4%
140 bps
South Irving
$618
$619
0.1%
5.8%
9.7%
390 bps
Far North
$751
$733
-2.4%
5.3%
8.6%
330 bps
Far Northeast
$552
$556
0.8%
12.3%
15.8%
350 bps
North White Rock
$605
$612
1.2%
9.1%
11.8%
270 bps
$565
$555
-1.7%
11.0%
13.6%
260 bps
East Dallas
$745
$742
-0.5%
10.3%
11.6%
130 bps
Southeast Dallas
$513
$512
-0.2%
10.2%
10.5%
30 bps
South
$669
$660
-1.4%
12.8%
16.1%
330 bps
Richardson
$770
$763
-0.9%
6.3%
9.1%
280 bps
Far Northwest
$634
$641
1.1%
6.5%
8.7%
220 bps
$748
$738
-1.4%
5.8%
8.9%
310 bps
Lewisville
$809
$786
-2.9%
6.5%
8.8%
230 bps
$863
$843
-2.4%
8.5%
12.0%
350 bps
Northwest
$719
$805
$785
$797
9.1%
-1.0%
8.3%
5.8%
19.5%
7.9%
1,120 bps
210 bps
$1,626
$1,091
$1,554
$1,088
-4.5%
-0.2%
13.5%
5.5%
14.0%
12.8%
50 bps
730 bps
North
$780
$762
-2.3%
6.0%
10.1%
410 bps
Metro
$740
$734
-0.8%
8.0%
10.7%
270 bps
SUPPLY TRENDS
Source: Reis, Inc
Reis identify that 5,387 apartment units were completed in 4Q09,
representing a 1.3% advance in inventory. Moreover, the service count
46 apartment assets totaling 13,823 units that were delivered during
2009.
Two apartment developments were completed in January and another
7,481 units were under construction in February. Most (5,695 units) of
the units under construction are scheduled to open by year-end.
Developers were most active in the Plano / Allen / McKinney
submarket as 1,963 units were under construction in February and all
but 334 units are slated to debut by August.
Condo construction was comparatively subdued. Only five condo
properties totaling 493 units were under construction in February. The
three largest properties are located in the North Irving (170 units),
Central Dallas (118 units) and Lewisville (105 units) submarkets.
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
14,000
Completions
Absorption
12,000
10,000
8,000
Units
•
4Q09
Garland
Central Dallas
Oaklawn
•
4Q08
6,000
4,000
2,000
0
-2,000
-4,000
02 03 04 05 06 07 08 09 10f 11f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
RED CAPITAL GROUP®
Market Overview
Dallas,Texas
November 2009
EXECUTIVE SUMMARY
T
he Texas economy bucked the
national trend by adding
41,700 payroll jobs during
October, largely on the strength of
hiring in the business and health care
services industries. At the same time,
the Dallas residential real estate market remained in good stead, recording
above-average price performance
(home re-sale prices fell just -1.2%
year-over-year in September, runnerup to Denver in the Case-Shiller resale index), and sharply lower foreclosure activity from 2008.
But the good news did not extend to
Dallas area job formation trends. Indeed, metro area payrolls declined on
a y-o-y basis for the tenth consecutive
month in October, dropping 52,800 (2.5%) jobs from last year, down from
a 49,300-job average decline during
the third quarter. Moderate improvements in retail trade and manufacturing comparisons (-14,000 in October
vs. –16,200 in 3Q09) were offset by
deterioration in the construction, finance and other service sectors. Only
health care and education services
exhibited much forward progress,
adding 20,800 jobs y-o-y in October,
up 200 from the 3Q09 performance.
RED CAPITAL Research expect
conditions to remain soft for the duration of 2009, culminating in a net loss
of about 42,000 jobs y-o-y during the
fourth quarter. But after posting a
40,700-job setback in FY09, labor
market conditions should begin to
improve next year. Our Dallas econometric payroll model foresees a return
to positive job creation during 2Q10
(25,600 jobs y-o-y), yielding to
30,900- and 66,600-job gains in calendar 2010 and 2011, respectively.
Job losses notwithstanding, apartment
demand rebounded in 3Q09 when
tenants net-leased 1,082 units, up
from 933 net move-outs recorded
during the typically robust spring
SNAP SHOT
leasing season. Absorption was overbalanced by 1,829 units of supply,
however, sending metro occupancy
down another 10 basis points to
90.6%, the lowest reading since 2005.
Vacancies in infill submarkets remained exceptionally high (Central
Dallas 14.2%; Oaklawn 13.3%) reflecting sluggish retail demand for
units in new mid-rise and high-rise
projects. Leasing conditions also were
soft in eastside submarkets where the
East Dallas, White Rock, Far Northeast and Southeast submarkets reported 10% or greater vacancy rates.
By contrast, rent trends were relatively constructive. Asking and effective rents fell sequentially, slipping $2
and $1, respectively, to $818 and
$739; but remained positive on a
year-over-year basis, rising $7 (0.9%)
and $1 (0.1%) from 2008. Although
year-on-year comparisons were
sharply lower from 2Q09’s strong
+1.1% advance, the effective rent
metric still ranked fifth among the
RED 50 markets, down only two
places from the previous quarter.
Supply concerns cloud the market’s
near-term prospects. Reis expect developers to complete nearly 3,000
units in 4Q09, followed by a 7,200–
unit vintage during calendar 2010.
The service is of the mind that owners
will do well to absorb half that number, resulting in a 140 bps vacancy
rate crease by the end of next year.
After plunging $6 and $10 in 4Q09,
asking and effective rents are forecast
to reclaim most of the gains by
YE2010, setting the stage for near
average rent growth through 2013.
Investors acquired a total of 20 properties since mid-year, according to
Real Capital Analytics. Cap rates
gravitated near the 7% level. At that
rate, RCR calculate an expected 4.7%
generic 5-year total rate of return,
lower than the 5.4% RED 50 mean.
Y-o-y
change
Projected
YE09 Metric
190bps
60 bps
0.1%
1.5%
100bps
Neutral
49.3m
40.7m
Vacancy
(9.4% - 3Q09)
Effective
Rents
($739 - 3Q09)
Cap Rate
(7.2% - 3Q09)
Employment
(2,062.0m - 3Q09)
KEY POINTS
•
Heavy apartment supply totaling 1,829 units
pushed apartment occupancy lower in 3Q09.
Tenants net leased 1,038 units, according to
Reis, resulting in a 10 basis point increase in
metro vacancy to a 9.4% average.
•
Asking and effective rents declined
moderately in the third quarter, dropping $2
(-0.2%) and $1, (-0.1%), respectively. By
contrast, over-the-year asking and effective
rent measures remained in the black, ranking
Dallas 4th and 5th among the RED 50 as
regards asking and effective rent growth.
•
Investor ardor for Dallas properties wasn’t
diminished as 20 assets were acquired from
mid-year to mid-November, equaling the
1H09 total. Cap rates for institutional quality
assets ranged from about 6.5% to 8.5%.
•
Although evidence mounted that the Great
Recession is over, Dallas payrolls continued
to shrink. Attrition proceeded at a 52,800-job
annual rate in October after a 49,300-job loss
in 3Q09. RCR forecast a slower pace of
losses (42,100 jobs) in 4Q09, before Dallas
rebounds with a 30,900-job advance in 2010.
•
Cap rates ranged from 6.5% to 8.5% in 2H09.
Dallas - Plano - Irvine, Texas Metropolitan Division - 3Q 2009
VACANCY TRENDS
•
•
The Dallas market struggled with a surge of new supply in the third
quarter. Developers completed a total of 1,829 units during the period,
according to Reis, heavily concentrated in Dallas urban neighborhoods
and in Plano / Allen. Owners net leased a total of only 1,082 units,
resulting in a 10 basis point average occupancy rate decrease to 90.6%.
Delivery of 316 units in 3Q09 to the 2,369-unit Oaklawn inventory
produced a 6.5% sequential quarter vacancy rate hike to 13.3%. Three
submarkets sported higher vacancy rates: adjoining Central Dallas
(14.2%), where rents averaged $1,612, and largely class B/C Far
Northeast and South, where vacancy rates stood at 14.0%
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
9.4%
10%
7.5%
8%
6%
4%
DALLAS
U.S.A.
2%
0%
Reis expect supply challenges to persist through year-end 2010, when
Dallas occupancy is projected to bottom at a cycle-low 89.2%.
3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q
00
01 02
RENT TRENDS
•
•
04
05
06
07 08
09
Metro Rent Trends
Source: Reis, Inc.
Accelerating job losses and competition from new supply forced
owners to discount rents to maintain occupancy levels. Reis report that
asking rents declined $2 (-0.2%) and effective rents $1 (-0.1%) from
2Q levels. By way of comparison, a public real estate trust with more
than 4,700 units in the Dallas metro area reported a -1.0% sequential
decline in average rental rate and a –2.4% decline in revenue per
occupied unit in the third quarter.
Rents in supply-pressured submarkets were soft, as Plano, Central
Dallas and North Dallas recorded sequential effective rent declines
exceeding -0.9%. Several submarkets catering to service and
transportation industry workers also reported significant rent decreases,
including Garland (-1.5%) and South Irving (-2.7%).
6%
YoY Rent Trend
•
03
ASKING
EFFECTIVE
4%
2%
0.9%
0%
0.1%
-2%
-4%
3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q
00
Reis expect effective rents to drop $10 (-1.4%) to $729 in 4Q09.
01
02
03
04
05
06
07
08
09
RANK: 5th out of 50
Source: Reis, Inc. (Trade Median)
•
•
Sales of Dallas properties continued at a brisk clip in the third and
early fourth quarters. Real Capital Analytics report that 20 apartment
projects with 4,642 units exchanged hands July 1 to November 20.
Pricing details were sketchy as is typical in this non-disclosure state.
Average price/unit of fully-reported trades was $45,295, consistent
with the $45,654/unit metric observed in the first half of 2009.
Cap rates for institutional quality assets ranged from about 6.5% to
8.0%. RCR are of the view that the typical Dallas institutional-grade
property will trade to an approximate 7.0% initial yield. Using this
figure as the generic market cap rate produces a 4.7% unlevered 5-year
expected total return and a 1.46 risk-adjusted index, comparing
unfavorably to the 5.4% and 2.03 respective RED 50 averages.
9%
Cap Rate
•
10%
8%
7%
6%
5%
4%
1Q
3Q
1Q
3Q
1Q
3Q
07
07
08
08
09
09
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
Saddlecreek Apts (Northwest)
Mustang Park (Lewisville)
Windridge (Grand Prairie)
Chase Oaks Village (Plano)
A
A
BA
30-Sep-2009
15-Aug-2009
30-Oct-2009
04-Nov-2009
$32.0
$28.3
$22.0
$6.0
$84,211
$97,924
$30,556
$182,353
6.5%
7.0%
8.5%
5.0% (quoted)
Dallas - Plano - Irvine, Texas Metropolitan Division - 3Q 2009
Year-over-year Home Value Change
Source: S&P Case-Shiller Index, RCR
5%
DALLAS
•
CSX20
Appreciation
0%
•
-1.2%
-5%
-9.4%
-10%
•
-15%
-20%
Feb- May- Aug- Nov- Feb- May- Aug08
08
08
08
09
09
•
09
80
60
Annual Chg (000)
To date, Dallas remains largely unscathed from the widespread
epidemic of mortgage foreclosures. Realtytrac.com report that 0.45%
of D/FW households were involved in a foreclosure action in the third
quarter, the 96th highest rate among 203 U.S. metro areas. Dallas also
stood in 96th rank at about 0.42% during the first half of 2009.
The Census report a 62.6% D/FW homeownership rate in 3Q09.
Third Quarter 2009
66.6
30.9
•
•
20
0
-20
-40
-40.7
-60
The year-over-year comparison was steady at –1.2%, however, ranking
Dallas real estate market second strongest among the 20 metros
included in the CSX20 composite index. Denver ranked number one.
EMPLOYMENT TRENDS
Source: BLS Data, RCG Research Forecast
40
Surprisingly, the S&P Case-Shilling Index reported that the value of
Dallas properties declined month-to-month in September for the first
time since January. The index dropped –0.7%.
-80
00 01 02 03 04 05 06 07 08 09f 10f 11f
•
The pace of job losses accelerated in the third quarter, rising from a
47,500-job, -2.2% rate in 2Q09 to a 49,300 (-2.3%) job annual pace.
Sub-sector trends didn’t vary a great deal quarter-to-quarter. Goods
producing industries disgorged workers at a 15,700-job year-on-year
pace, up from a loss of 15,800 jobs in the prior period. Trade, transportation and utilities companies trimmed workers at a 20,600-job
annual rate in 3Q, down from attrition of 15,500 jobs in 2Q. Headcounts at information, financial, business and hospitality service firms
declined at a 32,300-job rate, while health care and education service
added 20,600 workers, up from 15,400 jobs in the prior quarter.
The unemployment rate averaged 8.3% in the third quarter, up from
7.3% during the prior 3-month period and 5.4% in 3Q08.
October 2009
•
Source: BLS
6%
4%
•
Rate
2%
-2.5%
0%
-2%
-4%
-4.0%
99 00 01 02 03 04 05 06 07 08 09
5%
•
Just as the Dallas economy was late to succumb to the Great Recession, the RED CAPITAL Research econometric payroll model suggests that it also will find an earlier exit. The model projects that
metro payrolls will resume year-on-year job growth in 2Q10, leading
to a 30,900-job full year gain. In 2011, the model indicates that the
most probable outcome will be a 66,600-job advance.
15%
10%
Improved trends in the professional, scientific and technical services
sub-sector hinted at better conditions in the Big D’s critical skilled
business services industry. Employment in the sector fell at a 1,900job, -1.2% pace in October, up materially from the 5,200-job, -3.0%
performance recorded in 2Q09.
Forecast
DALLAS
USA
-6%
Monthly annual comparisons improved slightly in October, as payrolls declined at a 52,800-job, -2.5% rate, up from September’s 7-year
low 56,800-job -2.7% job clip. The improvement was primarily attributable to moderately slower job cuts in manufacturing and retail trade.
DAL (RAI=1.46)
2.0%
0.3%
FW (RAI=1.94)
3.0%
4.7%
4.6%
6.5%
6.3%
8.2%
8.5%
10.7%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Submarket
Garland
South Dallas County
Southwest Dallas
Grand Prairie
North Irving
South Irving
Far North
Far Northeast
North White Rock
East Dallas
Southeast Dallas
South
Richardson
Far No West / Farmers Branch
Lewisville
Northwest
Central Dallas
Oaklawn
North
Metro
Effective Rent
Physical Vacancy
3Q08
3Q09
Change
3Q08
3Q09
$672
$672
$660
$609
$633
$783
$626
$757
$554
$601
$571
$753
$514
$685
$763
$637
$742
$804
$851
$732
$800
$1,601
$1,117
$771
$738
$653
$655
$663
$612
$638
$784
$609
$736
$556
$616
$556
$761
$519
$691
$783
$635
$736
$795
$847
$716
$817
$1,612
$1,117
$753
$739
-2.9%
-2.5%
0.5%
0.5%
0.8%
0.2%
-2.7%
-2.8%
0.4%
2.4%
-2.7%
1.2%
0.9%
0.9%
2.6%
-0.2%
-0.8%
-1.1%
-0.4%
-2.2%
2.2%
0.7%
0.0%
-2.3%
0.1%
6.3%
5.5%
9.2%
7.5%
8.8%
8.2%
4.9%
4.7%
12.2%
8.8%
11.6%
9.7%
10.4%
14.8%
5.4%
6.1%
4.9%
5.3%
7.8%
7.8%
5.5%
12.0%
5.7%
5.5%
7.5%
7.6%
8.2%
8.6%
9.8%
9.5%
9.5%
8.6%
7.1%
14.0%
11.1%
12.6%
11.6%
10.7%
14.0%
8.0%
8.0%
6.9%
6.7%
10.6%
11.9%
6.2%
14.2%
13.3%
8.1%
9.4%
Change
130 bps
270 bps
-60 bps
230 bps
70 bps
130 bps
370 bps
240 bps
180 bps
230 bps
100 bps
190 bps
30 bps
-80 bps
260 bps
190 bps
200 bps
140 bps
280 bps
410 bps
70 bps
220 bps
760 bps
260 bps
190 bps
SUPPLY TRENDS
•
•
•
Reis identified 34 institutional quality projects under construction in
late November encompassing a total of 10,724 units. Eleven projects
(3,754 units) are located in the Plano submarket; four (811 units) are
located in Oaklawn / Central Dallas; and eight (1,826 units) are being
constructed on sites in various Denton county submarkets.
Thirty-one projects with 9,682 units are scheduled to debut during the
13-month period ended December 31, 2010. All the units in six
projects (1,631 units) will be available for occupancy in December ’09.
A 146-unit, 2008-vintage, transit-oriented development located in the
West End Historic District was 88% occupied in September.
About 69 units of a 21-story, 375-unit Uptown high-rise were leased in
September, about five months after the property received final C.O.
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
Source: Reis, Inc
15,000
Completions
Absorption
10,000
Units
•
5,000
0
-5,000
02
03
04 05
06
07 08 09f 10f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
RED CAPITAL GROUP®
Market Overview
Dallas,Texas
August 2009
EXECUTIVE SUMMARY
T
he Great Recession was late to
arrive in Dallas, yet once it
began the angle of descent
was steep. Metro year-over-year payroll comparisons didn’t slip below
parity before January 2009, eight
months later than the nation. But
losses quickly gained momentum
thereafter, averaging 47,500 (-2.2%)
jobs in 2Q09 (nearly twice the 1Q09
rate), driving the unemployment rate
from 7.1% in March to a 20-year high
8.1% in June in the process.
Weakness in the second quarter was
largely attributable to faster job cuts
in the skilled service sector. Financial
and business service headcounts declined at a 30,200-job, -5.6% pace,
down from attrition at a 15,200-job, 1.2% rate in 1Q, principally due to
faster cuts at professional and technical service shops and non-bank financial institutions. By contrast, trends in
the goods producing industries were
relatively stable. In aggregate, construction, manufacturing and wholesale trade payrolls fell at a 25,400-job
y-o-y rate in 2Q, only marginally
faster than the 19,900-job rate of redundancy recorded January to March.
Preliminary July data were, by comparison, remarkably constructive.
Payroll losses expressed on a y-o-y
basis fell by one-third from June’s
50,500-job, -2.4% rate to a 33,300job, -1.6% pace, primarily because of
stronger business service metrics (job
cuts declined by nearly one-half) and
a hiring surge by health care and education service establishments.
RED CAPITAL Research are of the
mind that the July data mark the beginning of a reasonably robust recovery. Based on the latest national economic forecast published by PNC
Financial Group, our econometric
payroll model now forecasts a return
of positive y-o-y comparisons by
1Q10, followed by steadily stronger
SNAP SHOT
job growth through YE2011. Dallas is
forecast to add 51,300 jobs next year
and 89,200 positions in 2011.
Tenant job losses diluted apartment
demand, giving rise to negative net
absorption in the typically strong
spring leasing season. Owners lost a
net of 925 leased tenants in 2Q09,
comparing unfavorably to an average
of 1,700 net move-ins recorded during
the previous ten April to June periods.
Supply of 2,307 units compounded
the effect on average occupancy,
pushing the metric down 80 basis
points from March to 90.7%, the lowest level recorded in four years.
Occupancy declined across the metro
area as only 3 of 25 Reis defined submarkets notched sequential quarter
gains. In many cases supply was the
principal culprit, especially in Plano,
where net absorption of nearly 400
units could not keep pace with 1,075
new units added to inventory, producing a 170 bps sequential decline of
average occupancy to 90.0%.
Rent trends were mixed. Owners
managed to nudge face rents $4
(0.5%) higher to $820, but growing
competition for tenants among communities in lease-up contributed to a
$5 increase in average concessions,
negating the advance. Average effective rent fell $1 (-0.1%) sequentially
to $740, yet rents remained 1.1%
above year-earlier levels, ranking #3
among the RED 50 on this basis.
Pending supply will hamper market
performance through year-end 2010.
Reis expect developers to complete
7,500 units in 2H09, and nearly 5,700
units next year. Although the service
foresees strong tenant demand, it projects 110 bps decrease in average occupancy by YE10 to 89.2%. Rents
will suffer accordingly, tumbling $14
(-2.2%) to $726 by YE09, before
gradually recovering the 2H09 losses
over the following 24 months.
Y-o-y
change
Projected
YE09
170 bps
60 bps
1.1%
1.9%
60%
Unchd
Vacancy
(9.3% - 2Q09)
Effective
Rents
($740 - 2Q09)
Cap Rate
(7.5% - 2Q09)
Employment
(2,070.0m - 2Q09)
47.5m
30.6m
KEY POINTS
•
Dallas payroll trends continued to regress in
2Q09. Sharply higher job losses in financial
and business services sent year-over-year
payroll comparisons down by 50,500 jobs.
•
July data were more constructive, however,
falling only 33,300 jobs from the comparable
period of 2008. Based on this improving
trend and a more optimistic baseline U.S.
GDP forecast from PNC economists, RED
CAPITAL Research now expect metro
establishments to add 51,300 employees next
year and 89,200 jobs in 2011.
•
The spring leasing season is typically the
strongest period for Dallas apartment
owners, who typically absorb nearly 1,700
vacant units during the period. But it was
not to be this year, as tenants vacated a net of
925 units even as developers brought on line
2,307 new units, sending average metro
occupancy tumbling 80 bps sequentially.
