Dallas, as anyone with eyeballs has no doubt noticed, is in the middle of an apartment boom. Currently, the Dallas-Fort Worth metropolitan area has 50,000 apartment units under construction, which, to put things in historical perspective, is a crapload.
"It's been a long time since we've had 50,000 apartments under construction," Greg Willett, the chief economist for RealPage Inc., told the Dallas Business Journal. "Technically, we hit that number in the mid-1980s, but that was a long time ago."
The '80s were a heady time in Dallas. A big part of that was a free-wheeling real estate boom that created the modern downtown skyline and tens of thousands of rental units in and around the city.
The troublesome thing about being compared to the '80s is what happened after the the apartment boom: a tremendous bust. The rush to build apartments lasted until 1986, when falling oil and gas prices and a foundering economy combined with an oversupply of rental units. Construction came to an abrupt halt and the hangover lasted for years. Apartment vacancies shot up, rents declined, and apartment owners were reduced to offering free rent and trinkets to lure tenants. Developers didn’t start building new apartments again for a decade.
This leads to an obvious question: If the Dallas area is currently possessed by an '80s-like apartment boom, is it also headed for an '80s-like apartment bust?
At this point at least, most observers think the overall picture is good. Despite a leasing slowdown and decelerating rent growth, the apartment market remains strong. Vacancies are low, rents are still ticking upward, and home prices are high enough to keep renters renting. The Texas economy is strong and job growth has been keeping pace with the number of new units coming on line.
That said, not everywhere should feel equally secure. Questions of size, price, and location of new units will shape the market. “If you're building a new project between Belt Line and [State Highway] 121, you're in pretty good shape,” says Mike Puls, a Dallas-based apartment analyst. The northern suburbs, after all, is where a lot of the region’s job and population growth has been concentrated.
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All those luxury apartments going up in and around downtown? Those might be harder to fill. “The likelihood of oversupply is much higher in the highest-end one bedrooms in the urban core,” Puls says. He referenced one new development near Victory Park that was recently offering potential tenants three months of free rent – which suggests that at least some developers of downtown-area apartments are struggling to fill their units.
The Victory units, like a lot of those being built around downtown, are small but pricey one-bedrooms, which developers have come to favor because they can cram in a lot as a way to offset high land prices and construction costs, that cater to single people making about $75,000 a year. That’s a small sliver of the market, and the growth in the type of jobs that give single people high incomes is considerably stronger in the northern suburbs, where apartments tend to be larger and rents tend to be cheaper.
Longer-term, there’s the worry that the units will become even harder to fill in years to come as the 25 to 35 age bracket (and thus the number of likely renters of luxury one-bedrooms) shrinks as the current glut of millennials ages.
Nor is there an easy way for the market to absorb an excess of luxury one-bedrooms. Financing arrangements for apartment developments are such that owners can’t just knock down rents to fill units. Which means it might be time for developers to stop building so many.