A year ago, Connect Media sat down with Matthews Real Estate Investment Services’ David Harrington, to ask him why the Southern California company was hanging its shingle in North Texas. At the time, Harrington, who is Matthews’ executive vice president and national director multifamily, was speaking at the annual Connect Texas Multifamily Conference. Mr. Harrington is returning as a panelist for the 2018 Connect Texas Multifamily Conference – and Connect Media decided to find out how things are going.
Q. Have we been seeing an uptick in smaller deals when it comes to multifamily properties in Texas?
A. In terms of total deal volume, DFW still remains as one of the most active markets in the country. However, keeping up the pace has been a challenge when Dallas ranked as the top market in 2017. For the first half of this year, deal volume is down approximately 15% year over year. In part, this reduction in activity can be attributed to the competitive nature in the multifamily space in Dallas and compressing cap rates. The average cap rate for Dallas was approximately 5.5% at the midway point of this year, while a market like Houston checked in at 5.7%. The slightly higher yields and the greater momentum from an employment and operational front in Houston have resulted in roughly 40% more deal volume year over year. Austin has the lowest average cap rate at 5.4%, but experienced a major decline in volume at over 30% lower.
Generally, the overall gains and declines seen in these metros will mirror what has happened on small asset sales. However, we have seen a greater interest from both local investors and those coming from out of state in Class C, value-add opportunities. This is due in large part to the operational performance in this space. Dallas-Fort Worth’s Class C apartment stock is currently leading the pack in occupancy numbers with rates at just over 95%. That pressure on occupancy gives investors the story they need to get excited about the potential for future rent growth. Plus, many of the sellers of this product are longer-term owners who have not made any effort to renovate their properties and reposition the rents to keep up with the changes that have occurred in these less desirable neighborhoods. Sellers of this smaller product have been asleep at the wheel for far too long, and a new investor can make better sense of higher pricing today given the upside potential they can capture through a strategic renovation program.
Q. Your North Texas office has been open for about a year. How has it been going?
A. Our Dallas office, located in Preston Center, has done very well for us and continues to grow like a weed. Through this year, we have added another 20 agents with many of those focusing on the multifamily space. Given how the year has gone in California, we have seen even more interest from investors in moving to the Texas markets. There has traditionally been interest in Texas as capital migrates to chase yield, but the regulatory and political environment in California over the last few months has amplified the interest from investors. We have sold several assets throughout Texas to investors from California, who are new to the area and seeking better returns and greater freedom to operate their business.
From a company standpoint, we have continued to expand our footprint and grow our operations. We have now opened an office in Austin, and will look to aggressively grow our presence in Central Texas. We have already executed a number of multifamily sales in the area and will build upon that momentum. Our next focus will be the opening of an office in Houston in late 2019, early 2020. In addition to the opening of our Austin office, we have also aggressively grown our property management business and currently have nearly 1,000 units under management throughout the DFW metro. This service line allows us to provide institutional quality services to the private client investor based locally, and also those coming in from out of the area.
Q. What are we looking at when it comes to smaller multifamily properties?
A. Smaller property sales will continue to find healthy interest from investors, given the sheer potential that these types of properties often present. The smaller assets are more likely to be owned by a private investor who has held the asset for a number of years, has a low basis, low leverage and self manages. These factors almost always lead to an owner who has not kept units up to market rents, and has a greater desire to keep the units full rather than focus on improving the property and continually pushing rents. We are uncovering deals with 30% to 50% rent upside (and some higher), and selling to a value-add investor with the means to execute a renovation and capture the income upside while also improving operating efficiency. We have seen larger investors come into this space and focus on areas in which they see future growth potential.
The key to finding these great opportunities is in working with the right company who is in touch with owners. At Matthews™, our platform is much different than every other traditional brokerage company that exists, and our differences, from a technology, culture and collaborative standpoint, yield greater results. No one shakes the tree harder or more efficiently than we do, which means we will uncover more opportunities than anyone else.
Discover why the most active players and stakeholders are focused on this red-hot multifamily market. Join Matthews™ at Connect Texas Multifamily on Thursday, August 23rd 2018 at the W Dallas Victory.