•
Average effective rent fell $1 to $740 in 2Q.
Reis expect the metric to fall $14 (-1.9%) by
YE09, a setback that the service does not
expect will be fully recovered before 2012.
•
Standard class-B garden apartments traded a
roughly 8% cap rates in 1H09.
Dallas-Plano-Irving, Texas Metropolitan Division - 2Q 2009
VACANCY TRENDS
•
•
Dallas apartment owners experienced unusually weak tenant demand
during the spring leasing season. Traditionally the strongest quarter of
the year when tenants absorbed an average of 1,700 vacant units, the
second quarter produced 925 net move-outs this year.
Heavy supply placed further downward pressure on occupancy.
Developers completed seven major projects encompassing 2,307 units
in the quarter, forcing occupancy down 80 basis points sequentially
and 170 bps year-over-year. The Plano and Richardson areas bore the
brunt of the assault, adding a combined total of 1,510 units.
Occupancy fell 170 bps in the former and 130 bps in the latter.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
9.3%
7.6%
10%
8%
6%
4%
DALLAS
U.S.A.
2%
0%
Reis expect supply to be a serious obstacle to occupancy rate gains in
2H09 and 2010. Dallas is poised to add 13,150 units during the period.
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
00 01 01 02 03 04 04 05 06 07 07 08 09
RENT TRENDS
•
•
Metro Rent Trends
In the first quarter, Dallas year-over-year rent trends were among the
strongest in the country, rising 2.5%. Momentum was considerably
weaker in the second quarter — effective rents fell $1 sequentially to
$740 and y-o-y advances slowed to $8 (1.1%) — but Dallas maintained
its #3 position among the RED 50 markets nevertheless.
Rising vacancy and competition from new supply exerted downward
pressure on rents across the metro area. Eighteen of Dallas’s 25
submarkets posted sequential effective rent decreases in 2Q, with the
largest recorded in infill submarkets, especially East Dallas (-1.6%);
Northwest (-2.2%); Oaklawn (-2.3%); and Central Dallas (-1.4%).
Reis forecast sharp rent decreases in the second half. The service
expects average effective rent to decline from $740 (recorded at midyear) to $726 at year end, representing a –1.9% six-month decline.
Source: Reis, Inc.
6%
YoY Rent Trend
•
ASKING
EFFECTIVE
4%
2%
1.1%
0%
-2%
-4%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q
rd
00 01 01 02 03 04 04 05 06 07 07 08
RANK: 3 out of 50
•
•
•
Source: Reis, Inc.
As elsewhere, apartment trade velocity slowed materially in the first
half 2009. Real Capital Analytics reported 14 Dallas trades in the
period for total proceeds of $210 million, down from 67 transactions
for $1.26 billion of total proceeds in the comparable period of 2008.
RCA estimate the average first half cap rate at 8.0%, 70 basis points
higher than the year earlier period.
Trades reverse-engineered by RCR suggest generic institutional
quality properties were valued at going-in yields of about 7.0%.
Employing a 7.0% generic cap rate, RCR derive an expected 5-year
unlevered total return for Dallas assets of 3.7%, considerably lower
than the 4.7% RED 50 mean. These data suggest that either cap rates
are too low or investors are more optimistic regarding Dallas’s
prospects than Reis are. We advise caution and careful asset selection.
8.0%
7.5%
6.9%
7.0%
Cap Rate
•
2.0%
6.0%
5.0%
4.0%
2Q
4Q
2Q
4Q
2Q
4Q
2Q
06
06
07
07
08
08
09
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
Ridge Gate (Far Northeast Dal.)
Huntington Circle (Lewisville)
B
B
25-Mar-2009
04-Jun-2009
$6.1
$4.2
$22,593
$32,937
10.0%
8.0%
The Livingston (Plano / Allen)
A
08-May-2009
$18.4
$102,222
6.5%
Property Name
$240
D/FW
$220
•
US
Prices (000)
$200
$180
$160
$140
•
$120
$100
•
$80
05
06
07
Y
Y
Y
1Q 2Q 3Q 4Q 1Q 2Q
08
08
08
08
09
09
GDP & Employment Growth
•
3%
5 1.3
60
2%
40
20
1%
- 3 0 .6
0
0%
-20
- 1%
•
•
-40
-2%
-60
-80
-3%
•
Source: BLS
•
DALLAS
USA
4%
•
Rate
2%
-1.6%
0%
Payroll losses accelerated in the second quarter, rising to a 47,500job, -2.2% rate from 24,400 (-1.2%) in 1Q09.
Across the country, second quarter weakness was largely the result of
job attrition in the goods-producing industries. But this was not the
case in Dallas. Rather, skilled service sectors were the principal culprits, as financial and business service employers cut payrolls at a
30,200-job annual rate, down from a 15,200-job loss in 1Q09.
Hiring in the health care and education services sector remained impressively robust. Establishments in these industries hired at a 15,400
(6.8%) job pace in the period, up from 10,900 jobs in 1Q09.
Twelve Months ended July 2009
01 02 03 04 05 06 07 08 09f 10f 11f
6%
RealtyTrac.com note that 0.96% of D/FW households were involved in
a mortgage foreclosure during 1H09, the 96th highest rate among the
top 203 U.S. metro areas; however, Dallas foreclosure rates were the
highest posted among the eight Texas markets included in the index.
Second Quarter 2009
GDP Growth
Annual Chg (000)
80
The FHFA report that the average value of a Dallas home fell -2.04%
year-over-year in 2Q, and was unchanged quarter-to-quarter.
EMPLOYMENT TRENDS
So urces: B EA , B LS, RCG & P NC
8 9 .2 4 %
10 0
Home prices were firm in the Dallas area. According to the National
Association of Realtors, the median price of a Dallas/Fort Worth
CMSA home was $150,700 in 2Q09, down –0.2% year-over-year.
This compared to U.S. and South Region median price changes of –
15.6% and –10.3%, respectively. By way of comparison, the May
S&P Case-Shiller Repeat Sales Index found that the value of Dallas
homes increased 1.9% from April but declined -4.1% y-o-y.
-2%
Payroll trends looked materially better in July, as year-over-year comparisons improved from June’s 20-year data series worst –50,500-job
performance to a net 33,300-job, -1.6% job loss in July.
Firmer results were attributable in large part to rebounding business
service employment. Year-over-year job losses in this super-sector
declined from a 32,000-job annual pace in June to 18,500 in July.
Unemployment hit a series high 8.1% in June, up from 7.1% from
May and 5.1% in June 2008. The increase primarily was attributable
to a surge of new entrants into the labor force in May and June
Forecast
-4%
-4.2%
-6%
99 00 01 02 03 04 05 06 07 08 09
•
PNC Financial Service Group economists lately are more optimistic
regarding prospective U.S. GDP growth, forecasting a 2.4% advance
in 2010, and potentially faster growth in 2011. Accordingly, RCR’s
payroll forecasts based on the PNC outlook have improved as well.
Our model now projects that Dallas payrolls will begin to grow again
on a y-o-y basis in 1Q10, leading to a 51,300-job add next year, followed by an 89,200-job advance in 2011.
15%
10%
D A L ( R A I = 1. 11)
5%
1.1%
A T L ( R A I = 1. 69 )
1.8%
3.8%
3.5%
5.5%
5.3%
7.1%
7.6%
9.5%
0%
-5%
-0.8%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Submarket
Garland
South Dallas County
Southwest Dallas
Grand Prairie
North Irving
South Irving
Far North
Far Northeast
North White Rock
East Dallas
Southeast Dallas
South
Richardson
Lewisville
Northwest
Central Dallas
Oaklawn
North
Metro
Effective Rent
Physical Vacancy
2Q08
2Q09
Change
2Q08
2Q09
$669
$654
$647
$614
$632
$782
$621
$750
$564
$592
$564
$723
$521
$697
$761
$626
$748
$792
$852
$723
$799
$1,578
$1,124
$757
$732
$663
$655
$659
$609
$626
$785
$626
$746
$558
$610
$558
$754
$523
$682
$778
$626
$742
$791
$857
$705
$811
$1,627
$1,069
$775
$740
-0.9%
0.1%
1.9%
-0.7%
-1.0%
0.4%
0.9%
-0.5%
-1.2%
3.1%
-1.1%
4.3%
0.4%
-2.3%
2.3%
0.0%
-0.8%
-0.1%
0.6%
-2.5%
1.4%
3.1%
-4.9%
2.4%
1.1%
6.2%
5.3%
11.1%
7.3%
11.0%
9.0%
4.6%
4.6%
11.9%
8.3%
11.3%
6.4%
9.9%
14.6%
5.8%
7.7%
4.2%
6.1%
8.3%
8.6%
5.2%
13.5%
7.2%
5.9%
7.6%
7.9%
8.0%
8.8%
10.0%
9.3%
9.7%
7.6%
6.8%
12.7%
10.9%
12.8%
13.1%
10.4%
12.8%
8.3%
8.5%
7.5%
7.2%
10.0%
8.4%
5.8%
14.4%
6.8%
6.1%
9.3%
SUPPLY TRENDS
•
•
Source: Reis, Inc
Not atypically, supply represents a serious challenge to Dallas
fundamentals. Reis counted 11,614 units under construction on 8/11
of which 5,623 will be completed by YE09. With 1,041 units already
delivered since July 1, 2H09 supply will total about 6,660 units.
Developers will debut six Plano/Allen submarket complexes
incorporating 2,202 units by year-end, adding to the 449 submarket
units completed since July 1. Vacancy rates are likely to spike higher
from the 10.0% mid-year level as a result, at least temporarily.
Infill submarkets also are struggling with supply, contributing to some
property distress. Eight properties were added to the Central / East
Dallas inventory in 2008, totaling 1,712 units. In June, the group was
less than 50% occupied at average asking rents of $2,557. Two
lower-rent (<$2,000) properties had the better of the leasing wars, as
one property was stabilized and the other was nearly 75% occupied.
Daniel J. Hogan
[email protected]
614-857-1416
170 bps
270 bps
-230 bps
270 bps
-170 bps
70 bps
300 bps
220 bps
80 bps
260 bps
150 bps
670 bps
50 bps
-180 bps
250 bps
80 bps
330 bps
110 bps
170 bps
-20 bps
60 bps
90 bps
-40 bps
20 bps
170 bps
William T. Hinga
[email protected]
614-857-1499
14,000
Completions
12,000
Absorption
10,000
8,000
Units
•
Change
6,000
4,000
2,000
0
-2,000
-4,000
02
03
04 05
06
07 08 09f 10f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
©2008 RED CAPITAL GROUP (11/08)
CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the
report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should
any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is
solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Dallas,Texas
June 2009
EXECUTIVE SUMMARY
R
ecessions have a way of
turning big dreams into bigger nightmares, and no city
in America dreams bigger than Dallas. When the global downturn finally
made its most unwelcome arrival at
this address some big real estate projects that seemed to make perfect
sense in 2007 started to unravel. Construction on a half-complete downtown condo tower ground to a halt,
leaving lenders, investors and buyers
with an unsightly legal tangle; a meticulously constructed parcel of land
in Central Dallas destined for a new,
high-density neighborhood was left in
limbo for want of investors and an
effort to convert a nearly empty office
tower into a mixed-income transit
oriented development was pushed into
bankruptcy by impatient lenders.
The tight market for commercial
credit was largely responsible for the
foregoing but the metro’s rapidly deteriorating labor market shared in the
blame. Dallas posted year-over-year
payroll gains as recently as December
but establishments culled payrolls at a
24,200-job, -1.2% pace in 1Q09; a
performance that proved a mere prelude to a stunning 42,900-job, -2.0%
setback registered in April. The
abrupt reversal of fortune was primarily attributable to a sharp decrease in
business service headcounts, which
fell at a 23,700, -6.7% rate in April
after posting a gain last November.
Hiring by goods producers also declined, as construction, manufacturing
and wholesale trade payrolls plunged
by 19,100 (-4.1%) jobs.
Our forecast model indicates that
quarterly job losses are likely to persist through 1Q10. Consequently, we
project a net full-year 2009 loss totaling 46,700 jobs, segueing to a 7,000job advance in 2010. Economy.com
are more optimistic, seeing a 38,000job loss in 2009 giving way to a
48,000-job advance next year.
SNAP SHOT
Apartment demand declined in step.
Owners reported negative net absorption of 140 units in 1Q09, down from
a net gain of 1,038 leased tenants in
the same period of 2008. This in combination with the addition of 1,318
units to the metro inventory pushed
average occupancy down 30 basis
points sequentially and 110 bps yearover-year to 91.7%. Demand for
Collin County and Central Dallas
units remained healthy and submarkets south of Downtown reported
uncharacteristically robust leasing.
Conversely, weaker results were recorded in Irving and some North Dallas County suburban submarkets.
Owners managed to maintain positive
rent momentum, pushing asking and
effective rents above December levels
by $2 and $1, respectively. At $741,
average effective rent was up 2.5% yo-y, placing Dallas third in the RED
50 ranks, the first time the Big D figured in the top 10 in our nine-year
quarterly data series.
Pipeline supply pressure will return,
however, as a total of 8,479 and 7,057
units are on tap for the balance of
2009 and 2010, respectively, according to Reis. The service expects the
implied 4% rise in metro inventory to
give rise in part to occupancy and
effective rent decreases of 130 bps
and -1.8%, respectively, by YE09.
Sales of Dallas apartments proceeded
at a steady pace during the first five
months of 2009 as 12 properties exchanged hands compared to 15 closings recorded from August to year
end 2008. Cap rates ranged from the
high-6% area for sought after Plano
and Irving properties to more than
10% for class-C assets. RCR believe
generic institutional quality assets will
trade at roughly 7% cap rates in the
current market, producing expected 5year total returns of 4.1% and a riskadjusted index of 1.28.
Y-o-y
change
Projected
YE09
110 bps
130 bps
2.5%
1.6%
Vacancy
(8.3% - 1Q09)
Effective
Rents
($741 - 1Q09)
Cap Rate
(7.5% - 1Q09)
Employment
(2,066.4m - 1Q09)
180 bps
24.4m
46.7m
KEY POINTS
•
After nearly five years of robust expansion
the Dallas economy came back to earth.
Employers trimmed 23,700 (-1.2%) names
from payrolls in 1Q09 and 42,900 (-2.0%)
positions over the twelve months ended in
April. RCR expect metro payrolls to decline
by 46,700 (-2.2%) jobs in 2009 before
recovering with a 7,000-job gain next year.
•
Average metro apartment occupancy
declined 30 basis points in 1Q09 to 91.7%.
Reis expect supply pressure to send
occupancy down another 130 bps by YE09.
•
Asking and effective rent levels continued to
climb, gaining $2 (0.2%) and $1 (0.1%)
respectively. At an average of $741,
effective rents were 2.5% higher year-overyear, ranking #3 among the RED 50.
•
Year-to-date, Investors demand for Dallas
assets was solid with 14 properties acquired
by June 4. The bellwether was an $18.4mm
acquisition of a Plano project by a Canadian
fund, priced to yield an estimated 6.5%.
•
Recent cap rates applicable to top Dallas
assets ranged from 6.5% to 7.5%. Cap rates
for class-BC assets reached as high as 10%.
VACANCY TRENDS
•
•
Net absorption was negative in 1Q09 as occupied stock declined by
140 units. Accounting for 1,318 units of supply, average occupancy
slipped 30 basis points to 91.7% (Reis). By way of comparison, M/PF
Yieldstar reported that average occupancy for the Dallas/Fort Worth
Metroplex was 90.4% in March.
Properties in Downtown and Uptown Dallas neighborhoods struggled
with supply pressure and a weaker office employment environment.
Following completion of 1,800 units since 1Q08, the vacancy rate
exceeded 14%, according to M/PF. Further vacancy rate increases can
be expected as nearly 2,000 units are in the pipeline.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
10%
7.2% 8.3%
8%
6%
4%
DALLAS
U.S.A.
2%
0%
Conditions in the Near North Dallas and Oak Lawn submarkets were
stronger: the occupancy rate in each was above 93% in March.
1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
00 00 01 02 03 03 04 05 06 06 07 08 09
RENT TRENDS
•
•
•
Reis aver that Dallas effective rent increased $18 (2.5%) year-overyear and $1 (0.1%) sequentially to $741. In another survey, O’Conner
& Assoc. found that average D/FW asking rents increased $10.74
(1.4%) y-o-y in February to $758.50 ($0.891/sf).
First quarter apartment revenue trends were mixed. Rents at Irving,
Northwest Dallas, South Dallas, Southwest Dallas and Central Dallas
communities were softer. Conversely, properties located in Northeast
Dallas and portions of Collin County enjoyed solid y-o-y gains.
Strong supply is likely to put downward pressure on rents this year.
Reis expect average effective rents to fall $13 (-1.8%) by year end
2009. This source foresees stronger conditions returning in 2010,
however, lifting average effective rents $3 (0.4%) y-o-y by 4Q10.
Source: Reis, Inc.
6%
YoY Rent Trend
•
Metro Rent Trends
ASKING
EFFECTIVE
4%
2.8%
2%
2.5%
0%
-2%
-4%
1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
Supply pressure sent Plano rents down $8 (-0.9) quarter-to-quarter.
00 00 01 02 03 03 04 05 06 06 07 08 09
RANK: 3th out of 50
•
•
Last fall, investors exhibited intense interest in Dallas / Fort Worth
apartments even as property trade slumped elsewhere. But trade was
significantly slower during the first five months of 2009. Only 19
properties traded in that period for about $130 million of proceeds,
down from 32 trades for estimated aggregate proceeds of $300 million
during the previous five-month period.
Demand for Dallas-Plano-Irvine M.D. properties was fairly steady,
however, as 12 properties traded year-to-date through May, compared
to 15 transactions recorded in the last five months of 2008.
Two sales of note closed in late spring. A private equity fund sold a
1991 class-A property in North Irving to an owner-manager at an
estimated 6.8% yield in May, and an opportunistic Canadian fund
purchased a 10-year old Plano property at a cap rate of about 6.5%.
7.5%
7.0%
Cap Rate
•
Source: Reis, Inc.
8.0%
6.5%
6.0%
5.5%
5.0%
4.5%
1Q
3Q
1Q
3Q
1Q
3Q
1Q
06
06
07
07
08
08
09
Property Name
Rancho Mirage (North Irving)
The Livingston (Plano / Allen)
Amber Vista (Plano / Allen)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
A
B-
22-May-2009
04-Jun-2009
30-Apr-2009
$19.0
$18.4
$3.0
$61,290
$102,222
$34,091
6.8%
6.5%
10.5%
$240
D/FW
Prices (000)
$220
•
US
$200
•
$180
$160
$140
$120
$100
06
07
Y
Y
4Q 1Q 2Q 3Q 4Q 1Q
07
08
08
08
08
09
•
•
HousingTracker.net published a June 15, 2009 average Dallas area
listing price of $203,000, reflecting a 7.7% year-over-year increase.
The D/FW foreclosure rate was 102nd highest out of 203 US metros.
Past 12 Months
•
80
60
Annual Chg (000)
Dallas home prices were moderately softer in 1Q09. The NAR report
that the median home price of a Dallas/Fort Worth home fell -4.7%
year-over-year to $137,500. The FHFA repeat sales index recorded a
2.21% gain in the same period, including a 0.66% advance in 1Q09.
By contrast, the Case-Shiller repeat sales index found that D/FW prices
dropped -6.6% year-over-year in March and –2.8% in 1Q09.
EMPLOYMENT TRENDS
40
7.0
20
•
0
-20
-40
-60
According to the latest figures from the Census Bureau, metro
population increased by 93,006 (2.3%) in 2008. Collin Co. added the
most residents (31,104) and recorded the fastest growth rate (4.3%).
Dallas Co. population expanded by 29,648 (1.2%) persons.
(46.7)
-80
99 00 01 02 03 04 05 06 07 08 09f 10f
•
Dallas job trends deteriorated in early 2009. After posting a net yearover-year advance as recently as December, April payrolls were
42,900 (-2.0%) jobs below the April 2008 comparison.
In keeping with global trends, conditions in the goods producing industries were weak, but most of the downward impetus came from the
business and financial service and retail trade sectors. During 4Q08,
the foregoing super-sectors scraped together a 1,300-job over-the-year
advance. By April, the same comparison showed a 31,800-job decline. Employee leasing and temporary employment shops bore the
brunt of the cuts, showing a 16,700-job, -10.4% drop in the period.
The unemployment rate averaged 7.1% in 1Q09 but receded to 6.7%
in April. Nevertheless, the rate was 260 bps higher than April 2008.
First Quarter 2009
•
Source: BLS
DALLAS
USA
6%
4%
•
Rate
2%
After posting 19 consecutive quarters of year-over-year employment
growth Dallas payrolls slipped by 24,400 (-1.2%) jobs in 1Q09.
In a rare event, demand for professional, scientific and technical services workers plunged, falling at a 2,900-employee, -1.9% rate. As
recently as 3Q08, sub-sector firms hired workers at a 4.2% pace.
Forecast
0%
•
-2%
-4%
•
-6%
99 00 01 02 03 04 05 06 07 08 09
10%
5%
0%
The Dallas Fed reported weak conditions in the Texas economy in the
June 10 Beige Book, but indicated that many respondents experienced
stabilizing conditions and an economy “bouncing on the bottom.”
