WS1967 Dallas - Fort Worth Real Estate in 2024 | Highlights Mark Allen

Looking for insights on the Dallas Fort Worth (DFW) multifamily market and how to thrive in today's investment climate? This  highlight episode of the Real Estate Syndication Show dives deep with seasoned broker Mark Allen of GREA.


Mark highlights the enduring strength of the DFW market, even as it moderates from previous highs, underpinned by consistent demand and corporate relocations. He points out that the increase in interest rates necessitates recalibrations by sellers and underscores the significance of thorough analysis of rent growth, alongside identifying investment opportunities that prioritize sponsorship quality, liquidity, and operational acumen. Despite an increase in distressed deals across the board, the DFW area maintains its stability, supported by lenders willing to collaborate. Mark also notes the crucial roles of experience and liquidity in successfully maneuvering through market fluctuations.


3 Key Takeaways for Multifamily Investors:

1. Market Dynamics: Explore the current state of the DFW multifamily market, including the impact of rising interest rates, renter trends, and insurance costs.
2. Investment Opportunities: Discover where buying opportunities lie and the key factors to consider when evaluating multifamily deals in the DFW area.
3. Sponsor Selection: Learn how to identify high-quality sponsors who prioritize long-term success over short-term gains.

Connect with Mark Allen and GREA:

• Website: GREA.com
• LinkedIn

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Transcript

Whitney Sewell: This is your daily real estate syndication show. I'm your host, Whitney Sewell. Today, we've packed a number of shows together to give you some highlights. I know you're going to enjoy the show. Thank you for being with us today. Mark, welcome to the show. Honored to meet you and have you on.

Mark Allen: Whitney, thanks for having me. And thanks for your service.

Whitney Sewell: Yeah, thank you as well for your service. Mark, always grateful for guys and gals who have who have served and to be able to have you on the show, for sure. So I just thank you to you as well. Well, let's jump in. You know, you are you're in a market that man, it seems like it many, many, many operators are in and love being in and passive investors as well and have for a number of years now. So, you know, we want to dive into Dallas Fort Worth and what you've learned there. And, you know, even some some of what's happened right over the last year and maybe give a little review, get a review from you, you know, maybe nationwide as well. But I know you're mostly specific to Dallas Fort Worth and and dive into a number of things. First, why don't you talk about I know you even in And not too many years ago, you were Broker of the Year and, you know, multiple awards and whatnot. But give the listeners a little bit about, you know, your focus, because I love this. So I asked you this before we got started. And I loved, like, you knew the exact, like, details of your focus and your niche, which I think is so powerful. But let's, you know, tell the listeners as well.

Mark Allen: Yeah, sure. So Mark Allen with GREA, Global Real Estate Advisors. We were formerly with a big company called Greystone. And we broke off beginning of 2022 and launched GREA. Ironically, we're called Greystone Real Estate Advisors internally at Greystone. So that's kind of where the name came from. And Four letter domain is difficult to come by. So GREA was available for a pretty cheap price. But all that being said, I grew up in Orlando, Florida, and made my way here to Dallas through the military. I went to West Point U.S. Military Academy and then ended up in the Army. And my last duty station was in Killeen, Texas, Fort Hood, which is now Fort Cavazos. Today, I'm specifically focused on multifamily BNC class, specialize in the $5 to $30 million space. That's really my focus. A lot of my clients are either private investors or syndicators, most of those who are raising retail equity.

Whitney Sewell: Yeah, no, it's great to know people like yourself, especially if you are focused in Dallas area, Dallas-Fort Worth. We need somebody like yourself on our team, no doubt about it. Well, you know, let's jump right in and maybe we begin with, you know, last year, maybe like a review of 2023 and multifamily sales, some things around, you know, what you saw happen and give us some details of how it played out and maybe even some lessons learned, you know, from working with some of your operators.

