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Top D-FW Growth Submarkets are in Outlying Areas

CoStar Market Insights: Investors Chasing Renters, Yields to Exurban Locales
April 27, 2018
Value-add deals in the Mid-Cities, as well as parts of the inner-ring, blue-collar suburbs surrounding Dallas and Fort Worth, have become popular this cycle. Renovations, a lack of supply and strong blue-collar job growth stemming from Dallas’ booming industrial sector, have allowed landlords to raise rents at an impressive clip in these areas in recent years.

However, for value investors looking at D-FW multifamily, much of the low-hanging fruit in those areas has already been tapped out, with some assets already changing hands two or three times this cycle.

Rather than looking towards some of the more economically depressed areas of the metro, or outside the metro entirely, many investors are turning to the outlying exurban areas of Dallas-Fort Worth, and for good reason. Outlying areas of D-FW have seen some of the strongest rent growth in the metro in recent quarters.

Defining outlying D-FW submarkets as Wise, Parker, Johnson, Ellis, Kaufman and Hunt counties--those areas combine for about 14,000 apartment units. Vacancies in these submarkets fell from a high of roughly 10 percent in 2010 to below 6 percent as of the second quarter of 2018.

More impressively, rent growth roughly matched that of the metro average from 2010 to 2015.

But as metrowide growth has slowed since 2015, year-over-year rent growth in outlying submarkets averaged better than 5 percent in 2016-17. And as of April 2018, four of the top five submarkets for annual rent growth in D-FW were outlying submarkets--Johnson County, Kaufman County (Southeast Outlying), Hunt County (Northeast Outlying) and Ellis County.

Even with the incredible rent growth seen in the outlying submarkets, these exurban areas still come at a discount to Mid-Cities and inner-ring suburban working class areas. The average two-bedroom apartment in Arlington was below $750 per month in 2010 but is now $1,100 per month. In comparison, the average two-bedroom in the outlying submarkets is only $950 per month. That difference is huge for many working-class residents of D-FW, especially if they already drive to work.

While metrowide rent trends are certainly a major factor as to why the outlying submarkets have outperformed as of late, other factors such as job growth and improved transportation within these submarkets have also had an impact. For example, Johnson County benefits from the new Chisholm Trail Tollway and a steady stream of manufacturing jobs, Ellis County drafts off the industrial/distribution growth in South Dallas and Hunt County is boosted by Texas A&M Commerce and is adding hundreds of warehouse jobs in Greenville.

Investors have started to catch on. In terms of sales transactions, inventory turnover has averaged about 10 percent annually since 2014 in the outlying submarkets. But pricing is still much lower in the outlying areas than in the Mid-Cities or inner-ring suburbs. Considering the still sizeable delta between rents in the Mid-Cities and inner-ring suburbs and rents in the outlying areas, there are likely plenty of opportunities out there for investors willing to go off the beaten track.

CoStar Market Insights provides a snapshot of recent real estate trends. The CoStar Market Analytics team monitors commercial and multifamily real estate across 390 metro areas, with a granular understanding of the projects, players and economic trends that move these markets.

Learn how CoStar Market Analytics can add to your market knowledge, helping to minimize risk and maximize returns.

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