RED CAPITAL Research expect the metro economy to continue to
scrape along the bottom for the remainder of 2009, registering quarterly payroll losses ranging from -47,200 (2Q) to -60,400 (3Q), culminating in a FY09 loss of -46,700 jobs. Trends should swing to the
plus side by 2Q09, yielding a net gain of 7,000 jobs for the year.
DALLAS
-0.3%
2.3%
4.0%
5.7%
7.9%
-5%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Submarket
Garland
South Dallas County
Southwest Dallas
Grand Prairie
North Irving
South Irving
Far North
Far Northeast
North White Rock
East Dallas
Southeast Dallas
South
Richardson
Lewisville
Northwest
Central Dallas
Oaklawn
North
Metro
Effective Rent
Physical Vacancy
1Q08
1Q09
Change
1Q87
1Q09
$658
$643
$637
$609
$628
$771
$612
$736
$554
$597
$554
$709
$523
$692
$740
$605
$745
$786
$835
$715
$794
$1,545
$1,126
$749
$723
$670
$658
$653
$612
$633
$778
$614
$755
$556
$614
$564
$767
$524
$687
$766
$630
$748
$801
$855
$721
$813
$1,650
$1,094
$769
$741
1.8%
2.4%
2.4%
0.5%
0.7%
0.8%
0.3%
2.6%
0.4%
2.9%
1.8%
8.1%
0.2%
-0.7%
3.4%
4.1%
0.4%
1.9%
2.3%
0.9%
2.4%
6.8%
-2.9%
2.6%
2.5%
6.9%
6.7%
8.7%
8.7%
10.5%
8.0%
5.8%
5.3%
12.3%
9.1%
11.0%
10.3%
10.2%
12.8%
6.3%
6.5%
5.8%
6.5%
8.5%
8.3%
5.8%
13.5%
5.5%
6.0%
7.2%
7.5%
7.1%
8.0%
8.9%
9.3%
9.3%
6.7%
5.8%
12.2%
9.8%
11.1%
12.6%
9.3%
11.4%
7.0%
7.1%
6.1%
6.1%
8.3%
9.0%
5.9%
12.6%
6.2%
6.6%
8.3%
SUPPLY TRENDS
•
•
60 bps
40 bps
-70 bps
20 bps
-120 bps
130 bps
90 bps
50 bps
-10 bps
70 bps
10 bps
230 bps
-90 bps
-140 bps
70 bps
60 bps
30 bps
-40 bps
-20 bps
70 bps
10 bps
-90 bps
70 bps
60 bps
110 bps
Source: Reis, Inc
Reis count 46 apartment projects currently under construction in the
Dallas-Plano-Irvine Metropolitan Division incorporating a total of
15,074 units. According to Reis’s construction report, more than
9,000 units will be delivered to market in the second half of 2009.
Investors who recently paid top dollar for Plano / Allen properties
may be dismayed to find that 4,661 new submarket units are in the
pipeline for delivery before year end. This total is in addition to 1,275
units completed from January through May of this year. Higher
vacancy and rent concession levels are likely to evolve as a result.
Fortunately, recent vintage Plano submarket properties appear to be
leasing up well. A 370-unit first phase of a project located near the
EDS campus was 80% occupied after leasing for 12 months, and a
302-unit project near the Stonebriar Centre achieved stabilized
occupancy six months after receiving final certificate of occupancy.
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
12,000
Completions
Absorption
10,000
8,000
6,000
Units
•
Change
4,000
2,000
0
-2,000
-4,000
02
03
04 05
06
07 08 09f 10f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations
to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or
accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or
conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party
sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or
strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation.
Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Dallas,Texas
F
or a moment last year it
seemed that Dallas would be
among the few US metros to
escape the maw of the global recession. But revised data from the BLS
demonstrate that this will not be the
case. Indeed, Dallas output probably
declined in 4Q08 and conditions
clearly deteriorated further in 1Q09.
Factory orders plummeted. The largest declines were recorded by manufacturers serving the construction and
oil & gas industries. Manufacturers
responded by furloughing workers
and trimming inventories to cut costs,
causing factory payrolls to fall at a
7,700-job, -4.0% rate in 4Q08, and a
6,400-job, -3.4% pace in 1Q09.
Firms engaged in homebuilding and
trade also took action to bring costs in
line with evaporating income streams.
Construction headcounts fell at a
3,700 (-2.9%) job rate following a
small gain in 3Q08. Wholesalers and
retailers cut 2,700 (-0.7%) jobs after
hiring at a 3,400-job, 1.3% rate in the
prior quarter. Demand for temporary
construction workers and seasonal
store help also diminished, reducing
workers on employment service job
rolls by 4,700 (-6.3%).
In all, payroll growth fell from
3Q08’s 31,600-job advance to a 6,400
job gain in 4Q. Preliminary data for
1Q09 reveal intensifying losses averaging –24,300 (-1.2%), including a
five-year low –34,600 job y-o-y retreat recorded in March.
The negative momentum observed in
1Q09 data tips further employment
weakness through the fall or longer.
Our latest econometric model forecasts a net loss of 10,900 jobs in
2009, with quarterly attrition persisting through 3Q09. The recovery will
gain strength by 1Q10, with a 25,000job gain, culminating in a 49,000-job
add for the year. Economy.com are
more optimistic by comparison, foreseeing a loss of 4,333 jobs in 2009,
and a 55,000-job rebound next year.
April 2009
Job losses contributed to a disintegration of apartment demand in 4Q08.
Reis aver that tenants vacated a net of
1,033 units after absorbing 1,504 and
2,186 units in the prior quarter and
comparable period of 2007, respectively. With 786 new units coming on
line, vacancy rose 50 basis points
sequentially and 90 bps y-o-y to
8.0%. Leasing conditions were weakest in Southside submarkets and communities located in proximity to D/
FW (Irving, Lewisville, Grand Prairie), perhaps owing to job cuts by
freight, transportation, warehousing
and industrial employers.
Owners switched pricing strategy to
occupancy-maintenance mode, eschewing revenue growth in favor of
tenant retention. Reis aver that sequential asking and effective rent increased $3 (0.4%) and $2 (0.3%),
respectively, but data released by public real estate trusts suggest that samestore rent levels were moderately
weaker. Fourteen of Big D’s 24 Reis
submarkets recorded quarterly effective rent decreases, while only four
achieved gains without the benefit of
a new property delivery or attrition of
an existing property from the Reis
inventory. Submarkets in East and
South Dallas reported weak rent momentum, while popular North Dallas
and Collin County suburban submarkets posted above average gains.
Property sales volume declined but
the Dallas market remained more liquid than most. RCR observed ten
$5mm+ 4Q property trades for total
proceeds of $245mm, and four 1Q09
transactions valued at $60mm. Cap
rates for institutional quality assets
were up only slightly in 4Q08 (to the
6% area), but appeared to rise considerably in early 2009 trade. The January sale of a recent construction East
Dallas infill asset at an 8%+ yield was
the clearest indication that sellers
must accept substantial price discounts now. Intrepid investors may
want to wade in “opportunistically.”
SNAP SHOT
Y-o-y
change
Projected
2009
90 bps
130 bps
Vacancy
(8.0% - 4Q08)
Effective
Rents
($740 - 4Q08)
2.9%
0.9%
Cap Rate
(7.5% - 4Q08)
Employment
(2,066.5m - 1Q09)
130 bps
60 bps
24.3m
10.4m
KEY POINTS
•
After chalking down net absorption of 4,400
units in the prior four quarters, demand for
Dallas apartments plunged in 4Q08. Tenants
vacated a net of 1,033 units, contributing to a
50 basis point sequential and 90 bps yearover-year increase in the average vacancy
rate to 8.0%, according to Reis. Preliminary
1Q data show a further 30 bps rise to 8.3%.
•
Reis report that asking and effective rents
increased sequentially by 0.4% and 0.3%,
respectively. But REIT disclosure and other
evidence suggest that average effective rent
probably declined about –0.5%. Asking
rents rose 0.2% in 1Q09, preliminarily.
•
Investors actively pursued Dallas properties
in 4Q, snapping up at least ten institutional
quality assets for total proceeds of $245mm.
Cap rates for assets built since 1995 ranged
from the low-6s to mid-8s. Early 2009 trade
suggests a further rise in cap rates, although
some sellers likely were motivated.
•
Investors willing to seize the initiative in a
market in cyclical decline may find attractive
values in Dallas. Invest opportunistically
from motivated sellers at 8%+ cap rates.
•
RED forecast a loss of 10,400 jobs in 2009.
Dallas-Plano-Irving, TX Metropolitan Division - 4Q 2008
VACANCY TRENDS
•
•
After seven consecutive quarters of positive absorption, Dallas owners
suffered the net loss of 1,033 tenants, according to Reis. The delivery
of 762 units compounded the effect, sending, occupancy down 50 basis
points from 3Q08 and 90 bps from the year-earlier period to 92.0%.
Submarkets south of Downtown and near the DFW Airport suffered
the largest occupancy rate decreases. The performance of North Dallas
and Collin County submarkets was better than the metro average.
Reis expect further occupancy attrition as the year unfolds. The service
expects average occupancy to decline 130 bps to 90.7% by YE09, and
to recover gradually thereafter to the 91.5% level by 2013.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
10%
7.1% 8.0%
8%
6%
4%
DALLAS
U.S.A.
2%
0%
th
RANK: 40 out of 50
COMMENT: Preliminarily, Reis report a 30bps vacancy increase in 1Q09,
comparing favorably to a 60 bps average hike among the top 80 markets.
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
99 00 01 02 02 03 04 05 05 06 07 08 08
RENT TRENDS
•
•
•
Source: Reis, Inc.
Rent velocity continued to decelerate following the 4Q07 peak level.
Reis report that asking and effective rents rose $3 (0.4%) and $2
(0.3%), respectively, on a sequential quarter basis to $814 and $740.
Effective rents advanced 3.2% year-over-year, ranking 14th among the
RED 50. Dallas ranked 16th in the year earlier period.
Public REIT disclosure and reports from published sources suggest that
effective rent trends were weaker than reported by Reis. Three trusts
with Dallas holdings reported negative sequential trends in 4Q.
8%
Asking
Effective
6%
YoY Rent Trend
•
Metro Rent Trends
Reis expect rents to fall in 2009. The service forecasts a –0.9% decline
this year, comparing favorably to a national average –1.7% reduction.
3.2%
2%
0%
-2%
-4%
-6%
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
COMMENT: Preliminarily, Reis report a $2 (0.3%) asking rent hike in 1Q09.
99 00 01 02 02 03 04 05 05 06 07 08 08
•
•
Source: Reis, Inc.
Investors remained active in the Dallas multifamily market even as
sales elsewhere declined materially. RCR identified 10 fourth quarter
institutional quality asset trades completed in 4Q for $245 million.
10.0%
The bellwether was the acquisition of a 1998-vintage luxury townhome
development in North White Rock. The 338-unit project traded for
$52.5mm (according to Loopnet.com), which equates to an RCR
estimated 6.2% cap rate. The previous owner, a pension fund, acquired
the property in 2005 for $61mm. At year-end 2007, the pension fund
listed the property at a then current market value of $65.4mm, equating
to an approximate 4.8% yield.
8.0%
Sales completed in January and February suggested further value
deterioration in 2009, but institutional quality assets continued to fetch
top dollar. Two public trusts sold trophies at 6.0% caps (see below).
REIS Composite
9.0%
Cap Rate
•
2.9%
4%
NCREIF
7.0%
6.0%
5.0%
4.0%
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
06 06 07 07 07 07 08 08 08 08 09
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
Shadow Ridge (NW Denton Co)
Vue Fitzhugh (East Dallas)
Worthing Bend (South Irving)
A
A
A
Jan-2009
Feb-2009
Jan-2009
$25.0
$18.3est.
$10.7est.
$112,568
$81,029
$32,584
6.0%
10.0%
9.8%
Marquis Lantana (NW Denton)
A
Dec-2008
$22.8est.
$91,734
7.5%
Prairie Creek Villas (Plano Allen)
A
Jan-2009
$46.0
$99,138
6.0%
$240
D/FW
Prices (000)
$220
•
US
•
$200
$180
$160
•
$140
$120
•
$100
05
06
07
Y
Y
Y
4Q 1Q 2Q 3Q 4Q
07
08
08
08
08
49
Annual Chg (000)
60
40
0
HousingTracker.net also report that existing homes offered for sale
decreased -16.5% in March from the year earlier period. These data
suggest that home selling pressures may be abating, a necessary but not
sufficient condition for the re-establishment of market equilibrium.
Dallas Metropolitan Division establishments created 32,900 jobs in
2008, a 1.6% advance. By way of comparison, U.S. payrolls declined
at a -0.4% annual rate.
The unemployment rate increased from 4.3% in December 2007 to
6.0% twelve months later and hit 7.0% in February.
Fourth Quarter 2008
-10.9
•
-40
-60
-80
99 00 01 02 03 04 05 06 07 08 09f 10f
•
Conditions deteriorated rapidly in 4Q08. Payroll growth slowed from
a 31,000 job rate in 3Q08 to a 6,400-job, 0.4% rate in 4Q09.
Trends were especially soft in the goods-producing industries. Construction, manufacturing and wholesale trade concern payrolls were
down by 3,700, 7,700 and 2,300 jobs, respectively, calculated on a
year-over-year basis.
•
Trends also were weaker in technical service industries. Information
service companies downsized at a 2,400-job, -3.2% rate, and business
service employers expanded at just a 300-job, 0.0% pace, down from
a 10,200-job add in 3Q08.
January 2009
Source: BLS
DALLAS (REBENCH)
DALLAS (ORIG)
USA
•
2%
Rate
•
•
20
4%
Data published by HousingTracker.net have a more optimistic take.
The firm reports that the median metro division asking price increased
3.0% from February to March to $194,900; and 8.4% y-o-y.
Past 12 Months
80
6%
The S&P Case-Shiller Index reports that Dallas homes fell -4.7% in
value over the 12 months ended in December. The Index indicates that
prices declined –2.3% from November 2008 to December.
EMPLOYMENT TRENDS
-20
The median price of Dallas/Fort Worth homes sold in 4Q08 was
$138,000, down -4.8% year-over-year. The Dallas real estate market
outperformed the South Region (-7.5%) and the U.S. (-12.4%).
0%
-2%
Dallas payrolls declined by 24,300 (-1.2%) jobs year-over-year in
1Q09, according to preliminary data. It was the worst quarterly performance in nearly five years.
Forecast
-4%
•
-6%
99 00 01 02 03 04 05 06 07 08 09
12%
10%
8%
6%
4%
2%
0%
The RCR payroll model foresees further losses in 2009. For the year,
the model expects Dallas establishments to shed an average of 10,400
jobs. Losses will persist through the third quarter. Our model foresees significant improvement beginning in 1Q10, however, leading to
a robust 49,000-job net gain for the full year.
D A LLA S ( R A I = 2 . 0 0 )
F W ( R A I = 2 . 24 )
2.9%
2.0%
90%
4.5%
5.5%
70%
6.1%
7.2%
50%
7.7%
8.9%
30%
10.0%
11.3%
10%
SUBMARKET TRENDS
Submarket
Garland
South Dallas County
Southwest Dallas
Grand Prairie
North Irving
South Irving
Far North
Far Northeast
North White Rock
East Dallas
Southeast Dallas
South
Richardson
Lewisville
Plano / Allen / McKinny
Northwest
Central Dallas
Oaklawn
North
Metro
Effective Rent
Physical Vacancy
4Q07
4Q08
Change
4Q07
4Q08
$654
$646
$625
$609
$616
$769
$613
$740
$548
$594
$556
$711
$520
$691
$735
$604
$733
$782
$830
$706
$796
$1,541
$1,130
$742
$719
$675
$669
$656
$611
$627
$776
$618
$751
$552
$605
$565
$745
$513
$669
$770
$634
$748
$809
$863
$719
$805
$1,626
$1,091
$780
$740
3.3%
3.5%
4.9%
0.3%
1.7%
0.9%
0.7%
1.5%
0.7%
1.8%
1.5%
4.8%
-1.2%
-3.1%
4.8%
4.9%
2.1%
3.5%
4.0%
1.9%
1.2%
5.5%
-3.5%
5.1%
2.9%
7.2%
5.8%
6.9%
7.3%
9.2%
8.0%
4.8%
4.6%
12.2%
8.6%
8.8%
6.6%
8.7%
12.3%
6.7%
7.6%
4.0%
6.1%
7.0%
7.7%
3.5%
9.6%
7.5%
4.9%
7.1%
6.9%
6.7%
8.7%
8.7%
10.5%
8.0%
5.8%
5.3%
12.3%
9.1%
11.0%
10.3%
10.2%
12.8%
6.3%
6.5%
5.8%
6.5%
8.5%
8.3%
5.8%
13.5%
5.5%
6.0%
8.0%
•
Source: Reis, Inc
Reis count 6,021 units delivered to Dallas M.D. in 2008, 676 units
more than 2007. The service forecasts another supply increase this
year, as completions are anticipated to rise to the 7,328.
12,000
The deluge of luxury supply Downtown gave rise to a temporary
supply/demand imbalance. Of approximately 2,080 units delivered in
2007 and 2008, roughly 1,265 were occupied in December.
C o m ple t io ns
A bs o rpt io n
8,000
Reis forecast a year-on-year supply decrease in 2010, as completions
fall to 4,748. Further moderation is anticipated in 2011—2013.
Units
•
-0.3%
0.9%
1.8%
1.4%
1.3%
0.0%
1.0%
0.7%
0.1%
0.5%
2.2%
3.7%
1.5%
0.5%
-0.4%
-1.1%
1.8%
0.4%
1.5%
0.6%
2.3%
3.9%
-2.0%
1.1%
0.9%
SUPPLY TRENDS
•
Change
4,000
0
-4,000
02
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
03
04 05
06
07 08 09f 10f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the
report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should
any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is
solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Dallas,Texas
December 2008
EXECUTIVE SUMMARY
W
SNAP SHOT
hile much of the country
experienced wrenching
recessionary economic
conditions, Dallas continued to create
new jobs at a brisk clip in the fall.
Metro establishments added workers at
a 44,900-job, 2.1% year-over-year pace
in 3Q08, unchanged from 2Q08’s performance and only marginally slower
than 2007’s 57,100-job vintage.
Reis aver that apartment absorption rebounded from 2Q08’s tepid 593 units to
1,244 in 3Q. Still, this figure was the
lowest third quarter result recorded in
four years and fell materially below the
three-year 3Q average of 2,826 units.
Occupancy increased 10 basis points to
92.6%, but occupancy remained 10 bps
below the year ago comparison and 40
bps lower than the 93.0% YE07 metric.
Which is not to say that the Dallas area
was immune to the effects of the global
slowdown. Indeed, payroll trends in
“export” oriented industries were
weaker in 3Q, and didn’t perform markedly better than the national average.
For example, manufacturing headcounts
fell at a 4,800-job, -2.5% annual rate,
compared to a -3.0% U.S. drop; while
employees on transportation payrolls
declined at a -0.6% clip, marginally
better than the –0.8% national decline.
Rent trends were robust, as owners
maintained good pricing power before a
back drop of strong population and job
growth and weaker for-sale home demand. Average asking and effective
rents increased $6, pushing the former
0.6% higher to $810 and the latter up
0.8% to $738. Expressed on an overthe-year basis, effective rents increased
4.2%, ranking Dallas 13th among the
RED 50, up from 20th in 2Q and the
metro’s highest ranking of the decade.
Dallas distinguished itself with robust
internally-generated growth. Population
in-migration supported hiring in construction, retail sales, government and
services. Construction payrolls grew at a
7,400-job, 5.4% y-o-y rate, comparing
favorably to 2Q’s 6,000-job advance
and the nation’s -5.8% decline; retailers
hired a net of 3,500 (1.7%) workers, up
from 2Q’s 1,700-job increase, readily
surpassing the –1.6% U.S. decrease; and
health care, leisure and personal services and government establishments
added 33,600 workers, a 4.5% surge.
Reis forecast slower but constructive
rent trends through 2010. The service
projects a $1 effective rent gain in
4Q08, lowering the y-o-y comparison to
2.8%. For 2009 and 2010, Reis expect
effective rents to rise 2.0% and 2.8%,
respectively, moderately better than the
1.6% and 2.8% U.S. averages. With
respect to occupancy, Reis foresee solid
apartment demand through 2012 contributing to absorption of an average of
3,500 units per year. But supply promises to be stronger, giving rise to lower
occupancy throughout the period.
RED CAPITAL Research’s models
indicate that the party may be in its final
hours. Although the Big D is positioned
to out-perform the nation, job growth is
likely to be slower than residents are
accustomed to. The latest econometric
model output suggests payroll growth
will to decelerate to a 31,100-job, 1.5%
y-o-y pace in the fourth quarter, slipping
to a 0.4% trough rate in 3Q09, before
rebounding to 0.8% in 4Q.
For
FY2009, the model indicates that payrolls will expand by 15,000 (0.7%) jobs.
Active trade in metro assets persisted
into the fall, but volume and velocity
were down sharply from 2007. RCR
identified 12 $5mm+ trades closed from
July through October totaling $217mm,
down from 35 trades for $521mm in the
comparable period last year.