Mark Allen: Yeah. Challenging environment. Dallas-Fort Worth, fortunately, even taking a step back, I moved to Dallas to take a job with a software company based out of Newport Beach, California. I think it's common for military folks, when you get out, you're just like, very generally, I don't know what I want to do. There's a lot of folks will go to grad school to figure it all out. or it's just broad. I want to get in sales. I want to stay in operations, whatever the case may be. So I did that for a little bit and found myself in Dallas-Fort Worth. And I was also a real estate investor, primarily single family. And at a certain point, I wanted to go scale up and go multifamily. So I met some folks here, and they convinced me to come to the dark side, to the broker side. I already had my real estate license. And I think about that. And I had no idea, you know, like I like multifamily, but I didn't explore other asset classes. I didn't explore other jobs within multifamily, whether it be asset management or acquisitions, or I did go to a local seminar here of one of the mentors or mentorship groups here in town that has kind of the ecosystem. So learn a little bit about that, consider that maybe. But I feel fortunate for ending up in Dallas-Fort Worth and specifically in the multifamily asset class, because there's probably no better place on earth to be a multifamily broker or that asset class in this market. Anyways, yeah, 2023 was a heck of a lot slower than 2022. We had a record year in 2022 as far as multifamily sales go, and that's GREA across the board, but specifically in this market. We were the poster child across, you know, sales volume for all asset classes here in DFW, but specifically multifamily. And a lot of that is just, you know, I mean, for the same reasons, a lot of folks are investing in some of the other, you know, growth Sunbelt states because we had incredible supply demand fundamentals. I think we're still delivering, you know, this year, 32,000 units are under construction. And when you look at a percentage of our entire inventory, that's just a little bit over 2%. And you've got markets, I mean, for example, in Austin. Austin, they have about the same number of units under construction. However, it's closer to about 9% of their inventory. So here in DFW, we can easily absorb that. Seems like every other week you have some company, even as the economy has maybe slowed down a little bit, You still have companies announcing relocations and expansions here in the Dallas-Fort Worth Metroplex. And we have a lot of land, like our infrastructure set up to where we can bear the growth. So there's been a lot of not only growth to the north, but also to the southern, eastern, and western suburbs, not hindered as like a Phoenix market where you have like mountainous regions and you can't expand as far. So anyways, generally, 2023, we saw, you know, we saw kind of, I guess you could consider potentially peak rates. As we had a 10-year treasury yield reach up to I think it hit 5% at a certain point and then has kind of dwindled back down to sub 4% and then looks like today over 4% so a lot of volatility. It's been up and down but generally in 2022 we saw the Federal Reserve decide to start hiking rates and as they drag the short end of the yield curve up the long end of the yield curve, which matters for us real estate investors, as well specifically for multifamily, because a lot of times we're borrowing with a corresponding spread over the corresponding treasury yield. With higher interest rates, that really cooled off the sales market. and created a bid-ask spread, which is commonly heard in the news. Generally, sellers, it's frustrating as a broker because you see where the terminal rate is and you expect rates to continue rising. And you're trying to guide sellers and tell them like, you know, take the deal, take the deal, take the deal. But, you know, they won't take the deal and then they wait and they actually drop their price and they're just chasing. I guess maybe you heard the term chasing a falling nine. So that's kind of what's been happening. Specifically, headwind here, I mean, through most coastal states, but specifically Texas with all the losses, insurance. Insurance is a big headwind. So average increases probably north of 30% here. One of our larger line items outside of taxes and payroll and property taxes being another big topic here in Texas, specifically in some of the major counties in Austin, Houston, and Dallas. Taxes, insurance is both the headwind and then we have last year for the first time, you probably saw a lot in the news about negative rent growth. We just had slowing revenue growth. Unfortunately, I think we fared better than a lot of markets like Nashville, Phoenix, so on and so forth that had negative rent growth. a lot of concessions in those markets. Like I said, our supply demand fundamentals are really strong here in Dallas, Fort Worth. So because of that, I feel like we fared better than a lot of other markets. But generally, I think too, you probably see in the news about negative rent growth, and that includes articles in Dallas about negative rent growth. But you kind of have to break that out too, because I mean, each sub-market is going to be a little bit different. And then also the asset quality, you know, 60s and 70s vintage may be completely different than, you know, brand new construction or even, you know, a late 90s vintage property. So here in DFW, we still see workforce housing rent growth in the positive territory closer to, you know, about three and a half percent. So that's just something else to take a look out for any sponsors or operators out there that are looking for deals. you know, don't just take the headlines that it's, you know, take it with a grain of salt because, you know, the, the devil is in the details or in the data.

