DFW Capital Markets
Dallas-Fort Worth (DFW) is ranked among the top areas in the U.S. to buy an investment property and is well-positioned to recover from the pandemic. While changes to specific commercial real estate sectors are still to be determined, demand for industrial, multifamily, and essential retail origination remain strong from a capital markets perspective. Investors are being priced out of core coastal metros such as New York and San Francisco and are pursuing opportunities in interior markets like DFW. Whether the product is office, industrial, retail, or multifamily, there has been increased interest in commercial real estate investments. We are starting to see an increase in the 10-year U.S. Treasury from a post-pandemic high of 1.48%, a vote of confidence in the markets as investors move away from safe havens and back into core real estate investments.
Deal volume stalled in 2020 due to the pandemic. Weak leasing activity, softening rents, and low rent collection, among other factors, dissuaded investors from pursuing deals. Before the recession, annual sales volume typically landed near $1.1 billion, according to CoStar. The sector will continue to be a strong asset class in 2021 for those with good underlying financials. Investment-grade companies will look to execute synthetic leases to achieve a low cost of capital and minimal balance sheet impact. As a business-friendly market, many companies are relocating or expanding their presence in DFW. The favorable demographics and proximity to economic anchors are attracting more and more investors.
THE INDUSTRIAL MARKET
For the industrial market, 2019 was the high-water mark for the decade, reaching $3.8 billion in sale volume. This number doubled the previous high of $2.1 billion in 2018. Overall, the market had a solid performance in 2020, reaching $2.2 billion in total sales. As many traditional retailers have borne the brunt of the pandemic, many are shredding distribution space. The number of portfolio transactions impact the market, and the fact that Texas is a non-disclosure state, pricing on individual assets is usually challenging to determine. One emerging trend is major retailers converting space into last-mile distribution. We will continue to monitor this trend and anticipate strong pricing and structure in industrial through 2021.
THE MULTIFAMILY MARKET
Investors have remained confident in deploying capital in the DFW multifamily market as vacancy rates remain intact and there have been minimum rent cuts. Significant investor interest has driven up pricing in urban and premier suburban areas of the metroplex, causing cap rates on properties in core submarkets to fall into the mid-4% to low-5% range. Assets rated 4 & 5 Star in the northern suburban markets typically range from $150,000/unit – $200,000/unit, while those in the urban areas now go above $200,000/unit. Attractive economic and demographic drivers, low cost of entry, and solid multifamily fundamentals have led to record levels of capital investment in the metroplex over the last decade. Submarkets in the Mid-Cities and parts of East and South Dallas are popular multifamily targets for value-add investors.
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