RCR estimate 5-year unlevered Dallas
total returns at 6.4%, 60 bps above the
R50 mean, but risk-adjusted returns are
slightly below the group norm. We find
Dallas an attractive value. Accumulate
at slightly above market average yields.
Y-o-y
change
Projected
YE2008
(7.4% - 3Q08)
10 bps
30 bps
Effective
Rents
4.2%
2.8%
Unchd
Unchd
44.9m
42.8m
Vacancy
($738 - 3Q08)
Cap Rate
(6.2% - 3Q08)
Employment
(2,124.2m - 3Q08)
KEY POINTS
•
The Dallas economy exhibited considerable
strength in 3Q08. Payrolls expanded at a
44,900-job, 2.1% pace. RCR expect job
creation to slow next year, however,
decelerating to an estimated 15,000 jobs..
•
Home prices were stable, rising 0.03%
sequentially in 3Q08, according to OFHEO.
•
Net apartment absorption rebounded from
2Q’s soft 593 units, recovering to 1,244
units. Occupancy increased 10 bps to 92.6%.
•
Owners assumed a more cautious pricing
posture, raising real rents $6 (0.8%), down
from $9 in 2Q. But 4%+ over-the-year rent
growth persisted for the fourth consecutive
quarter, the first time the Dallas market
breached this threshold in nine years.
•
Active property trade in the summer gave
way to slower sales in the fall due to tight
credit conditions. Cap rates for institutional
quality assets rose from the mid-5% range in
July to the mid-6% range in November.
•
Supply will weaken market fundamentals to
a degree over the next four years. Still,
RCR find Dallas fundamentals compelling:
accumulate assets at a modest discount.
VACANCY TRENDS
•
•
•
Tenants absorbed 1,244 units in the third quarter, exceeding completed
supply by 201 units. Occupancy increased 10 basis points sequentially
to 92.6%. Over-the-year, occupancy declined by 10 bps from 93.7%.
Tenants favored class-A properties, which recorded 1,305 net leases in
the quarter. Class-B/C projects reported 65 net move-outs.
Tenant demand was strongest in Northwest Dallas County near the
airport and in Collin County. Urban submarkets (Oaklawn and Central
Dallas) also recorded meaningful occupancy and absorption gains..
Source: Reis, Inc.
14%
Metro Vacancy Rate
•
12%
7.3%
10%
6%
DALLAS
U.S.A.
CLASS-A
CLASS-BC
4%
2%
An alternative source of data reported net D/FW absorption totaling
3,344 units in 3Q08, up from 293 units in 2Q. This source estimated
average occupancy at 92.3%, up 16 bps from 2Q08.
0%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q
00 01 01 02 03 04 04 05 06 07 07 08
RENT TRENDS
•
•
Metro Rent Trends
Average class-A rents topped the $1,000 mark for the first time, rising
$9 (0.9%) to $1,006. The increase helped push metro average rents up
$6 (0.7%) to $810, despite moderately weaker class-B/C trends.
Average concession levels were unchanged at $72 (8.9% of GRR),
allowing effective rents to increase $6 (0.8%) as well to $738.
Sequential effective rent trends were negative in some submarkets
where new construction is concentrated. Rising lease concessions
contributed to sequential real rent decreases in the Carrolton / Addison
(-0.7%), Oaklawn (-0.6%) and Plano / Allen (-0.1%) submarkets.
An alternative data service reports that D/FW apartment asking rent
increased by an average of $9.80 in 3Q08, representing a 1.2%
advance. Rents were 3.7% higher year-over-year.
YoY Rent Trend
•
Source: Reis, Inc.
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
Asking
Effective
•
4.2%
00 01 01 02 03 04 04 05 06 07 07 08
January to September sales of Dallas/Fort Worth properties declined at
a rate consistent with the U.S. metro average Real Capital Analytics
report that 80 properties valued at $5mm or greater exchanged hands
during the period for aggregate proceeds of $1.49bn. Velocity dropped
50% and total proceeds 45% from the comparable period of 2007.
RCR identified 12 $5mm+ Dallas property trades closed from July 1 to
October 31, 2008. Total proceeds were $217mm. In the comparable
period of 2007, 33 broker-assisted trades were consummated for
aggregate proceeds of $521mm, representing velocity and proceeds
decreases of -64% and -58%, respectively.
Cap rates for quality assets increased about 100 bps in late fall to levels
in the mid-6% range. Employing a 5.3% rate applicable to 3Q08
trades, RCR estimate expected unleveled 5-year total returns of 6.4%.
Source: Reis, Inc.
7.5%
7.0%
6.5%
Cap Rate
•
4.2%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q
•
7.4%
8%
6.0%
5.5%
5.0%
4.5%
4.0%
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
06 06 07 07 07 07 08 08 08
Property Name
Post Legacy (Plano)
Thronberry @ Chase (Plano)
Avalon @ Chase (Plano)
McMillan (North White Rock)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
A
A
B-
Oct-2008
Sep-2008
Sep-2008
Oct-2008
$34.9
$34.4
$29.6
$18.0
$90,788
$91,589
$90,702
$46,269
5.2%
6.0%
6.0%
6.5%
$240
D/FW
•
US
Prices (000)
$220
$200
•
$180
$160
•
$140
$120
$100
05
Y
06 1Q 2Q 3Q 4Q 1Q 2Q 3Q
Y
07 07
07
07 08
08
08
•
43
40
•
15
20
0
-20
-40
•
-60
-80
99 00 01 02 03 04 05 06 07 08f 09f
•
Source: BLS
DALLAS
USA
6%
HousingTracker.net report that the median asking price of a Dallas
home increased 9.5% to $191,600 during the 12 months ended 11/15.
The inventory of homes for sale plunged -18.4% in the same period.
Metro establishments hired 44,900 (2.1%) workers y-o-y in 3Q08.
Over-the-year payroll growth in September totaled 39,200 jobs, the
largest amount recorded among all US metro areas during the period.
Consumer-oriented industries performed well, contrary to the national
trend Payroll headcounts in the construction, retail sales and leisure.
hospitality and personal services industries advanced at a 20,500-job
year-over-year rate, up from a 15,600-job pace posted in 2Q08.
By contrast, industries more sensitive to national economic trends
were somewhat weaker. Manufacturing, transportation and information payrolls declined at a 6,400-job, -1.8% pace, compared to a
3,600-job, –1.0% rate in 2Q08.
In the skilled services, the finance and health care sectors reported
robust hiring. Net payroll positions increased at 1.3% and 5.1% rates,
respectively. Business services employers, on the other hand, hired at
a sluggish 200-job annual pace, down from 5,200 jobs in 2Q08.
October 2008
•
4%
2%
Rate
At 2.31%, the West South Central Region enjoyed the nation’s
strongest home appreciation during the 12 months ended September,
according to OFHEO. Dallas prices increased 2.55%. Only Austin and
Houston among major Texas metros reported superior appreciation.
Third Quarter 2008
80
60
The NAR. report that the median price of a Dallas-Ft Worth home sold
in 3Q08 was $150,200, representing a decrease of -2.3% from 2007.
EMPLOYMENT TRENDS
Annual Chg (000)
•
According to the North Texas Council of Governments, Collin, Dallas,
Denton, Hunt and Rockwall Counties added about 79,000 residents
during calendar 2007. The Census estimate for Dallas MSA during the
year ended July 1, 2007 is 104,916.
0%
•
-2%
-4%
Hiring by metro establishments from May to October didn’t exhibit
the sharp downturn observed nationally. U.S. payroll expansion plummeted from 0.1% y-o-y in May to –0.9% in October. Dallas growth
slowed only 20 bps, from 2.1% to 1.9% over the same period.
A rapid influx of job seekers elevated the metro unemployment rate in
the fall. A 43,000 increase in the size of the labor force over the 12
months ended in October pushed the metro unemployment rate from
4.1% in October 2007 to 5.6% this year.
-6%
Forecast: RCR expect hiring to decelerate during the winter. Our
model produces a forecast of growth at a 20,400-job, 1.0% rate in 1Q09;
a 13,000-job 0.6% rate in 2Q09; and a 9,400-job, 0.4% rate in 3Q09.
99 00 01 02 03 04 05 06 07 08
11%
9%
7%
5%
3%
1%
DALLAS (RAI=2.19)
ATL (RAI=1.91)
4.8%
2.5%
4.1%
6.4%
7.8%
5.7%
9.9%
9.4%
7.3%
1.7%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Submarket
Physical Vacancy
3Q07
3Q08
Change
3Q07
3Q08
Garland
$637
$672
$632
$672
South County
$625
$660
Southwest Dallas
$596
$609
5.6%
6.4%
5.5%
2.2%
3.6%
4.7%
4.3%
4.5%
3.4%
1.5%
3.2%
7.1%
2.0%
2.1%
4.0%
7.9%
1.6%
3.2%
3.5%
5.8%
0.5%
5.4%
-0.1%
6.1%
4.2%
7.3%
6.8%
5.3%
8.1%
6.8%
7.2%
5.1%
4.7%
13.3%
9.5%
8.7%
6.6%
9.3%
11.0%
7.2%
9.2%
4.5%
6.4%
7.6%
8.6%
3.6%
8.9%
7.7%
5.3%
7.3%
6.3%
5.5%
9.2%
7.5%
8.8%
8.2%
4.9%
4.7%
12.2%
8.8%
11.6%
9.7%
10.4%
14.8%
5.4%
6.1%
4.9%
5.3%
7.8%
7.8%
5.5%
12.0%
5.7%
5.5%
7.4%
Grand Prairie
$611
$633
North Irving
$748
$783
South Irving
$600
$626
Far North
$724
$757
Far Northeast
$536
$554
North White Rock
$592
$601
$553
$571
East Dallas
$703
$753
Southeast Dallas
$504
$514
South
$670
$685
Richardson
$733
$763
Far Northwest
$590
$637
$731
$742
Lewisville
$778
$804
$822
$851
Northwest
$691
$732
$796
$800
Central Dallas
$1,520
$1,601
Oaklawn
$1,118
$1,117
$726
$771
$708
$738
North
Metro
SUPPLY TRENDS
•
•
Change
-100 bps
-13o bps
390 bps
-60 bps
200 bps
100 bps
-20 bps
Unchd
-110 bps
-70 bps
290 bps
310 bps
110 bps
380 bps
-180 bps
-310 bps
40 bps
-110 bps
20 bps
-80 bps
190 bps
310 pbs
-200 bps
20 bps
10 bps
After absorbing the shock of 6,690 units of new supply in 2008, Reis
expect the market to bear the brunt of another 6,109 units next year.
The service forecasts a 40 bps vacancy rate increase as a result.
Supply is expected to subside after 2009, falling to an annual average
of 3,410 units from 2010 to 2012. Occupancy is expected to recover to
the 92.1% level at that time, up 40 bps from the 2010 cyclical trough.
15,000
10,000
5,000
0
-5,000
Source: Reis, Inc
Completions
02
03
04
05
Absorption
06
07
08f
09f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
800.837.5100
Columbus, OH_Boston, MA_Charlotte, NC_Chicago, IL
Denver, CO_Fredericksburg, TX_Irving, TX_Jupiter, FL_Linwood, NJ_Nashville, TN
Newport Beach,CA_Reston, VA_San Diego, CA_Syracuse, NY
Market Overview is a publication of RED CAPITAL GROUP. If you are interested in other metro areas we cover or would like to
read about the research methodology we apply in our reports, please visit us at www.redcapitalgroup.com/research.
RED CAPITAL GROUP®
Market Overview
Dallas,Texas
August 2008
EXECUTIVE SUMMARY
D
allas reported solid second
quarter employment
growth, only moderately
slower than the preceding period.
Metro payrolls increased by 45,000
jobs from the 2Q07 level, a 2.1% annual advance. By comparison, total
payrolls increased at 2.4% and 2.8%
rates in 1Q08 and calendar 2007, respectively. Preliminary estimates for
July payrolls exhibit a modest accelerating tendency to a 51,800-job,
2.5% year-over-year growth rate.
Consumer behavior and housing market trends also were constructive.
Stores enjoyed healthy sales growth
in the summer, boosting July state
sales tax revenue disbursements by
8.7%, substantially faster than
Texas’s robust 6.3% overall average.
As for homes, prices increased 2.05%
y-o-y and 0.2% in the second quarter,
according to OFHEO, comparing favorably to the nation’s -1.71% and 1.44% average price declines.
Slower growth is likely to follow.
Business leaders expect weaker oil
prices and slower domestic and export
sales growth to exert downward pressure on the local economy. The Dallas
Business Confidence index fell to a
near-historic low 44.3 in August, well
below the index of 50 that indicates a
growing economy. The Dallas Fed
expressed similar concerns, noting
weaker transportation, housing and
retail sales activity as harbingers of
slower expansion.
RED CAPITAL Research agree.
The group’s econometric payroll
model forecasts slower job creation in
the second half of the year, leading to
full-year 2008 payroll gains ranging
from 41,000 to 46,000 jobs. For
2009, the model yields a forecast confidence interval ranging from 21,000
to 47,000 jobs with a point estimate of
34,000 jobs, representing a 1.6% rise.
Metro apartment absorption declined
SNAP SHOT
for the third consecutive quarter in
2Q08 after peaking at 3,145 units in
3Q07. Households net-leased 364
units, down from 1,225 units in 1Q08
and the lowest total since 1Q07. Conversely, developers delivered 1,934
new units, causing the average vacancy rate to ascend 40 basis points to
7.5%. Vacancy remains 20bps below
the 2Q07 level and 290bps lower than
the 10.4% cyclical high set in 4Q04.
Rent trends showed no ill effect from
weaker demand. Average effective
rent increased $9 (1.2%) to $732
quarter-to-quarter, the second largest
sequential advance recorded in 8
years and a smart recovery from the
sluggish $4 rise posted in 1Q08.
Rents gained 4.4% y-o-y, earning the
Big D 20th spot among the RED 50.
Reis expect absorption to recover to
2,829 units in 2H08, but supply also
is anticipated to rise. The service
forecasts delivery of 3,523 units,
enough to slice another 10 bps from
the metro occupancy metric to 92.4%.
Added competition will exert pressure
on rent trends. Reis expect average
effective rent to rise $13 (1.8%) to
$732 by year end, followed by a $26
(3.5%) advance in 2009.
Trade in the property markets continued at a brisk pace. Real Capital Analytics report 67 1H08 acquisitions of
D/FW properties for $1.3bn of proceeds. Although sales fell about 30%
from 2007, the Metroplex ranked behind only New York and Houston
with respect to total sale proceeds.
RCR are of the mind that Dallas
properties provide investors with attractive relative value. Expected 5year holding period total returns are
estimated at 7.6%, ranking 15th
among the RED 50. Moreover, riskadjusted returns approach the 2.80
group mean, leading us to reaffirm
our Cautious Accumulate rating.
Vacancy
(7.5% - 2Q08)
Effective
Rents
($732 - 2Q08)
Cap Rate
(6.9% - 2Q08)
Y-o-y
change
Projected
2008
20 bps
10 bps
4.4%
3.6%
50 bps
Employment
(2,120.6m - 2Q08)
45m
34m
KEY POINTS
•
•
•
•
•
The Big D remained one of the nation’s most
prolific job producing metros in the second
quarter, expanding at a 45,000-job, 2.1%
pace, trailing only Texas rival Houston.
The RCR econometric payroll model
foresees slower but still robust economic
growth on the horizon. The model leads us
to expect Dallas establishments to create
43,000 jobs in 2008, and 34,000 in 2009.
Net apartment absorption tumbled for the
third consecutive quarter to only 364 units,
causing average occupancy in the Dallas
metro area to drop 40 basis points to 92.5%.
Owners exerted considerable pricing power,
pushing effective rents up $9 (1.2%) to $732.
The metro’s 4.4% year-over-year advance
was the 20th fastest growth rate recorded
among the RED 50, up 2 spots from 1Q08.
RCR estimate that a typical institutional
quality Dallas apartment priced to a 5.2%
initial yield will produce unlevered 5-year
total returns of 7.6%, comparing favorably to
the 6.9% RED 50 mean. Although riskadjusted returns are not better than average,
we reaffirm our cautious accumulate
investment rating.
VACANCY TRENDS
•
•
•
Although single-family home sales fell 15% January to June compared
to 2007 and job growth was unusually robust, apartment absorption
dropped from 1Q08’s constructive 1,225 unit level (a 7-year high for a
winter quarter) to only 364 units.
Average occupancy fell 40 basis points sequentially to 92.5%.
Occupancy increased 20 basis points year-over-year, however.
Southern Dallas submarkets bore the brunt of the occupancy declines.
South Dallas County and South Dallas City submarkets endured overthe-year vacancy increases of 510 and 490 basis points, respectively.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
10%
7.7%
7.5%
8%
6%
4%
DALLAS
U.S.A.
2%
0%
Reis expect supply pressure to raise average vacancy to 8.2% in 2010.
3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
COMMENT: Supply pressures in 2H08 could raise vacancy faster than forecast.
00 01 02 02 03 04 05 05 06 07 08
RENT TRENDS
•
•
Owners were largely unfazed by weaker demand trends or so it would
seem in light of the aggressive rent hikes observed in 2Q08. Rents in
many West Dallas submarkets exceeded 5% y-o-y, led by Grand
Prairie (6.1%), South Irving (5.5%) and Northwest Dallas (6.8%).
Average face rents increased $10 (1.3%) in 2Q08 to $804, the second
largest hike of the past eight years. Concession levels increased $1,
however, holding effective gains to $9 (1.2%).
Addition of roughly 1,000 units to the smallish urban infill Oaklawn
and Downtown submarkets gave rise to muted rent growth there. Yearover-year gains in Oaklawn were 4.0%; in Central Dallas, 4.6%.
Source: Reis, Inc.
6%
YoY Rent Trend
•
Metro Rent Trends
Asking
Effective
4%
4.4%
4.3%
2%
0%
-2%
-4%
th
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
RANK: 20 out of 50
00 01 02 03 03 04 05 06 06 07 08
Source: Reis, Inc.
•
•
7.5%
Investors were active in Dallas / Fort Worth property markets during
1H08. Real Capital Analytics report 67 first half trades totaling
$1.26 billion of proceeds.
RCA report that the average cap rate was 7.3% in 1H08, up 30 bps
from FY2007. The average unit exchanged hands at a $55,893
price, a small increase from the $55,781 average recorded in 2007.
Buyers concentrated on Class-B and Class-C repositioning plays in
recent acquisitions.
7.0%
6.5%
Cap Rate
•
6.0%
5.5%
5.0%
4.5%
4.0%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
06 06 06 06 07 07 07 07 08 08
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
Lakeview (So. Irving)
B
Jul-2008
$19.8
$41,649
8.6%
Woodland Ridge (No. Irving)
Autumn Ridge (No White Rock)
Windsor Townhomes (SW Dall)
BBB-
Jul-2008
Apr-2008
May-2008
$36.0
$11.0
$7.5
$102,987
$38,194
$40.761
4.2%
7.5%
7.4%
Property Name
$240
DALLAS
•
US
Prices (000)
$220
•
$200
$180
$160
•
$140
$120
$100
04
05
Y
Y
06 1Q 2Q 3Q 4Q 1Q 2Q
Y
07
07
07 07
08
•
43
40
34
20
•
0
-20
Active single-family listings fell 6% year-over-year in June to 44,493,
representing 6.3 months’ inventory, representing near equilibrium.
Dallas produced 57,100 jobs in 2007. Business, health care and education services accounted for one half of this amount.
The pace of Job creation in the 12 months ended in July 2008 decelerated slightly to a 50,600-job pace. Slower hiring in the business services sector was largely responsible. Sector growth fell from 16,700
jobs in calendar 2007 to 8,600 jobs during the trailing 12 months.
Second Quarter 2008
-40
•
-60
-80
99 00 01 02 03 04 05 06 07 08f 09f
Source: BLS
DALLAS
USA
6%
•
•
•
2%
0%
-2%
•
-4%
-6%
99 00
01 02
5%
The slowdown was broad-based. Minor slowing in construction,
trade, technical services and hospitality services contributed to the
decline.
The unemployment rate rose to 4.8% in June from 4.5% in April and
May. The June metric was up 20 basis points from 2007.
05 06 07
•
08
RED CAPITAL Research expect the secular slowdown to continue.
Our econometric payroll model forecasts payroll job creation for 2008
totaling 43,000 jobs, with a confidence interval ranging from 41,000
to 46,000. This implies 2H08 job creation trends dropping to a
38,000-job annual rate.
For 2009, the model generates a more stable forecast ranging from
21,000 to 47,000 jobs. The point estimate is 34,000 jobs.
National City Bank chief economist Richard DeKaser revised down
his forecast for 2008—2008 GDP growth in his August report. Dr.
DeKaser now expects GDP to grow by 1.69% in 2008; 1.7% in 2009.
15%
10%
03 04
The pace of job growth slowed about 10% in the second quarter,
dropping from a 50,700-job rate in the first quarter to 45,000.
Forecast
4%
Rate
The Dallas Case-Shiller Housing Price Index fell -3.2% year-over-year
in June, representing the ninth consecutive negative comparison. On
the other hand, the index was up 0.7% month-over-month, the fourth
consecutive sequential-month advance.
Past 12 Months
80
60
The median price of home sold in June was $158,580, representing a
0.4% increase from June 2007. The price per square foot advanced
from $93 in 2007 to $94.