Whitney Sewell: Yeah, no doubt about it. I appreciate the look back there and just thinking through some of the things about 2023. And, you know, these you're talking about are a number of things there you were mentioning, but, you know, sellers wouldn't sell, right. And then they, they're, kicking themselves, right? You know, like, you talked, you know, you mentioned chasing a, you know, trying to catch a falling knife or something like that. And so it's no doubt, you know, as we've been trying to buy, you know, it's, it's been difficult, right, to find deals that make sense. And I think It's a seller still want that price they could have gotten right 18 months ago, right, or that they think they could have got right, you know, or what they were told anyway. So do you see that just that mindset changing at all even now, you know, from, you know, or the just the realization of, you know, what properties are really valued at today versus two years ago to sellers?

Mark Allen: Yeah, when we, I mean, when we have a sense of stability, when rates are stable, and it seemed like it was that way last year, and kind of like we had a treasury yields drop. So like, April through, through maybe July, and then all of a sudden, we saw the spike after that. But through that couple of month period, it seemed like that's that bid-ask spread really closed. And so I feel like anytime we have a sense of stability, from a dealmaking standpoint, it really helps. And I would also, I'd say like, you know, generally the conversations last year, uh, for those that bought at peak pricing in 2021 or 2022, and this is going to be the same across any markets generally. I mean, here in Dallas, Fort Worth, we're seeing price adjustments from the, from the peak pricing, 20 to 50%. And that 50% may be a deal that's just not not performing really well it's, you know, 78% occupied with 10% of the rental delinquent. So that's going to have a bigger discount pricing because there's less demand for that kind of deal today. But generally, a lot of the conversations I was having for folks in bridge loans last year, or in 2022 rather, was, hey, I promised a 15% IRR to my investors. I really want to achieve that. I can't go with the 5% IRR, because that's what this price will return to my investors. And then the conversation transferred a little bit in 2023 to, hey, I really got to break even. I need to get my investors their money back. I don't want to have them take a loss. So it'll be interesting. And again, I, you know, even with rates dropping I kind of put together a case study myself, just to talk through with some of my some of my clients but you know with proposed values coming out for the new assess values for 2024 come out usually April May. and then you're going to have insurance renewals. I'm hearing insurance renewals, again, averaging somewhere around 30%. If revenue is generally flat and you're not executing your value out business plan and driving revenue growth, even if interest rates drop 75 to 100 basis points, it's really not going to help you on value because a lot of that expense growth is eating up the value there. We'll see what happens this year, what the economy does. what happens on the revenue side. Again, it's going to be market by market dependent, but generally, I would expect that values will be a little bit lower this year than last year. Then I think we start to see it pick up as it rebounds on the revenue side in 2025 and beyond. Because of that, I think we're pretty close to the bottom. It's impossible to time the bottom. All that being said, I think it's a really good time to buy. You just have to be able to stomach the volatility. In a competitive market like the FW, it comes with risk because we're still seeing strong terms in today's market. Most deals are going non-refundable earnest money with agency execution. That's going to be market by market dependent, but that's what we see here.

Whitney Sewell: Wow. Awesome. It makes me think, you know, everybody's talking about distress deals right now, right. And having a distress fund or, you know, a deal fund, um, where they can hopefully take advantage of these properties that, that people are going to have to sell. I just wonder, you know, is that something you're seeing or even an expectation over the next number of months that, that operators unfortunately are in positions where they're, they're having to sell, right. Uh, you know, for, uh, their, uh, you know, their caps are expiring or whatever it may be.