EMPLOYMENT TRENDS
Annual Chg (000)
•
08
The North Texas Realtors Association reported sales totaling 38,453
units January to June, down 15% from 2007. The average price of a
home was $199,317, down 2% from last year.
Dallas (RAI=2.70)
Atlanta (RAI=2.42)
6.1%
3.8%
5.6%
7.6%
7.2%
9.0%
11.1%
8.8%
10.9%
3.2%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
Garland
South Dallas County
Southwest Dallas
Grand Prairie
North Irving
South Irving
Far North
Far Northeast
North White Rock
East Dallas
Southeast Dallas
South City of Dallas
Richardson
Far Northwest / Farmer Brnch
Lewisville
Northwest
Central Dallas
Oaklawn
North
Metro
2Q07
2Q08
Change
2Q07
2Q08
$633
$625
$618
$592
$596
$749
$589
$708
$536
$589
$556
$708
$496
$668
$718
$586
$729
$763
$805
$689
$778
$1,508
$1,081
$718
$701
$669
$654
$647
$614
$632
$782
$621
$750
$564
$592
$564
$723
$521
$697
$761
$626
$748
$792
$852
$723
$799
$1,578
$1,124
$757
732
5.7%
4.6%
4.7%
3.6%
6.1%
4.4%
5.5%
5.8%
5.4%
0.6%
1.4%
2.1%
5.0%
4.4%
5.9%
6.8%
2.5%
3.8%
5.8%
5.0%
2.7%
4.6%
4.0%
5.4%
4.4%
8.2%
7.5%
6.0%
8.9%
7.6%
7.0%
5.8%
5.0%
12.3%
10.5%
9.2%
8.1%
10.1%
9.7%
8.5%
10.9%
5.0%
7.2%
7.0%
7.3%
3.7%
9.9%
4.1%
5.6%
7.7%
6.2%
5.3%
11.1%
7.3%
11.0%
9.0%
4.6%
4.6%
11.9%
8.3%
11.3%
6.4%
9.9%
14.6%
5.8%
7.7%
4.2%
6.1%
8.3%
8.6%
5.2%
13.5%
7.2%
5.9%
7.5%
•
•
-200 bps
-220 bps
510 bps
-160 bps
340 bps
200 bps
-120 bps
-40 bps
-40 bps
-220 bps
210 bps
-170 bps
-20 bps
490 bps
-270 bps
-320 bps
-80 bps
-110 bps
130 bps
130 bps
150 bps
360 bps
310 bps
30 bps
-20 bps
SUPPLY TRENDS
•
Change
Reis identify 8,943 units in 30 projects currently under construction. A
total of 2,670 units are expected to be completed by year end.
Another 8,595 units are in the planning stages, including 3,300 that are
scheduled for delivery by 2011.
Plano, Allen and McKinney will receive the largest share. Over 3,000
units are currently under construction in this submarket.
Source: Reis, Inc
Completions
Absorption
12,000
10,000
8,000
6,000
4,000
2,000
0
-2,000
-4,000
02
03
04
05
06
07
08f
09f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Charlotte, NC_Chicago, IL
Fredericksburg, TX_Irving, TX_Jupiter, FL_Linwood, NJ_Nashville, TN
Newport Beach,CA_Reston, VA_San Diego, CA_Syracuse, NY_Voorhees, NJ
©2006 RED CAPITAL GROUP (8/9/06)
RED CAPITAL GROUP®
Market Overview
Dallas,Texas
June 2008
EXECUTIVE SUMMARY
P
ropelled by a buoyant energy
market and robust population
growth, the Dallas economy
showed no signs of succumbing to the
national economic slowdown in early
2008. Payroll employment increased
at a 50,700-job, 2.4% year-over-year
rate in the first quarter, nearly on par
with 4Q07’s 53,500-job performance.
Total payroll employment hit a record
2.111 million jobs in April, reflecting
a 47,400-job y-o-y advance, while
unemployment dipped to 4.0%, an
equal 7-year low.
Furious efforts to expand the capacity
of the health care, education, retail
and housing infrastructure fueled
much of the metro’s recent growth.
Construction headcounts increased by
7,200 jobs (5.6%) y-o-y in 1Q08,
keeping pace with 2007 results.
Health care and education services
payrolls increased at a 13,000-job
annual rate (the fastest ever recorded
in the metro area), while government
and school district payrolls advanced
at a near record 7,300-job annual clip.
By contrast, the pace of hiring in primary, export-oriented industries
slowed. Business services establishments added 5,800 employees y-o-y,
down from 10,000 in 4Q07 and
16,700 during calendar 2007. Weaker
shipping and freight volumes put pressure on warehouse, logistics and temp
agency employment, while job attrition accelerated at electronics, semiconductor and aerospace manufacturing companies.
RED CAPITAL Research expect job
growth trends to moderate. Our payroll model produces a 36,000-job forecast for 2008, in a 31–41,000 job confidence interval. For 2009, the model
forecasts a 29,000-job vintage, falling
within a 16-41,000-job interval. The
model appears to have a negative bias;
hence we have a logical bias favoring
the high-end of the forecast ranges.
SNAP SHOT
Metro owners experienced good apartment demand in the typically weak
first quarter period, absorbing 727
units, comparing favorably to the 206
units net leased in the same period of
2007. Average occupancy dropped 10
basis points to 92.9%, however, due to
supply (1,088 units) and the conversion of a 304-unit for-sale property to
rental tenancy.
Reis expect supply pressures to raise
metro vacancy rates by year-end. In
addition to units added to the rental
inventory in 1Q08, the service identifies another 6,829 units in the pipeline, enough to make 2008 the largest
vintage in eight years. Supply is expected to exceed demand by roughly
3,400 units, elevating metro vacancy
70 bps to the 7.8% level. Moreover,
Reis foresee supply outpacing demand
through 2010, when the vacancy rate
is expected to hit a cycle-high 8.2%.
Rising vacancy and competitive pressures from properties in lease-up limited average asking rent hikes to $6
(0.8%) in 1Q, down from the $9 advance recorded in the prior quarter.
Owners were compelled to offer more
generous concession packages, cutting
net effective rent progress to $4
(0.6%), down from an $11 hike recorded in 4Q. As a result, year-overyear rent trends dropped from 2007’s
eight-year high 4.7% rise to 4.2%.
Reis foresee fairly soft revenue trends
through 2012. Rents are projected to
rise 3.3% in 2008, followed by annual
compound growth averaging 3.5%
through the end of the forecast period.
RCR’s internal models generate more
optimistic rent and occupancy forecasts, particularly in the 2010—12
period; but even using Reis projections, the group expect Dallas assets
to yield adequate total and riskadjusted returns to justify an active
buying program. Therefore, we affirm
our cautious Accumulate rating.
Y-o-y
change
Vacancy
(7.1% - 1Q08)
Effective
Rents
110 bps
Projected
2008
70 bps
4.2%
3.4%
10 bps
30 bps
50.7m
36m
($723 - 1Q08)
Cap Rate
(5.7% - 1Q08)
Employment
(2,037.6m - 1Q08)
KEY POINTS
•
•
•
•
•
•
Metro establishment continued to hire at a
brisk clip in the first quarter. Payrolls
increased at a 50,700-job, 2.4% annual rate.
The composition of new jobs shifted toward
internal infrastructure development at the
expense of primary, export-oriented jobs.
This evolution suggests that Dallas is not
entirely immune from the nation’s broader
economic woes. RCR expect net job creation
to slow to 36,000 in 2008; 29,000 next year.
Apartment owners experienced robust
apartment demand during the seasonally
weak first quarter when tenants absorbed 727
units. But supply was considerably larger,
precipitating a 10 basis point decline of
average occupancy to 92.9%.
Introduction of nearly 1,400 units to market
inventory gave rise to price pressures and
increased incentives to sweeten lease
concession offers. Consequently, sequential
effective rent increased only $4 (0.6%).
Property sales proceeds decreased by about
33% in the January to April period but
acquisition cap rates continued to fall.
We affirm a cautious Accumulate rating.
VACANCY TRENDS
•
•
Reis aver that Dallas apartment owners net leased 772 units in 1Q08,
while Hendricks & Partners recorded negative net absorption of 1,190
units in the D/FW Metroplex during the period, noting that it was the
market’s worst first quarter performance since 2002.
Both Reis and H&P make reference to supply pressures. The former
source noted a 1,392-unit increase in market inventory; the latter a
2,828. Both expect 2008 to be the largest supply vintage since 2000.
Reis estimate a 10 bps increase of market vacancy to 7.1%. The
service expect vacancy to rise 70 bps by year-end as a record supply
vintage swamps FY2008 absorption estimated at 4,721 units
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
10%
8.2%
8%
7.1%
6%
4%
DALLAS
U.S.A.
2%
0%
th
RANK: 38 out of 50
COMMENT: Reis expect the metro vacancy rate to reach 8.2% in 2010 before
receding to 8.0% by 2012. RCR forecast sub-8% vacancy rates for this period.
3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
00 01 02 02 03 04 05 05 06 07 08
RENT TRENDS
•
•
Source: Reis, Inc.
Rent growth stalled in the first quarter under the weight of increased
supply pressure. Average asking rents rose $6 (0.8%) to $794, but
increased concessions held effective rent growth to $5 (0.6%), the
smallest gain recorded since 4Q06.
The weight of realized and pending supply exerted a strong downward
pull on rents in high-rent infill submarkets. Oaklawn effective rents
dropped -$2 from YE2007 levels, while Central Dallas submarket
revenues increased $2. In Q407, rents in the foregoing submarkets rose
$10 and $21, respectively. Further weakness can be expected this year
as 1,531 units are forecast to be completed by December.
The Addison and Grand Prairie submarkets benefited from
redevelopment efforts. Sequential effective rents increased $12 in each
submarket, producing 1.6% and 1.9% quarter-to-quarter rent growth.
4.2%
6%
YoY Rent Trend
•
Metro Rent Trends
Asking
Effective
4%
3.9%
2%
0%
-2%
-4%
3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
00 01 02 02 03 04 05 05 06 07 08
•
•
The Dallas / Fort Worth apartment property market was among the
most active in the country January through May. Real Capital
Analytics report that 43 properties exchanged hands for total proceeds
of $883mm. Aggregate proceeds only were larger in Manhattan
($1.1bn) and Houston ($1.0bn) in the same period.
NCREIF applied a 4.8% cap rate to metro properties in 1Q08, down 60
bps from 4Q07 and 40 bps year-over-year.
RCR estimate 5-year holding period total returns from Dallas
properties at 6.5%, 30 bps above the RED 50 mean. Dallas ranked #20
on this basis. The risk-adjusted index was 2.20, below the 2.56
average, ranking #30 overall.
7.0%
REIS Composite
NCREIF
6.5%
Cap Rate
•
Source: Reis, Inc. / NCREIF
6.0%
5.5%
5.0%
4.5%
4.0%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
06 06 06 06 07 07 07 07 08 08
COMMENT: Dallas’s above average expected total returns and compelling
economic growth capacity elevate the market to a cautious “Accumulate” status.
Property Name
Legacy Village (Plano)
Riviera at West Village (Cnt Dal)
Carrington Apts (No Irving)
Saint Marin Apts (No Irving)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
A
A
A
May-2008
May-2008
Apr-2008
Apr-2008
$54.1
$23.0
$25.7
$36.0
$113,135
$153,333
$102,917
$102,917
5.7%
5.1%
5.4%
5.2%
$240
DALLAS / FW
•
US
Prices (000)
$220
$200
•
$180
$160
$140
•
$120
$100
04
05
06
1Q 2Q 3Q 4Q 1Q
Y
Y
Y
07
07
07
07
08
Past 12 Months
•
80
Annual Chg (000)
36
29
•
20
0
•
-20
-40
-60
-80
99 00 01 02 03 04 05 06 07 08f 09f
DALLAS
USA
2%
Rate
•
•
4%
•
0%
Dallas Metropolitan Division payrolls increased by 54,000 employees
in the 12 months ended in April 2008, down almost imperceptibly
from the 57,100-job performance observed in calendar year 2007.
Trade employment was stronger. Wholesalers and retailers added
5,500 positions in the past 12 months, up from 3,200 in CY2007.
Skilled services employment, on the other hand, increased at a slower
pace. Only information services enjoyed faster growth, adding 1,100
jobs after suffering net attrition of 300 jobs last year. Financial and
business services hiring declined from 20,300 to 14,900.
First Quarter 2008
•
Source: BLS
6%
Dallas Metro Division recorded its second consecutive year of 100,000
person or greater demographic growth. The 104,916 total for 2007
represented a 12% decline from 2006.
EMPLOYMENT TRENDS
40
The Case-Schiller index reported a –3.3% decline in value over the 12
months. HousingTracker.net found that the median metro listing price
was $188,000 in mid-June, up 7.4% from 2007.
COMMENT: Dallas’s strong economy and low cost housing act as a magnet
for ambitious entrepreneurs and families. Strong population growth will
continue, boding well for apartment demand and metro economic expansion.
60
Strong job growth notwithstanding, Dallas was not immune to
downward home price pressures. The median price of a D/FW home
declined –2.1% to $142,400, according to the N.A.R. The value of
metro real estate has not changed materially in three years.
Dallas showed few ill effects from the national economic slowdown
in the first quarter. Establishments hired at a 50,700-job, 2.4% rate,
compared to 53,500-job, 2.6% pace in the previous quarter.
Wholesale trade firms expanded aggressively, hiring at a 4,900-job,
3.7% pace in the quarter, nearly twice as fast as the previous quarter.
Payrolls were up 47,400 jobs year-over-year in April, a considerable
improvement from the 41,800-job comparison recorded for March.
Unemployment declined to an equal 7-year low rate of 4.0% in April.
Forecast
-2%
•
-4%
-6%
99
00
01
02
03
04
05
06
07
08
RCR expect Dallas to continue to create jobs at a rapid pace. The
group’s econometric model forecasts job growth of 36,000 and
29,000 in 2008 and 2009, respectively. Applicable confidence intervals are 31,000 to 41,000 jobs and 16,000 and 41,000 jobs. The
model appears to have a downside bias: therefore, we maintain a
logical bias toward the high-end of each confidence interval.
RANK: 5th out of 50
15%
10%
5%
DALLAS (RAI=2.24)
FT WORTH (RAI=2.68)
4.9%
4.0%
2.6%
6.4%
6.4%
8.0%
8.0%
9.6%
10.1%
11.8%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
1Q07
1Q08
Change
1Q07
1Q08
Garland
South Dallas County
Southwest Dallas
Grand Prairie
North Irving
South Irving
Far North
Far Northeast
North White Rock
East Dallas
Southeast Dallas
South City of Dallas
Richardson
Far Northwest / Farmers Brnch
$624
$630
$611
$585
$594
$738
$587
$708
$546
$580
$558
$698
$500
$665
$709
$580
$658
$643
$637
$609
$628
$771
$612
$736
$554
$597
$554
$709
$523
$692
$740
$605
5.5%
2.0%
4.3%
4.1%
5.7%
4.5%
4.3%
3.9%
1.4%
2.9%
-0.8%
1.6%
4.5%
4.0%
4.4%
4.3%
9.0%
7.2%
5.4%
9.5%
7.0%
6.8%
6.4%
5.2%
12.5%
11.2%
10.0%
8.9%
11.1%
10.8%
9.4%
12.9%
7.6%
5.4%
7.5%
7.7%
9.8%
8.3%
4.2%
4.3%
11.5%
8.5%
8.4%
7.0%
9.0%
12.0%
6.4%
8.4%
-140 bps
-180 bps
210 bps
-180 bps
280 bps
150 bps
-220 bps
-90 bps
-100 bps
-270 bps
-160 bps
-190 bps
-210 bps
120 bps
-300 bps
-450 bps
Lewisville
Northwest
Central Dallas
Oaklawn
North
Metro
$732
$761
$798
$668
$772
$1,476
$1,034
$718
$694
$745
$786
$835
$715
$794
$1,545
$1,126
$749
$723
1.8%
3.2%
4.7%
7.0%
2.8%
4.7%
8.9%
4.4%
4.2%
5.2%
8.6%
7.4%
8.7%
8.5%
8.9%
5.5%
6.4%
8.2%
4.2%
6.5%
7.2%
8.0%
4.0%
11.0%
8.0%
5.5%
7.1%
-100 bps
-210 bps
-20 bps
-70 bps
-450 bps
210 bps
250 bps
-90 bps
-110 bps
SUPPLY TRENDS
•
Change
Dallas’s creative and peripatetic development community is hard at it
again. New projects are springing up in the suburbs, near Downtown
and at many commuter train stops in between. Reis forecast
deliveries totaling 7,917 units in 2008, plus 2,954 in Fort Worth,
comparable to the Hendricks & Partners Metroplex forecast of 11,200
units. For 2009, Reis expect supply to diminish to 6,787 and 1,373 in
Dallas and Fort Worth, respectively. H&P anticipate D / FW
deliveries reaching an aggregate of 7,900 units.
Source: Reis, Inc
12,000
10,000
C o m ple t io n
s
A bs o rpt io n
8,000
6,000
4,000
2,000
0
-2,000
-4,000
02
03
04
05
06
07
08f
09f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Charlotte, NC_Chicago, IL
Fredericksburg, TX_Irving, TX_Jupiter, FL_Linwood, NJ_Nashville, TN
Newport Beach,CA_Reston, VA_San Diego, CA_Syracuse, NY_Voorhees, NJ
RED CAPITAL GROUP®
Market Overview
Dallas,Texas
April 2008
EXECUTIVE SUMMARY
D
allas economic growth decelerated moderately after
mid-year 2007 but remained
considerably more robust than the
national average. Metro employers
created jobs at a 54,200 (2.7%) yearover-year pace in 2H07, comparing
favorably to the 1.0% advance recorded by the nation. Big D extended
its advantage in the 90 days ended
February, producing jobs at a 53,000job, 2.5% pace, nearly four times
faster than the U.S.’s 0.7% metric.
Residential and commercial development continued at a vigorous pace,
producing strong gains in construction
and retail trade employment. Builders
added 7,100 employees y-o-y December to February, nearly matching
2007’s 7-year high 7,500-job add.
Demand for home building materials
and furnishings boosted retail headcounts by 3,600 jobs in the same period, up from 700 in FY2007.
Government, health care and social
service employment surged in keeping with the growth of the working
population. Governments hired 8,200
employees y-o-y in February and
health care providers added 10,700.
Diverging from the American trend,
the Texas economy is expected to
avoid a recession this year, benefiting
from an export orientation; low housing and operating cost structure; stable real estate markets; concentration
of high tech employment and a profit
gushing oil and gas sector. Dallas will
share in the state’s prosperity, producing - according to projections by the
RED CAP econometric payroll
model - 46,000 and 26,000 jobs in
2008 and 2009, respectively.
Home prices appreciated moderately
in 4Q07, rising 0.16%, according to
OFHEO. For the year prices were up
an average of 2.95%, ranking Dallas
97th among the 291 largest U.S.
metro markets.
SNAP SHOT
Apartment demand was exceptional,
catalyzed by rapid population growth
and shifting household tenancy preferences toward the more risk averse
rental option. According to Reis,
owners net leased 2,643 units in
4Q07, a comprehensive turnaround
after net losses totaling –1,265 units
in the year earlier period. As a result,
sequential occupancy increased 30
basis points to a 7-year high 93.0%.
The metro posted a 130 bps occupancy advance in 2007, the fifth
strongest performance in the RED 50.
Owners gained pricing power as well,
implementing face rent increases averaging $11 (1.4%), while trimming
average concessions $1. The resulting $12 (1.7%) effective rent advance
was the largest recorded since 1999.
Effective rents rose $38 (4.8%) y-o-y,
the largest 12-month advance registered in eight years.
Consistent with its cautious industry
outlook Reis foresee leaner times
ahead. The service expects occupancy
to fall 60 bps in 2008 to 92.4% and
tumble another 20 bps in 2009, while
effective rent growth slows to the
mid-3% range. Supply is the principal culprit, as Reis anticipates a 7year high 2008 vintage of 7,034 units.
Thereafter, stock growth will moderate allowing expected occupancy to
stabilize but not materially improve.
Investors cast a hungry eye on Texas
assets over the winter, but Houston
garnered most of the attention. D/FW
sales declined -20% last year to $3.6
billion, according to Real Capital
Analytics, even as Houston sales
climbed 22%. Big D sales velocity
slowed further in 1Q08. Only 10
properties traded hands for $197mm,
down from 27 sales worth $373mm in
4Q07. Cap rates were lower nevertheless, with several suburban class-A
assets trading in the mid-5% range at
prices approaching $100,000 per unit.
Y-o-y
change
Vacancy
(7.0% - 4Q07)
Effective
Rents
130 bps
Projected
2008
60 bps
4.8%
3.3%
20 bps
unch
54m
42m
($720 - 4Q07)
Cap Rate
(5.6% - 1Q08)
Employment
(2,105.1m - 4Q07)
KEY POINTS
•
•
•
•
•
Metro population increased by 99,429
(2.5%) persons in 2007, generating strong
housing demand. Although home prices were
stable, households gravitated to the more risk
averse rental option, boosting absorption.
Investor grade properties net leased 2,643
units in 4Q07, raising average occupancy 30
bps despite 1,730 units of supply.
Healthy demand and rising incomes helped
owners achieve the fastest rent growth
recorded since 2000. Effective rent increased
$12 (1.7%) sequentially and $33 (4.8%)
year-over-year to a $720 metro average.
This eclipsed the existing rent record set in
2001.
The economy exhibited no sign of slack in
4Q07/early-2008. Dallas metropolitan
division payrolls increased at a 53,500-job,
2.6% y-o-y pace in 4Q07, and a 53,100-job
pace during the three-months ended in
February. These data compare to a 60,100job growth rate in 1H07.
RED expect Dallas to outperform the U.S.
economy. Big D should produce 42,000 and
26,000 jobs in 2008 and 2009, respectively.
RCR affirm our “Accumulate” rating.
Dallas-Plano-Irving-,TX Metropolitan Division - 4Q 2007
VACANCY TRENDS
•
•
Owners net leased 8,543 units in 2007, including 2,643 units during the
seasonally weak fourth quarter. Both figures represent significant
improvements over the comparable year before data. Absorption in
2006 and 4Q06 totaled 3,372 units and –1,265 units, respectively.
Average vacancy declined 30 bps in 4Q07, and 130 bps in FY2007 to
7.0%. In November, Reis forecast a 60 bps decline of average
occupancy and negative absorption of -665 units in 4Q07.
Tenants flocked to fast growing Collin and Denton County submarkets.
The Lewisville, Carrolton / Addison and Plano / Allen submarkets
absorbed 2,110, 1,282 and 1,896 units, respectively, in 2007.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
10%
8.3%
8%
7.0%
6%
4%
DALLAS
U.S.A.
2%
0%
th
RANK: 39 out of 50
COMMENT: Reis expect a surge of supply to cause occupancy to fall 60 bps
this year and a further 20 bps in 2009. RED expect better performance in 2008.
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
00 01 01 02 03 04 04 05 06 07 07
RENT TRENDS
•
•
•
Source: Reis, Inc.
Rent trends surged in the fourth quarter, rising $12 (1.7%), the largest
one-quarter advance registered since 3Q99. Average effective rent
reached $720, eclipsing the existing $716 metro record set in 3Q01.
Effective rents increased $33 (4.8%) year-over-year, the largest
calendar year advance since 1999.
Dallas ranked 16th in the 4Q07 RED 50 ranking by way of rent growth.
This compares to 39th rank in 4Q06 and 34th rank in 3Q07.
Growing demand for units in urban neighborhoods propelled rents in
the Central Dallas and Oaklawn submarkets. Rents in the new Central
submarket increased 5.8%, while Oaklawn rents surged 18.0%.
6%
YoY Rent Trend
•
Metro Rent Trends
4%
2%
4.0%
0%
-2%
-4%
COMMENT: Reis expect rents to slow to the mid-3% range beginning in 2008.
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
00 01 01 02 03 04 04 05 06 07 07
PROPERTY MARKET & CAP RATE TREND
•
•
Source: Reis, Inc.
7.5%
Sales activity decelerated in 1Q08 following robust trade in 4Q.
Brokers closed 10 property trades for $197mm in the first quarter,
down from 27 trades for $373mm in the 3-months ended in December.
But institutional interest in class-A properties didn’t diminish. A three
property deal was brokered for total proceeds of about $122.3 million,
equating to an average price per unit of $98,587. The cap rate was in
the mid-5% area, unusually low for Dallas suburban assets.
RED CAP Research estimate that a generic Dallas asset will produce
a 7.2% 5-year holding period internal rate of return, about 100 bps
above the RED 50 average. Although risk-adjusted returns are slightly
below average, we consider Dallas an attractive buy: “Accumulate.”
7.0%
6.5%
Cap Rate
•
4.8%
Asking
Effective
6.0%
5.5%
5.0%
4.5%
4.0%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
06 06 06 06 07 07 07 07 08
COMMENT: Reis’s cautious forecasts for Dallas rent and occupancy trends
notwithstanding, RCR calculate above average returns from Dallas assets.
Property Name
Benton Pt. / Lansbrook (Allen)
Cambria / San Simeon / Gardens
Honeycreek (S. White Rock)
Oak Forest I & II (Lewisville)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
A
C
B
Feb-2008
Feb-2008
Dec-2007
Mar-2008
$66.8
$122.3
$19.0
$46.3
$89,775
$98,587
$28,963
$66,578
5.4%
5.5%
8.5%
7.1%
$240
DALLAS
•
US
Prices (000)
$220
$200
•
$180
$160
$140
•
$120
$100
03
04
05
Y
Y
Y
4Q 1Q 2Q 3Q 4Q
06
07
07
07
07
•
Annual Chg (000)
42
40
26
20
•
0
-20
•
-40
-60
-80
99 00 01 02 03 04 05 06 07 08f 09f
•
Source: BLS
DALLAS
USA
Dallas was largely unfazed by the Nation’s economic slowdown.
Establishments in the metropolitan division created 57,100 (2.8%)
jobs in 2007, down 14% from 66,400 (3.4%) in 2006.
A total of 25,700 jobs were created in the construction, health care
and government sectors commensurate with the area’s strong demographic growth.
Expansion in outward-oriented industries was slower. Manufacturing, wholesale trade, finance and business services establishments
hired a net of 21,700 workers in 2007, down from a materially more
robust 37,000 in the prior year.
Fourth Quarter 2007
•
4%
2%
Rate
HousingTracker.net report data that are more bullish. The website
indicates that the median price of a listed home was $184,500 in midApril, up 6.6% year-over-year. The same source reported that the
inventory of listed homes dropped 7.1% y-o-y in April, suggesting the
market remains in relative equilibrium.
Past 12 Months
80
6%
The median price of homes sold in Dallas/Fort Worth MSA was
$150,900 (N.A.R.) in 2007, up $1,400 (0.9%) from 2006. In 4Q07, the
median price was $145,000, up $700 (0.5%) from the comparable
period of 2006.
EMPLOYMENT TRENDS
60
The population of the six-county Dallas metropolitan division
increased 99,429 (2.5%) in 2007, reaching 4,032,000. Collin and
Denton Counties accounted for 59% of the gain, growing 34,307
(4.9%) and 24,775 (4.4%), respectively.
0%
Employment growth was steady in 4Q07, rising at a 53,500 (2.6%)
annual pace, in line with the 54,900 (2.7%) rate recorded in 3Q07.
Business services continued to make the single largest contribution to
net job creation, expanding at 10,000 (3.0%) job y-o-y pace. This
was a sharp decline from 3Q07, however, when the super-sector grew
at a 17,500 (5.4%) rate. The slowdown was attributable in large part
to a significant decrease in the rate of growth in the administrative
and support services sub-sector. Faster government, information and
retail trade growth counterbalanced the decline.
Forecast
-2%
•
-4%
-6%
99
00
01
02
03
04
05
06
07
RCR remain optimistic regarding the Dallas economy. The group’s
econometric payroll forecast model foresees job growth ranging from
36,000 to 48,000 in 2008, with point estimate of 42,000. For 2009,
the model generates a confidence interval of 17,000 to 36,000 jobs,
with most probable result falling at 26,000 jobs.
RANK: 5th out of 50
15%
10%
5%
D A LLA S ( R A I=2 .5 1)
F T . WO R T H ( R A I=2 .4 3 )
5.7%
3.4%
5.6%
7.2%
7.1%
8.7%
8.7%
10.8%
10.8%
3.2%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
Garland
South Dallas County
Southwest Dallas
Grand Prairie
North Irving
South Irving
Far North
Far Northeast
North White Rock
East Dallas
Southeast Dallas
South
Richardson
Far Northwest
Carrollton / Addison / Coppl
Lewisville
Plano / Allen
Northwest
Central Dallas
Oaklawn / Highland Park
No Dallas / University Park
METRO
3Q06
3Q07
Change
3Q06
3Q07
Change
$628
$622
$610
$582
$599
$733
$581
$709
$545
$574
$561
$701
$492
$663
$701
$570
$714
$757
$786
$671
$764
$1,456
$956
$721
$654
$646
$625
$609
$616
$769
$613
$740
$548
$594
$556
$711
$520
$691
$735
$604
$733
$782
$830
$706
$796
$1,541
$1,128
$742
4.1%
3.9%
2.5%
4.7%
2.8%
4.9%
5.6%
4.3%
0.6%
3.5%
-0.8%
1.5%
5.7%
4.2%
4.8%
5.9%
2.7%
3.3%
5.6%
5.2%
4.2%
5.8%
18.0%
2.9%
7.3%
6.8%
5.3%
8.1%
6.8%
7.2%
5.1%
4.7%
13.3%
9.5%
8.7%
6.6%
9.3%
11.0%
7.2%
9.2%
4.5%
6.4%
7.6%
8.6%
6.9%
8.7%
6.1%
6.2%
7.2%
5.8%
6.9%
7.3%
9.2%
8.0%
4.8%
4.6%
12.2%
8.6%
8.8%
6.6%
8.7%
12.3%
6.7%
7.6%
4.0%
6.1%
7.0%
7.7%
3.5%
9.6%
7.5%
4.9%
-10 bps
-100 bps
160 bps
-80 bps
240 bps
80 bps
-30 bps
-10 bps
-110 bps
-90 bps
10 bps
Unchd
-60 bps
130 bps
-50 bps
-160 bps
-50 bps
-30 bps
-60 bps
-90 bps
-340 bps
90 bps
140 bps
-130 bps
$687
$720
4.8%
8.3%
7.0%
-130 bps
SUPPLY TRENDS
•
•
Dallas seems perennially challenged by supply pressures and this season is no different. Reis forecast delivery of 7,032 units in 2008,
representing 1.8% stock growth. This promises to be the largest vintage and stock growth rate observed since 2000
The Allen / Plano submarket is scheduled to receive the largest portion of supply. Six deals are scheduled for completion in 2008
encompassing a total of 2,027 units. The small Oaklawn (2,487 units) submarket is next with eight projects and 1,640 (70%) units. An
additional 1,275 units are on tap for 2009. Occupancy in this popular area fell 140 bps last year on less intense supply pressure.
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Charlotte, NC_Chicago, IL_Fredericksburg, TX
Irving, TX_Jupiter, FL_Linwood, NJ_Nashville, TN_Newport Beach,CA
Reston, VA_San Diego, CA_Syracuse, NY_Voorhees, NJ
RED CAPITAL GROUP®
Market Overview
Dallas,Texas
November 2007
EXECUTIVE SUMMARY
E
mployment growth cooled off
a bit in the third quarter, but
Dallas retained one of the
strongest metro economies in the country. Payrolls advanced at a 59,100-job,
2.9% annual pace, down from 68,600
(3.4%) in the second quarter, while the
unemployment rate declined to 4.3% in
September, down 10 basis points from
June and 30 bps year-over-year.
Hiring accelerated in only three supersectors: construction, financial services
and health care. Conversely, the manufacturing, business services and government sectors exhibited the greatest
degree of deceleration, combining to
produce 7,300 fewer jobs measured on
a year-over-year basis than during the
three months ended in June. Sub-sector
data point to the computer and transportation equipment industries as the
principal sources of factory job attrition, while a sharp drop in temporary
workers was responsible for the decrease in business service expansion.
The dip in government headcount
growth may be related to shifts in
school district hiring practices and is
likely to be upwardly revised later.
Single-family construction is decelerating, but speculative office and other
commercial development is picking up
the slack. Contrary to the national
trend, construction headcounts continued to rise. Robust leasing activity has
kept office vacancy rates in check so
far but the sector is vulnerable to
slower office employment growth and a
more cautious posture among the tech
and energy firms expanding in the area.
Meanwhile, the residential sector is
beginning to show some signs of wear
and tear. The inventory of unsold
homes is up slightly, and the median
home price is off about 3% since July,
according to HousingTracker.net.
RED CAPITAL expect the pace of job
growth to moderate yet remain faster
than the U.S. average. The 99.4% Rsquared model foresees 2007 total pay-
SNAP SHOT
roll growth of 63,400 jobs, down 13%
from 2006. A similar degree of slowing should characterize 2008, giving
rise to a forecast interval of 43,000 to
65,000 jobs and point estimate of
54,000 (3.1%). The former is down
from our previous forecast of 62,000.
Rapid job formation, reduced access to
sub-prime mortgage financing and
weaker consumer confidence yielded
excellent demand conditions for the
apartment industry. Metro households
absorbed 3,179 units in 3Q, up 72% yo-y and 35% sequentially. Despite a
flood of supply, occupancy advanced
40 bps to 92.7%, the highest level in
nearly six years, moving Dallas up two
spots in the RED 50 to 42nd.
Average effective rent rose $7 (1.0%)
to $705, the fastest advance recorded
since 2Q05. Over-the-year, gains totaled $22 (3.2%), the best metric posted
in six years and enough upward movement to push Dallas up two spots in the
RED 50 to 34th. The average concession package fell $2 to $69 (8.2% of
gross revenue), an encouraging development but not enough to lift Dallas
above 45th place in the RED 50.
RED identified 23 2Q07 trades of
properties valued at $5mm or more
generating proceeds of $369mm, a bit
sluggish for this market. Action picked
up in 3Q07, however, when RED
counted 26 sales for $469mm. The
average price per unit sold was $61m,
down from $73m in 2Q, reflecting intensified interest in B and C properties.
Real Capital Analytics aver the average
cap rate was 7% and Reis report an
index of 7.4%. RED observed yields
ranging from the mid-6% to 9% range
for garden properties, but considerably
lower rates for mid-rises and high-end
assets. Cap rates as low as 5% were
applicable to trophy properties. Using a
5.3% generic cap rate, RED estimate a
most probable total return of 7.8%,
among the highest in the RED 50.
Vacancy
(7.3% -3Q07)
Effective
Rents
($705 - 3Q07)
Cap Rate
(7.4% - 3Q07)
Y-o-y
change
Projected
2008
50 bps
7.9%
3.2%
3.4%
20 bps
20 bps
59.1m
54m
Employment
(2,091.2m - 3Q07)
KEY POINTS
•
Metro economic growth decelerated in the
third quarter to a 59,100-job annual rate, but
remained among the strongest in the country.
•
RED expect stable growth through 2008.
We forecast net creation of 54,000 (3.1%)
jobs next year versus 1.2% for the U.S.
•
The sudden scarcity of sub-prime financing
coupled with robust job and population
growth catalyzed robust retail apartment
demand. Tenants absorbed a five-quarter
high 3,179 units in 3Q, generating a 40 bps
average occupancy rate rally.
•
Reis expect the market to come a cropper in
4Q. Negative net absorption and 1,678 units
of new supply will precipitate a 60 bps
occupancy rate decline. The service expects
occupancy to stabilize in the low 92% range
in 2008, where it will remain through 20
•
Effective rent increased $7 (1.0%) in 3Q, the
best sequential gain in 2 years. Reis forecast
a $5 (0.7%) hike in 4Q, followed by 3.5%
compound annual growth through 2011.
•
RED find Dallas’s cap rates and positive
fundamental outlook compelling. We
maintain our “Accumulate” rating.
Dallas-Plano-Irving, TX MSA - 3Q 2007
VACANCY TRENDS
•
•
•
•
Apartment demand went from strength to strength, rising from 2Q’s
impressive 2,646 unit total to 3,179. Indeed, net move-ins in 3Q
exceeded the aggregate of the four previous quarters.
Average occupancy increased 40 bps to 92.7%, a six-year high. Reis
project a 60 bps drop of average occupancy by year end, however.
Submarkets located in Denton County and Northwest Dallas County
excelled. Occupancy in Northwest Denton increased by 320 bps over
the 12 months ended in September. The Lewisville, Carrolton and Far
Northwest Dallas submarkets recorded 270, 290 and 180 bps gains.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
10%
7.8%
8%
7.3%
6%
4%
DALLAS
U.S.A.
2%
0%
O’Conner & Associates report occupancy rates of 91.8% for class-A,
and 92.5% for class-B Dallas / Fort Worth Metroplex properties.
1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q
00 00 01 02 03 03 04 05 06 06 07
RENT TRENDS
•
•
Source: Reis, Inc.
Effective rents increased by an average of $7 (1.0%) in 3Q07 and $19
(2.8%) year-to-date. The latter was the largest 9-month advance
registered since 2Q01. Rents are within $11 of the metro series record.
Reis expect rents to rise another $5 by year-end, irrespective of the
spike in vacancy forecasted for 4Q07. Were this to come to pass, 2007
rents rise 3.5%, the strongest metric reported since 2000. Reis expect
rents to continue grow at this pace through 2011.
Three submarkets reported y-o-y rent growth of more than 5%. Two
were located in the rapidly tightening Denton and West Collin County
markets (Plano / Allen and NW Denton). The third was Oaklawn,
where tremendous tenant demand was masked to some degree by
heavy (923 units / 8.3% growth) supply. By contrast, East and South
Dallas submarkets continued to lag the dynamic north and west.
6%
YoY Rent Trend
•
Metro Rent Trends
Asking
Effective
4%
2%
2.2%
0%
-2%
-4%
1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q
00 00 01 02 03 03 04 05 06 06 07
•
•
According to Real Capital Analytics, D/FW properties valued at $2.4
billion traded hands January to September. Although down 31% from
the same period last year, the Metroplex continued to rank fourth
nationally after Manhattan, Los Angeles and Phoenix. The data
service reported an average price per unit of $60,229.
Loopnet posted 25 Q3 trades of $5mm or more totaling $469mm.
Compared to the prior quarter, velocity and total proceeds were up
13% and 27%, respectively. Investors concentrated on assets located
in Carrolton, Plano and Northwest Dallas.
Investors are kicking tires in the Irving-Las Colinas area, where
O’Conner reports more than 120,000 workers are employed.
Source: Reis, Inc.
8.0%
7.5%
Cap Rate
•
7.0%
6.5%
6.0%
2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
05 05 05 06 06 06 06 07 07 07
2008 CAP RATE OUTLOOK: Institutional quality asset cap rates will be
stable, class-B cap rate levels could rally up to 50 bps.
Property Name
Idlewyld Village (Far No. Dallas)
Savannah Trails (NW Denton Co)
Legends at Chase Oak (Plano)
Settlers Gate (Plano / Allen)
3.2%
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
B
BC
A
A
Sept-2007
Sept-2007
Sept-2007
Sept-2007
$13.9
$12.2
$31.9
$37.5
$ 60,928
$ 39,511
$ 92,254
$ 88,458
6.3%
7.7%
7.5%
6.3%
D/FW
$240
•
US
Prices (000)
$220
$200
$180
•
$160
$140
$120
$100
03 04 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
Y
Y
05 06 06 06 06 07 07 07e
Annual Chg (000)
•
54
40
20
0
-20
-40
-60
-80
99 00 01 02 03 04 05 06 07f 08f
4%
•
2%
Rate
Dallas produced 69,900 (3.5%) new payroll jobs in the 12 months
ended in September, comparing well to the 72,800 (3.7%) jobs recorded in FY2006. Every NAICS super-sector recorded net growth.
Among major sub-sectors, only telecom and transportation equipment
industries experienced small net job losses. The business services
made the largest contribution to job growth chalking a 17,100-job,
5.4% advance. Exploding growth in professional, scientific and technical services industries was the principal catalyst, with special merit
going to the computer system design segment. By contrast, the
growth of temporary worker usage was relatively small. Although
home permitting fell 37.5% year-to-date, furious speculative construction in office and industrial space propelled construction payrolls
higher” construction establishments added 5,500 (4.5%) new wage
and salary employees during the period.
Third Quarter 2007
•
Source: BLS
DALLAS
USA
6%
RED estimate a $152.5m 3Q median price, down from 156.5m in 2Q.
Past 12 Months
63.4
60
Home values appreciated faster than the national average in 2Q07, but
early data for 3Q activity hint at a market slowdown. MetroTex
Realtors report that North Texas region 1-family home sales velocity
fell 19% year-over-year in September. The median price increased 3%
to $147,500, while the average price ascended 6%. Year-to-date, sales
fell 6% and the median price rose 1% to $150,000. The number of
active listing is up about only about 2% from September 2006,
however, indicating a stable equilibrium between buyers and sellers.
EMPLOYMENT TRENDS
80
•
A preliminary estimate of Dallas MSA population at July 1, 2007
published by Tactician Corp. shows the 8-county metro area population
up about 42,000 year-over-year. Last year, the metro population
increased by 122,000. Looking ahead, Tactician forecast average
growth of approximately 80,000 persons per year through 2012.
0%
The moderate slowdown observed in second quarter carried over into
the third. Payrolls expanded at a healthy 59,100 (2.9%) rate in 3Q07,
but growth was slower than 68,600 (3.4%) posted in the prior threemonth period.
Total payrolls in September were up 52,400 (2.6%) jobs, representing
the weakest year-over-year comparison observed since June 2005.
Recent softness can be traced to the goods producing sectors, particularly durable goods manufacturing, and transportation.
-2%
Forecast
-4%
•
-6%
99
00
01
02
5%
04
05
06
07
RED Estimated Generic Unlevered Asset Total Return Probabilites
15%
10%
03
RED CAPITAL Research forecast job creation totals ranging from
62,100 to 64,800 in 2007, with a point estimate of 63,400 (3.1%).
RCR forecast moderately weaker job growth in 2008, falling in a
range of 43,000 to 65,000 jobs, with most probable result of 54,000
(2.6%). That’s downward revision from our previous 62,000-job forecast.
DALLAS
3.7%
3.7%
HOUSTON
6.2%
6.2%
7.8%
7.8%
9.3%
9.3%
11.6%
11.5%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Submarket
Garland
South
Southwest
Grand Prairie
North Irving
South Irving
Far North
Far Northeast
North White Rock
East Dallas
Southeast Dallas
South
Oaklawn
Richardson
Far Northwest Dallas
Lewisville
Plano / Allen
Northwest Dallas
North Dallas
Metro
Physical Vacancy
3Q06
3Q07
Change
3Q06
3Q07
Change
$627
$616
$603
$578
$594
$728
$572
$709
$548
$578
$556
$696
$493
$665
$1,248
$708
$566
$709
$756
$781
$637
$632
$625
$596
$611
$748
$600
$724
$536
$592
$553
$703
$504
$670
$1,304
$733
$590
$731
$778
$822
1.6%
2.5%
3.7%
3.1%
2.8%
2.8%
5.0%
2.1%
-2.3%
2.5%
-0.5%
1.0%
2.3%
0.8%
4.5%
3.6%
4.3%
3.0%
3.0%
5.3%
5.7%
7.1%
7.2%
8.8%
7.6%
6.0%
6.0%
5.2%
11.7%
10.6%
10.4%
7.6%
11.0%
9.0%
7.8%
7.0%
12.1%
6.3%
9.1%
6.7%
7.3%
6.8%
5.3%
8.1%
6.8%
7.2%
5.1%
4.7%
13.3%
9.5%
8.7%
6.6%
9.3%
11.0%
7.4%
7.2%
9.2%
4.5%
6.4%
7.6%
160 bps
-30 bps
-190 bps
-70 bps
-80 bps
120 bps
-90 bps
-50 bps
160 bps
-110 bps
-170 bps
-100 bps
-170 bps
200 bps
-40 bps
20 bps
-290 bps
-180 bps
-270 bps
90 bps
$677
$814
$757
$683
$691
$818
$796
$705
2.1%
0.5%
5.1%
3.2%
8.2%
6.9%
6.8%
7.8%
8.6%
6.9%
3.6%
7.3%
40 bps
0 bps
-320 bps
-50 bps
SUPPLY TRENDS
•
•
Developers completed 1,791 units in the third quarter, according to Reis, the largest quarterly vintage since 2Q06. The service
expect a total of 1,678 units in the fourth quarter. Next year promises to be this cycle’s supply high water mark: Reis forecast
completions of projects incorporating 7,478 total units. Supply will persist at a challenging but more manageable level through
2011.
O’Conner and Associates report that 49 projects containing 12,769 units are currently under construction in Dallas and Fort
Worth. The Irving-Las Colinas and Downtown / Turtle Creek (Oaklawn) areas will experience the largest percentage stock
growth. Reis report 8,154 units under construction in Dallas Metropolitan Division, 1,921 units in Oaklawn submarket alone.
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Chicago, IL_Fort Worth, TX
Fredericksburg, TX_Jupiter, FL_Linwood, NJ_Nashville, TN_Newport Beach,CA
Philadelphia, PA_Reston, VA_San Diego, CA_Syracuse, NY_Voorhees, NJ
Market Overview is a publication of RED CAPTIAL GROUP. If you are interested in other metro areas we cover or would like to
RED CAPITAL GROUP®
Market Overview
Dallas,Texas
September 2007
EXECUTIVE SUMMARY
B
ig D economic health was
largely unaffected by the
U.S. summer slowdown, and
proceeded roughly at the same brisk
pace in 2Q07 as it exhibited since
2005. Payrolls expanded at a 68,600job, 3.4% per year pace moderately
slower than the 72,800-job performance observed in FY2006.
Housing market stability, a rare commodity these days, contributed to the
healthy growth trends. According to
OFHEO, Dallas homes appreciated
only 18% in the five years ended in
June; so there was little incentive to
speculate or overbuild. Home sales are
down only about 6% y-o-y, and new
home sales haven’t plummeted as elsewhere, thereby supporting construction
sector hiring. Indeed, construction payrolls were up 4,900 in 1H07, and 5,800
y-o-y in July, in line with the 5,800-job
advance recorded in 2006. There is life
left in the metro housing market.
Skilled service hiring was red hot, as
financial, business service and health
care concerns expanded faster than 5%.
Growth in tourist visits and strong consumer spending boosted accommodation, food service and air transport payrolls 6% or more, while government,
trade and even information services
produced significant net hiring gains.
RED CAPITAL expect job growth to
moderate in 2H07, bringing FY2007
net hiring to a range of 58,000 to
66,000 jobs, with point estimate of
62,000 (3.1%). The job market shouldn’t lose much momentum next year,
adding between 55,000 and 70,000
payroll jobs with a most probable result of 62,000 (3.0 %).
Higher mortgage interest rates and
tighter credit standards steered more
households toward rental options in
2Q07, boosting apartment absorption
to the highest level in a year. Tenants
absorbed 2,646 units, more than twice
the total leased in the previous nine
months. With deliveries totaling only
888 units, average metro vacancy tumbled 50 basis points, ranking 10th
among the RED 50 on this basis, however; with vacancy at 7.7%, Dallas still
ranks only 43rd in terms of vacancy
rate. Occupancy increased more than
200 bps y-o-y in several Denton and
Collin Co. suburban submarkets, including Carrolton, Lewisville and
Northwest Denton. Conditions were
mixed in Dallas County: generally soft
on the Eastside, but improving in submarkets south and west of downtown.
Average effective rent increased $6
(0.9%) for the second consecutive
quarter, reaching $698. The $12 1H07
advance represents the largest 6-month
gain recorded since 2H01. Unfortunately, rents remain about 2% below
their 1Q02 cyclical peak regardless.
Concessions are an obstacle to faster
revenue growth. The standard package
consumes $71 (9.2%) of gross rent.
Discounts are down from the 2005 $82
peak, but Dallas concessions still rank
6th highest in the RED 50.
Rising supply threatens the market
rally in 2H07 and 2008, when Reis
forecast delivery of 8,070 investor
grade units. The service expects fewer
than 4,500 net absorptions, giving rise
to a 60 bps decrease in average occupancy and moderately slower rent
growth in 2H07 and 2008.
The intensity of the investor feeding
frenzy in Dallas assets hasn’t abated.
Loopnet reported 15 $10mm+ trades
totaling $465mm in 2Q07. The median
cap rate was 7.2%, according to Reis,
while institutional quality assets trade
closer to 5.5% yields. Buyers were
active in Southwest Dallas County,
where 2,402 units exchanged hands.
RED estimate 7.8% expected 5-yr
holding period returns, tied fourth in
the RED 50, readily supporting an
“Accumulate” investment rating.
SNAP SHOT
Y-o-y
change
Vacancy
(7.7% - 2Q07)
Effective
Rents
30 bps
Projected
2007
70 bps
3.1%
3.1%
30 bps
25 bps
68.6k
62k
($698 - 2Q07)
Cap Rate
(7.2% - 2Q07)
Employment
(2,089k - 2Q07)
KEY POINTS
•
The Dallas economy showed no sign of
succumbing to the housing-led summer
economic slowdown observed in much of the
country. Payroll employment expanded at a
better than three percent over-the-year pace
through July. Metro payroll employment
increased by 68,600 (3.4%) in 2Q06 y-o-y,
while unemployment dipped below 4% in
May for the first time in seven years.
•
Through August, 61,746 homes were sold in
North Texas, down -6% from a year ago.
•
Tougher mortgage credit conditions steered
more households toward rental housing
options. Apartment owners absorbed 2,646
units in 2Q07, more than twice the number
net-leased in the previous 9 months.
•
Metro vacancy tumbled 50 bps, the 10th best
sequential quarter advance in the RED 50.
•
Effective rent increased 0.9% for the second
consecutive quarter, capping the best 6month rent traction recorded in six years.
•
RED estimate probable 5-year holding
period returns of 7.8%. That ranks tied 4th
among the RED 50, making the Big D a top
choice among U.S. growth markets.
VACANCY TRENDS
•
•
Dallas’s healthy economy and demographic trends were constructive
for household formation rates, while tighter mortgage credit conditions
and buyer anxiety about housing values steered more households
toward rental options. Apartment absorptions surged to 2,646 units,
according to Reis, more than twice the number of net move-ins
recorded during the previous nine months.
Occupancy increased by 50 basis points in the second quarter to
92.3%, the 10th best sequential advance among the RED 50. But the
surge left the Big D in 43rd position with respect to average
occupancy, and 32nd with regard to year-over-year advance (30 bps).
10%
7.7%
8%
8.0%
6%
4%
DALLAS
U.S.A.
2%
0%
Reis expect average occupancy to fall 70 bps by year end
2008 VACANCY RATE OUTLOOK:
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
99 00 01 02 02 03 04 05 05 06 07
Up through 2008 on supply pressure.
RENT TRENDS
•
•
Metro effective rents increased by an average of $6 (0.9%) in 2Q07,
the second consecutive quarterly advance of this magnitude. This
represents the largest 6-month rent growth since 2001. At an average
of $698, effective rents remain about 2.5% below the 2001 peak.
Reis expect rent trends to cool off in the second half after a hot start.
The service forecast year end effective rent of $707, a $9 advance
following the $12 gain achieved from January to December. For 2008,
Reis foresee a $24 (3.4%) rise to an average of $731.
The North Irving, Carrolton and Northwest Denton submarkets enjoyed
the fastest rent growth, ranging from 4.5% to 6.8% y-o-y.
Source: Reis, Inc.
8%
Asking
Effective
6%
YoY Rent Trend
•
Metro Rent Trends
4%
3.1%
2%
2.4%
0%
-2%
-4%
-6%
th
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
RANK: 36 out of 50
2008 RENT GROWTH RATE OUTLOOK: Moderately slower
99 00 01 02 02 03 04 05 05 06 07
•
Dallas remained one of the most active multifamily property markets
in the county in the first half of 2007. Real Capital Analytics report
that $1.4 billion of Dallas properties exchanged hands during the first
five months of 2007, trailing only Manhattan, Phoenix and Chicago in
regard to proceeds. Loopnet posted 15 2Q07 broker assisted trades of
$10mm or more, totaling a $465 million gross.
The range of estimated going in cap rates was unusually wide.
Institutional quality assets traded at initial yields from the low-5% to
high 6% range. NCREIF NPI contributors employed a 5.3% cap rate
to Dallas assets in 2Q07, about 60 bps above the national average.
7.5%
Cap Rate
•
Source: Reis, Inc.
8.0%
7.0%
6.5%
6.0%
2008 CAP RATE OUTLOOK:
2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
Cap rates are likely to rise to 2H07, but Dallas assets should succumb to these
pressures to a lesser degree than the national metro average.
05
05 05
06 06 06
06 07
07
Property Name
Village at Lake Highlands
St. Charles at Stonebriar
Bella Vista at Coyote Ridge
Archestone Las Colinas
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
C
A
A
A
29-Jun-2007
10-Aug-2007
16-May-2007
23-May-2007
$86.0
$32.1
$47.0
$53.0
$281,121
$105,098
$89,015
$103,112
n/m
5.0%
6.9%
5.5%
D/FW
$240
•
US
Prices (000)
$220
$200
•
$180
$160
$140
$120
$100
03
Y
05
06
06 06
06 07
07
EMPLOYMENT TRENDS
80
Past 12 Months
•
62 62
Annual Chg (000)
60
40
20
0
-20
-40
-60
Dallas produced 72,200 (3.6%) new payroll jobs in the 12 months
ended in July, comparing well to the 72,800 (3.7%) jobs recorded in
FY2006. The metro mounted a balanced attack, with each major
industry sector registering net gains. Skilled services led the charge,
with financial services (8,600 / 4.8%), business services (17,700 /
5.6%) and health care and education services (11,000 / 6.1%) establishments making key contributions to primary job growth. A banner
year for tourism and strong consumer spending boosted leisure services and air transportation headcounts more than 6%.
Second Quarter 2007
-80
99 00 01 02 03 04 05 06 07f 08f
•
Source: BLS
DALLAS
USA
6%
•
4%
2%
Rate
Home values appreciated faster than the national average, according to
the Office of Federal Housing Enterprise Oversight. OFHEO aver that
the value of a Dallas home gained 2.15% sequentially and 5.01% yearover-year in 2Q07. That compares to U.S. metro averages of 0.1% and
3.2%, respectively. Dallas homes gained only 18.77% of value since
2002, however, trailing the 50.76% U.S. norm by a wide margin.
2008 DEMOGRAPHIC OUTLOOK:
Demographic growth will cool in 2007—2008, but remain well above the
national average. Rising foreclosure sales will prove an impediment to further
above average home appreciation rates.
04 4Q 1Q 2Q 3Q 4Q 1Q 2Q
Y
Dallas’s strong economy and affordable housing attracted 42,413
domestic and 33,324 international net in-migrants in 2006, triggering
the fastest population growth since 2001. Total population increased
121,930 or 3.1%.
0%
Moderately slower hiring in goods producing industries gave rise to a
slight deceleration in metro job growth in 2Q07. Over-the-year expansion in the construction, manufacturing and wholesale trade supersectors declined to 11,400 jobs from a net gain of 13,600 jobs in
2006. Largely due to this factor, the pace of job growth declined to
68,300 jobs in 2Q07 from 72,800 last year.
Total payrolls in June were up 62,900 (3.1%) jobs, representing the
weakest year-over-year comparison observed since October 2005.
Preliminary estimates for July evidenced a mid-summer rebound,
however, indicating net job gains of 68,700 (3.4%) since the same
month of 2006.
Forecast
•
-2%
-4%
-6%
99
00
01
02
03
04
05
06
RED CAPITAL Research forecast job creation totals ranging from
58,000 to 66,000 in 2007, with a point estimate of 62,000 (3.1%).
RCR forecast job growth of comparable vigor in 2008, falling in a
range of 55,000 to 70,000 jobs, with most probable result of 62,000.
RANK: 5th out of 50
07
2008 EMPLOYMENT GROWTH RATE OUTLOOK: Strong and steady
15%
10%
5%
DALLAS
3.7%
2.2%
ATLANTA
6.2%
7.8%
4.6%
9.3%
6.3%
7.9%
11.6%
10.3%
0%
90%
70%
50%
30%
10%
RED CAPTIAL Research
SUBMARKET TRENDS
Effective Rent
Submarket
Garland
South
Southwest
Grand Prairie
North Irving
South Irving
Far North
Far Northeast
North White Rock
South White Rock/I-30
East Dallas
Southeast Dallas
South
Oaklawn
Richardson
Far Northwest
Lewisville
Plano / Allen
Northwest
North
Metro
Physical Vacancy
2Q06
2Q07
Change
2Q06
2Q07
$616
$606
$602
$576
$597
$714
$575
$699
$538
$574
$564
$703
$484
$670
$1,248
$703
$570
$698
$753
$777
$661
$797
$729
$677
$633
$625
$618
$592
$596
$749
$589
$708
$536
$589
$556
$708
$496
$668
$1,302
$718
$586
$729
$763
$805
$689
$803
$778
$98
2.7%
3.1%
2.6%
2.8%
-0.2%
4.9%
2.3%
1.3%
-0.5%
2.5%
-1.4%
0.8%
2.5%
-0.3%
4.4%
2.2%
2.9%
4.5%
1.4%
3.6%
4.2%
0.7%
6.8%
3.1%
6.2%
6.9%
6.7%
8.5%
8.0%
5.1%
6.7%
5.1%
11.1%
11.3%
9.9%
8.4%
11.2%
9.9%
7.9%
7.4%
12.2%
7.0%
10.0%
7.1%
8.9%
7.4%
7.5%
8.0%
8.2%
7.5%
6.0%
8.9%
7.6%
7.0%
5.8%
5.0%
12.3%
10.5%
9.2%
8.1%
10.1%
9.7%
8.0%
8.5%
10.9%
5.0%
7.2%
7.0%
7.3%
6.5%
3.7%
7.7%
Change
200 bps
60 bps
-70 bps
40 bps
-40 bps
190 bps
-90 bps
-10 bps
120 bps
-80 bps
-70 bps
-30 bps
-110 bps
-20 bps
10 bps
110 bps
-130 bps
-200 bps
-280 bps
-10 bps
-160 bps
-90 bps
-380 bps
-30 bps
SUPPLY TRENDS
•
Supply pressures are rising, with negative consequences for occupancy. Reis identify about 2,100 units on tap for 2H07 delivery, and
more than 7,000 units that may drop in 2008. In addition, about 2,500 units in larger condo projects will debut by YE2008.
2008 SUPPLY TREND OUTLOOK: Supply is always the issue in Dallas. The low cap rate environment that raised asset prices above replacement
costs in many cases and the spirited metro economy have inspired developers to crank up the production pipeline again. Although significant occupancy
progress will be blocked through the end of the decade, strong employment and income growth will allow rents to rise near the U.S. average rate.
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Chicago, IL_Fort Worth, TX
Fredericksburg, TX_Jupiter, FL_Linwood, NJ_Nashville, TN_Newport Beach,CA
Philadelphia, PA_Reston, VA_San Diego, CA_Syracuse, NY_Voorhees, NJ
RED CAPITAL GROUP®
Market Overview
Dallas,Texas
May 2007
EXECUTIVE SUMMARY
E
mployment growth in Dallas
accelerated to 72,800 (3.7%)
in 2006, from 47,600 (2.5%)
in 2005. As a result, the unemployment rate fell to 4.8%, the lowest ratio
since 2001. Faster hiring among professional service firms contributed to
economic strength. Business service
payrolls expanded by 22,100 (7.4%)
jobs in 2006, after gaining 13,500
positions in the prior year.
10 basis points sequentially to 91.8%
in 1Q07, ranking 44th among the 50
metro areas tracked by RED CAPITAL (RED 50). The increase was
attributable to net absorption of 1,004
units, outpacing supply of 723 units.
Reis anticipate tenant demand will
fail to keep pace with construction,
resulting in a 20 bps decrease in occupancy in 2007. Reis forecast occupancy to increase 20 bps in 2008.
In spite of weakness in the housing
sector, job growth increased to 77,300
(3.9%) year-over-year in 1Q07 and
the Federal Reserve Bank of Dallas
calculated job growth of 2.5% on a
seasonally adjusted annual basis, outpacing Fort Worth (1.3%), Houston
(1.5%) and San Antonio (1.2%). The
Fed notes that even as single family
housing starts fell, employment in
construction expanded by 500 positions, owing to increased building
activity in the apartment and office
sectors.
Effective rents increased 3.0% y-o-y,
from $672 to $692 in 1Q07. Asking
rents grew at a moderately slower rate
of 2.0% to $762. The value of the
average concession package fell to
9.2% of asking rent from 10.0% in
1Q06. Reis forecast year-over-year
effective rent growth of 3.1% in 2007
and 3.3% in 2008.
The manufacturing industry exhibited
new found strength in 2006 and continued to expand through 1Q07. Durable goods producers added 3,300
jobs in 2006, up from 500 in 2005.
Non durable factory employment rose
2,100 y-o-y in 1Q07, after adding an
average of only 400 jobs in 2006.
The Fed’s April manufacturing survey
indicates that Texas producers are
optimistic about business conditions
this year, boding well for further expansion.
RED forecast payroll growth of
73,000 (3.6%) in 2006 with a confidence interval of 67,000 (3.3%) to
79,000 (3.9%). In 2008, RED expect
moderately slower growth, ranging
from 57,000 (2.7%) to 79,000 (3.8%)
with a point estimate of 68,000
(3.2%).
The metro occupancy rate increased
According to Real Capital Analytics,
210 investor grade properties traded
in 2006 (in Dallas - Fort Worth), totaling $4,108 million in sales proceeds. This ranked 4th among the top
35 metro areas tracked by RCA. Volume increased 21% from 2005, while
the average price increased 9% to
$65,014 per unit. The average cap
rate increased 30 bps to 7.0%.
Loopnet identified eleven investor
grade trades in 1Q07, selling for a
total of $279 million. The average
price was $65,418 per unit and cap
rates typically ranged from 5.0% to
6.5%.
We estimate probable returns on generic metro assets of 8.4%, ranking 9th
among the RED 50. But above average historic volatility gives rise to
below average risk-adjusted returns.
Therefore, RED assign a cautious
“Accumulate” ranking for metro assets. The total return profile is attractive but the metro historically suffers
from over supply, contributing to the
observed volatility. Invest with care.
SNAP SHOT
Vacancy
(8.2% - 1Q07)
Effective
Rents
Y-o-y
change
Projected
2007
20bps
20 bps
3.0%
3.1%
10bps
unch
77.3k
73k
($692 - 1Q07)
Cap Rate
(7.6% - 1Q07)
Employment
(2,055.2k - 1Q07)
KEY POINTS
•
The vacancy rate in Dallas fell 10 basis
points to 8.2% in 1Q07. The metric is down
20 basis points year-over-year.
•
Asking and effective rents increased 2.0%
and 3.0% year-over-year, respectively.
•
Population growth accelerated to 3.1% in
2006 and the rate of homeownership fell 160
basis points to 60.7%.
•
Transaction volume totaled $279 million in
1Q07, supporting an average price of
$65,418 per unit.
•
RED forecast payroll growth of 73,000
(3.6%) in 2007 and 68,000 (3.2%) in 2008.
•
RED assign a rating of “Accumulate” to
Dallas assets, owing to acquisition friendly
cap rates and solid economic and
demographic trends.
Supply, however,
remains a concern.
Dallas, Texas MSA - 1Q 2007
VACANCY TRENDS
•
•
Tenant demand rebounded in 1Q07 as a total of 1,004 units were
absorbed. This largely compensated for the loss experienced in the
prior quarter when negative net absorption of 1,316 units was recorded.
The metro vacancy rate fell 10 basis points sequentially and 20 basis
points year-over-year to 8.2%. According to O’Connor & Associates,
the average vacancy rate in the Dallas - Fort Worth metro area was
10.3%, down 80 basis points year-over-year.
Reis forecast rapid supply growth throughout the remainder of 2007,
outpacing demand 4,757 to 3,660. As a result, vacancy is projected to
increase 20 basis points to 8.4% by YE 2007. In 2008, the service
expects the vacancy rate to fall 20 basis points to 8.2%.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
10%
8%
8.4% 8.2%
6%
4%
Dallas
U.S.A.
2%
0%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
2008 VACANCY RATE OUTLOOK: Stable
00
01 01
RENT TRENDS
•
•
•
The value of the average concession package fell to $70 per month, or
9.2% of asking rent. This equates to approximately 1.1 months free
rent on a twelve month lease.
•
06 07
According to O’Connor & Associates, the average rent per square foot
in the Dallas - Fort Worth metro area increased 0.6% year-over-year in
1Q07 to $0.87. Class A rents were up 1.3% to $1.07.
Reis forecast year-over-year effective rent growth to accelerate to 3.1%
in 2007 and 3.3% in 2008. Both metrics represent the strongest rate of
growth since 3Q01.
Asking
Effective
4%
2.0%
0%
-2%
-4%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
00
Real Capital Analytics report that prices averaged $65,014 in 2006, a
9% increase from 2005. Sales volume totaled $4,018 million as 210
properties traded.
RED estimate generic metro asset 10-year holding period total returns
of 8.4%, near the national average.
01
01
02
03
04
04
05
06
07
Source: Reis, Inc.
The Reis cap rate index fell 10 basis points to 7.6% in 1Q07. The
metric is up 10 basis points from the comparable period last year.
According to Loopnet, eleven properties priced at $10 million or
greater were traded in 1Q07, totaling $279 million in proceeds. The
average price was $65,418 per unit.
3.0%
2%
7.8%
7.6%
Cap Rate
•
05
6%
•
04
Source: Reis, Inc.
Effective rents increased 3.0% year-over-year to $692, outpacing
advances in asking rent for the seventh consecutive quarter.
2008 RENT GROWTH RATE OUTLOOK: Increasing
•
03 04
Metro Rent Trends
YoY Rent Trend
•
02
7.4%
7.2%
7.0%
6.8%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
05 05 05 05 06 06 06 06 07
2008 CAP RATE OUTLOOK: Stable
Property Name
Eastside Village
Jefferson Place
Amli at Autumn Chase
Auberry at Twin Creeks
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
A
A
A
January 2007
January 2007
March 2007
March 2007
$50.0
$30.6
$50.4
$21.0
$101,833
$72,052
$73,043
$97,222
N/A
6.4%
4.6%
5.2%
$240
MSA
•
US
Prices (000)
$220
•
$200
$180
•
$160
$140
•
$120
$100
03 04 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
Y
Y
05 05 05 06 06 06 06 07
The metropolitan division registered a 4.1% increase in the Office of
Federal Housing Enterprise Oversight (OFHEO) home price index in
4Q06. The median price of a Dallas home rose 3% year-over-year to
$156,300.
Past 12 Months
73 68
•
60
Annual Chg (000)
The median price of a single family MSA home fell 0.6% year-overyear to $145,500 in 1Q07. Inventory levels averaged 5.8 months in
1Q07, up 9% from the comparable period of last year.
EMPLOYMENT TRENDS
40
Job growth accelerated to 47,600 (2.5%) in 2005 to 72,800 (3.7%) in
2006. The 2006 metric was 180 basis points above the national average.
First Quarter 2007
20
•
0
-20
•
-40
-60
-80
99 00 01 02 03 04 05 06 07f 08f
•
Source: BLS
6%
•
Dallas
USA
4%
2%
Rate
The rate of homeownership in the Dallas-Fort Worth-Arlington MSA
fell 160 basis points from 62.3% in 2005 to 60.7% in 2006.
2008 DEMOGRAPHIC OUTLOOK: Stable
80
The population of the Dallas-Plano-Irving metropolitan division
increased 3.1% in 2006, up from 2.3% in the prior year.
Employment expanded at a faster rate of 3.9% in 1Q07, as 77,300
positions were added to payrolls.
Hiring among manufacturing firms contributed to the faster growth.
Durable goods producers added 500 jobs in 2005 and 3,300 in 2006.
The pace slowed somewhat in 1Q07 as 2,800 jobs were added yearover-year. Employment in the non durable goods sector picked up the
slack adding 2,100 jobs year-over-year compared to only 400 in 2006.
The wholesale trade sector benefited from increased production.
Wholesalers hired 4,000 employees in 2006, up from 1,300 new hires
in the prior year.
Business service sector establishments increased headcounts by
22,100 (7.4%) in 2006, the fastest gain since 1999. Attrition in accounting and payroll firms in 1Q07, however, lead to slightly slower
growth of 19,000 in the sector.
Forecast
0%
•
-2%
-4%
-6%
99
00
01
02
5%
04
05
06
07
RANK: 4th out of 50
2008 EMPLOYMENT GROWTH RATE OUTLOOK: Decreasing
15%
10%
03
RED forecast payroll growth of 73,000 (3.6%) in 2007, with a confidence interval of 67,00 (3.3%) and 79,000 (3.9%). In 2008, we expect moderately slower job growth of 68,000 (3.2%)
Dallas
4.4%
4.4%
Houston
6.8%
6.8%
8.3%
8.4%
9.9%
9.9%
12.1%
12.1%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Submarket
Garland
South County
Southwest Dallas
Grand Prairie
North Irving
South Irving
Far North
Far Northeast
North White Rock
East Dallas
Southeast Dallas
South
Oaklawn
Richardson
Far Northwest
Lewisville
Plano / Allen
Northwest
North
Metro
Physical Vacancy
1Q06
1Q07
Change
1Q06
1Q07
$614
$608
$600
$569
$591
$708
$573
$705
$533
$571
$565
$691
$491
$666
$1,229
$700
$562
$689
$739
$776
$667
$805
$735
$672
$624
$630
$611
$585
$594
$738
$587
$708
$546
$580
$558
$698
$500
$665
$1,289
$709
$580
$732
$761
$798
$668
$808
$772
$692
1.7%
3.6%
1.8%
2.8%
0.5%
4.3%
2.4%
0.4%
2.4%
1.7%
-1.3%
1.0%
1.7%
-0.2%
4.8%
1.2%
3.2%
6.2%
3.0%
2.9%
0.1%
0.4%
5.1%
3.0%
6.1%
7.1%
7.1%
9.1%
7.8%
5.9%
7.5%
5.6%
11.3%
11.9%
10.6%
8.6%
12.6%
10.4%
6.1%
7.8%
13.1%
7.6%
10.0%
7.9%
8.5%
8.2%
7.6%
8.4%
9.0%
7.2%
5.4%
9.5%
7.0%
6.8%
6.4%
5.2%
12.5%
11.2%
10.0%
8.9%
11.1%
10.8%
6.6%
9.4%
12.9%
5.2%
8.6%
7.4%
8.7%
8.5%
4.8%
8.2%
•
Source: Reis, Inc
Supply totaled 3,923 units in 2006, below the five-year historic average
of 4,435 units. In 1Q07, 723 units were delivered and Reis expect
nearly 4,800 more unit completions by year-end. More than 2,000
units of supply are expected in the Oaklawn submarket in 2007.
O’Connor and Associates count 39 properties under construction in the
Dallas - Fort Worth metro area, containing over 10,000 units. In
addition, the source identify 15 affordable housing developments that
were under construction in 1Q07, which will add over 2,700 units.
12,000
10,000
8,000
6,000
Units
•
290 bps
10 bps
-170 bps
40 bps
-80 bps
90 bps
-110 bps
-40 bps
120 bps
-70 bps
-60 bps
30 bps
-150 bps
40 bps
50 bps
160 bps
-20 bps
-240 bps
-140 bps
-50 bps
20 bps
30 bps
-280 bps
-20 bps
SUPPLY TRENDS
•
Change
According to Apartment Realty Advisors, there were approximately
8,700 units under construction in Dallas as of April and another 12,000
units in the pipeline. The source count only 2,558 units under
construction in Fort Worth.
4,000
2,000
0
-2,000
Completions
Absorption
-4,000
02
2008 SUPPLY TREND OUTLOOK: Increasing
03
04
05
06
07f
08f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Fort Worth, TX
Fredericksburg, TX_Jupiter, FL_Nashville, TN_Newport Beach,CA
Philadelphia, PA_Reston, VA_San Diego, CA
RED CAPITAL GROUP®
Market Overview
Dallas,Texas
February 2007
EXECUTIVE SUMMARY
M
etro payroll growth totaled
61,900 (3.2%) in 2006, the
largest gain since 2000.
The pace of job growth weakened in
4Q06, proceeding at an annual pace
of 50,100 (2.5%). The falling rate of
growth is partially attributable to
slower hiring in residential construction and to losses in the manufacturing sector. After gaining 1,900 workers in 1H06, employment in manufacturing fell 3,300 year-over-year in
3Q06 and 5,000 in 4Q06.
According to the Federal Reserve
Bank of Dallas, the Dallas Business
Cycle index rose 4.0% in December,
slightly slower than growth in the
State index of 4.3%. According to the
source, payroll employment increased
at a seasonally adjusted annual rate of
2.3% in December, down from 3.0%
in November.
Payroll growth is likely to decelerate
in 2007. RED forecast job creation
between 37,000 (1.8%) and 51,000
(2.5%) with a point estimate of
44,000 (2.2%). Looking to 2008,
RED expect similar job growth of
43,000 (2.1%) with a confidence interval of 33,000 (1.6%) and 53,000
(2.6%).
At 91.7%, the occupancy rate ranked
seventh lowest among the 50 metro
areas tracked by RED CAPITAL
(RED 50) in 4Q06. The occupancy
rate fell 50 basis points in 4Q06, attributable to negative net absorption
of 1,467 units and the completion of
440 units. The outflow of hurricane
evacuees is largely responsible for the
weak demand figures, according to
O’Conner and Associates. Another
contributing factor was the re-entry of
rental units that had previously been
removed from inventory by way of
conversion.
Reis anticipate a stronger leasing en-
vironment in 2007 to cause occupancy to increase 10 basis points to
91.8% in 2007. The service anticipate
developer constraint and stout absorption to elevate occupancy to 92% in
2008.
Effective rents increased 2.5% yearover-year, outpacing advances in asking rent for the sixth consecutive
quarter. The value of the average
concession package fell to 9.5% of
asking rent or $72 per month, 12%
below the $82 2Q05 peak. By way of
forecast, Reis anticipate year-overyear effective rent growth of 3.4% in
2007 and 3.2% in 2008.
At 7.7% the fourth quarter Reis cap
rate index is cheap to the Southwest
region average of 7.3%.
Higher
yields attracted considerable investor
interest, as first half 2006 sales proceeds advanced 68% to $1,965mm
while transaction velocity increased
44% to 99. Reis trade data indicate
investor grade properties traded at a
weighted average cap rate of 6.5% in
4Q06.
Market fundamentals are generally
improving, although weak demand in
the fourth quarter is cause for concern. Reis remain optimistic; however, forecasting occupancy to increase to 93.0% by 2011. Effective
rents are up only $58 since YE98, an
indication of significant upside revenue potential.
The total return profile for metro assets is among the top five in the RED
50, although risk-adjusted returns are
no better than average. Nonetheless,
the metro’s above average cap rates
are compelling reasons to consider
acquisition. Therefore, RED assign a
rating of “Accumulate” to Dallas assets.
SNAP SHOT
Y-o-y
change
Projected
2007
(8.3% - 4Q06)
10bps
10bps
Effective
Rents
2.5%
3.4%
40bps
unch
50.1k
44.0k
Vacancy
($686 - 4Q06)
Cap Rate
(7.7% - 4Q06)
Employment
(2,042.1k - 4Q06)
KEY POINTS
•
•
•
•
Vacancy increased 10 basis points year-overyear from 8.2% to 8.3%. The Far Northwest
submarket showed the greatest improvement,
as vacancy fell 340 basis points to 10.1%.
Asking and effective rents increased 1.7%
and 2.5% year-over-year, respectively. Reis
project the rate of effective rent growth to
accelerate in 2007 and 2008.
The Reis average cap rate index increased 40
basis points year-over-year to 7.7%. Trade
data suggest that investor grade properties
typically trade in the area of a 6.5% cap rate.
RED’s econometric model forecast payroll
growth of 44,000 (2.2%) in 2007 and 43,000
(2.1%) in 2008.
VACANCY TRENDS
•
•
The metro vacancy rate rose 10 basis points year-over-year from 8.2%
to 8.3%, ranking 44th among the RED 50.
On a sequential quarter basis, vacancy increased 50 basis points from
7.8%. The increase is attributable to negative net absorption of nearly
1,500 units as well as increased supply. Completions totaled 440 units
and an additional 150+ units that were previously converted to condo
re-entered the rental market.
Looking ahead, Reis project vacancy to fall 10 basis points to 8.2% in
2007 and an additional 20 basis points in 2008 to 8.0%.
Source: Reis, Inc.
12%
Metro Vacancy Rate
•
10%
8%
8.2%
Dallas
U.S.A.
4%
2%
0%
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
th
RANK: 44 out of 50
2008 VACANCY RATE OUTLOOK: Decreasing
00
01
RENT TRENDS
•
•
The value of the average concession package fell from 10.2% to 9.5%
of asking rent between 4Q05 and 4Q06. As a result, effective rents
increased 2.5%, outpacing advances in asking rent for the sixth
consecutive quarter.
Reis project effective rent growth acceleration through 2011. The
service forecast year-over-year effective rent growth of 3.4% in 2007
and 3.2% in 2008.
4%
04
05
06
06
Asking
Effective
2%
1.7%
-2%
-4%
4Q 3Q 2Q 1Q
4Q 3Q 2Q 1Q 4Q
00
03
2008 CAP RATE OUTLOOK: Stable
02
03
04
05
06
06
Source: Reis, Inc.
7.8%
7.6%
Cap Rate
Reis identified nine investor grade trades in 4Q06 with a weighted
average cap rate of 6.5% and a median rate of 7.6%. Prices ranged
from $26,106 to $123,500 per unit, with a median price of $29,751.
01
The Reis cap rate index increased 10 basis points to 7.7% in 4Q06 and
is 40 basis points above the comparable period of 2005.
According to NCREIF, the average cap rate fell 50 basis points to
5.2% in 3Q06. The average cap rate remained unchanged from the
comparable period of 2005.
2.5%
0%
•
03
6%
RANK: 39 out of 50
2008 RENT GROWTH RATE OUTLOOK: Increasing
•
03
Source: Reis, Inc.
Asking rents increased $13 or 1.7% year-over-year to $758 in 4Q06,
the largest percentage increase since 2Q02. On a sequential quarter
basis, asking rents increased $1 or 0.1%.
th
•
02
Metro Rent Trends
YoY Rent Trend
•
8.3%
6%
7.4%
7.2%
7.0%
6.8%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
At 7.7%, Dallas cap rates are above the Southwest region average.
05
05
05
05
06
06
06
06
Property Name
Regal Parc Apartments
Mandalay On The Lake
Villas of El Dorado
Turtle Creek Villas
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
BC
A
A
A
January 2007
December 2006
November 2006
September 2006
$26.5
$45.3
$17.7
$61.1
$47,491
$123,500
$71,371
$184,592
5.8%
5.1%
6.5%
6.2%
$240
MSA
Prices (000)
$220
•
US
•
$200
$180
•
$160
$140
•
$120
$100
03
04
Y
Y
2Q 3Q 4Q 1Q 2Q 3Q
05
05
05
06
06
06
Annual Chg (000)
The median price of a single family home in the Dallas - Fort Worth
MSA increased 2.8% year-over-year to $151,300 in 3Q06.
According to the Office of Federal Housing Enterprise Oversight home
price index, home prices in the Dallas metro division increased 3.8%
year-over-year in 3Q06, up from 3.7% in the second quarter.
2008 DEMOGRAPHIC OUTLOOK: Stable
Reis forecast metro population increase of 1.9% in 2008.
Past 12 Months
•
80
44 43
40
Payroll job growth totaled 61,900 (3.2%) in 2006, the metro’s largest
annual gain since 2000.
Fourth Quarter 2006
20
•
0
-20
•
-40
-60
-80
99 00 01 02 03 04 05 06 07f 08f
Source: BLS
6%
Dallas
•
•
USA
4%
Year-over-year job growth averaged 50,100 (2.5%) in 4Q06, down
from 55,400 (2.8%) in 3Q06.
The declining rate of payroll growth is largely attributable to reduced
hiring in the construction sector and attrition in the manufacturing
sector. Employment in manufacturing fell 3,300 year-over-year in
3Q06 and 5,000 in 4Q06, after gaining 1,900 workers in 1H06.
Increased hiring in the professional and business services contributed
to the faster rate of growth in 2006. The sector added 22,300 (7.5%)
jobs in 2006, up from the 2005 mark of 11,500 (4.1%).
Employment in local government grew stronger in 2006 averaging
year-over-year gains of 10,500 jobs, more than twice as many as 2005
(400). Much of the increase occurred in the fourth quarter as growth
swelled to 15,200 or 8.3%.
Forecast
2%
Rate
The rate of homeownership was 62.3% in 2005, down 10 basis points
since 2000.
EMPLOYMENT TRENDS
60
The population of the Dallas-Plano-Irving metropolitan division
increased 2.2% in 2005, partially attributable to positive net migration
(domestic and international) of 37,990 residents.
•
0%
•
-2%
-4%
-6%
99
00
01
02
03
04
05
06
In 2007, RED forecast job growth between 37,000 (1.8%) and 51,000
(2.5%) with a point estimate of 44,000 (2.2%).
RED expect payroll growth between 33,000 (1.6%) and 53,000
(2.6%) in 2008.
2008 EMPLOYMENT GROWTH RATE OUTLOOK: Decreasing
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
Garland
South County
Southwest Dallas
Grand Prairie
North Irving
South Irving
Far North
Far Northeast
North White Rock
East Dallas
Southeast Dallas
South
Oaklawn
Richardson
Far Northwest
Lewisville
Plano / Allen
Northwest
North
Metro
4Q05
4Q06
Change
4Q05
4Q06
$608
$597
$611
$567
$587
$712
$570
$698
$539
$567
$556
$699
$490
$657
$1,212
$693
$557
$695
$734
$779
$657
$784
$717
$628
$622
$610
$582
$599
$733
$581
$709
$545
$574
$561
$701
$492
$663
$1,269
$701
$570
$714
$757
$786
$671
$806
$764
3.3%
4.2%
-0.2%
2.6%
2.0%
2.9%
1.9%
1.6%
1.1%
1.2%
0.9%
0.3%
0.4%
0.9%
4.7%
1.2%
2.3%
2.7%
3.1%
0.9%
2.1%
2.8%
6.6%
6.7%
7.0%
7.0%
8.4%
8.1%
5.0%
6.7%
5.9%
11.8%
11.4%
9.8%
8.0%
12.7%
9.6%
6.5%
7.3%
13.5%
7.6%
8.9%
7.0%
9.1%
9.0%
7.2%
7.0%
7.8%
5.6%
9.9%
7.7%
7.1%
6.8%
5.6%
13.6%
11.6%
11.0%
7.4%
13.3%
11.8%
6.9%
7.7%
10.1%
6.0%
9.0%
7.0%
9.4%
8.0%
5.9%
$669
$686
2.5%
8.2%
8.3%
•
10 bps
Source: Reis, Inc
Supply totaled 3,653 units in 2006, a 1.0% increase in apartment
inventories. Net conversions totaled 44 units in 2006, while net
reversions eclipsed the 150 unit mark in the fourth quarter.
Reis project the delivery of 3,878 units in 2007 with an additional
2,906 units slated from completion in 2008. The service project the
delivery of 3,372 units in Oaklawn, 882 in Plano / Allen and 714 units
in the Richardson submarket.
12,000
10,000
8,000
6,000
Units
•
30 bps
80 bps
-140 bps
150 bps
-40 bps
210 bps
10 bps
-30 bps
180 bps
20 bps
120 bps
-60 bps
60 bps
220 bps
40 bps
40 bps
-340 bps
-160 bps
10 bps
0 bps
30 bps
-100 bps
-130 bps
SUPPLY TRENDS
•
Change
Reis identify three planned affordable properties containing 580 units
that are scheduled for completion by YE08.
2008 SUPPLY TREND OUTLOOK: Stable / Decreasing
4,000
2,000
0
-2,000
Completions
Absorption
-4,000
Supply totals will moderate through 2011.
02
03
04
05
06
07f
08f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
[email protected]
614-857-1416
William T. Hinga
[email protected]
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Fort Worth, TX
Fredericksburg, TX_Jupiter, FL_Nashville, TN_Newport Beach,CA
Philadelphia, PA_Reston, VA_San Diego, CA

Dallas Reports - RED Capital Group

Transcription

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