Mark Allen: not as much in Dallas, Fort Worth, even versus some of the other metros. Like I saw a LinkedIn post the other day from a brokerage down in Central Texas in Austin, San Antonio. And it was one of the analysts that made the post. But essentially, I think 22% of the deals that they underwrote in 2023 were distressed. And we're not seeing anywhere close to that. I mean, I could probably count the number of deals maybe four hands, but it's definitely not that much as far as a percentage of total deals. Again, I think it goes back to, I think we're seeing more distress in some of the coastal markets like here in Texas, that would be Houston, as we've seen just crazy increases on the insurance side. So that's been a that's been a definite challenge. And then, you know, another, we just don't deal with it as much. I mean, probably average, bad debt or delinquent, delinquent rent tenants that aren't paying the rent, you know, somewhere between the two, and I'm going to say 5% range is probably a good range. And, and, you know, probably obviously less on the higher quality assets, but generally for BNC class, two to 5%. Houston, You go to Houston, you know, I mean, there's a ton of deals that are 10% plus bad debt. So you factor in, you know, it's 89% occupied, you know, 91% occupied, you know, qualifying for agency debt from a physical occupancy standpoint. However, you know, 12% of the rent roll is delinquent, not paying rent. So, you know, it, you know, definitely more challenging market there. You know, same thing, our Atlanta counterparts, they're saying some of those counties in Atlanta are very tenant friendly and it's very difficult to get some of those non-paying tenants evicted. So, you know, a lot of those deals that are underwriting 10 to 40% delinquent rent rolls. So, you know, I think that's kind of the other headwind in some of those, you know, some of those markets and probably more specifically in markets that are more tenant friendly. But here in Dallas-Fort Worth, we're just not seeing as much. The other thing we're kind of seeing just generally across the country, a lot of the lenders seem really willing to work with the borrowers. I think generally they'd like to see some skin in the game. They call it rebalancing the loan. You may have to bring some cash to the table to get closer to their debt yield or DSCR requirements. Easier for maybe some of the more capitalized folks, maybe a little bit more difficult for It's syndicated at raised retail equity and has investors that are invested 50,000 or 100,000, unless they have their own liquid capital. Generally, I think a lot of the lenders don't want to take back assets. They're willing, as long as the sponsor is very communicative. Um, and, you know, it just really depends on the lender, uh, that they're willing to work out and kind of make a deal. Because I think the hope is, is that things continue to get better over, you know, the next year, year and a half. And, uh, you know, you probably heard the term survive through 25. So I think that's, that's kind of the general hope.

Whitney Sewell: You know, you mentioned this a couple of minutes ago, you said, you know, you, you believe it is a, a good time to buy right now. And, you know, I just wonder, I know some of the listeners are probably wondering, well, is there really good deals out there to be had right now? Is there, you know, it seems like they're also overpriced, you know, and, and, and nobody's really able to buy much, but, but what's your opinion or, you know, how would you answer that?

Mark Allen: Yeah, I mean, generally, like multifamily has been a longer term game. And I think everyone over the past couple of years got so, so used to the quick fix and flip, you know, in and out of deals in 18 to 24 months, and, you know, 30%, plus IRRs, whatever the case may be, there's that period where that was occurring. So I think and there is a lot of new insurance in the market as loose monetary policy and whatnot. I think just generally, Yes, prices have adjusted and shifted. I think you have to have a longer term mindset. Most syndicators are running a five-year model. I think in today's market, you see a lot of folks taking five and seven-year term debt with flexible prepay structures with the agencies, Fannie Mae and Freddie Mac, because they want to be able to have the term necessary to complete their business plan. It's probably going to be slow the next at least two years. So I think there's going to be a good opportunity over the, you know, probably between three and five years to exit, um, you know, probably have some cap rate compression, you know, we'll have some revenue growth on, on between those years, three and five. And, uh, you know, those deals today at pricing at today's prices and cap rates will, will look, uh, will look nice. So.

Whitney Sewell: Yeah, maybe dive in a little more to what you foresee or expect, you know, over the next 6-12 months in how, you know, buyers or even investors, past investors should be thinking about, you know, the next 6-12 months. Yeah.

Mark Allen: Well, I mean, it's tough, but I mean, at least the conversation that I'm having with a lot of sponsors, you know, there are certain sponsors that are are really good at raising money and they're doing it really well now. I don't know if they're, you know, you know, just I don't know if they're just network connections or whatever the case may be, but. It's a challenge because there's a lot of LPs that have invested in deals, and a lot of them maybe, again, maybe are newer to the multifamily market or private placement investments, and they're not going great. They're not getting distributions. So that's unfortunately, I think, going to pull some of those folks off, and they'll probably never invest in a deal again. And then you have those that are getting you know the capital calls are occurring all over the country so you have folks concerned about that and wanted to keep some capital on the sidelines, you know, should they need the extra liquidity for the capital call. You know, but generally, like I said, I think you have to have a longer term mindset. I think quality assets and quality locations will outperform over the long term. You know, it's helpful to have you know, I don't care what market it is. I think, I think the operator, the sponsors, like everything, um, cause they make or break the deal. So, I mean, there's, there's a couple of characteristics that, um, I look for and I, I generally like, I don't, you know, I like the folks that are the sponsors that are doing, you know, they don't have to do a deal. Um, they're not super fee driven. It's like, Hey, if I don't buy anything this year, like I'm going to be active looking for the right deals, but if I don't buy anything, that's great. If I, you know, You know, make 100 offers and I get one you know that that's great too, but they're they're active they're in the market they're always looking for deals. I like you know those that are tend to be a little bit more hands on as well and and have the experience. And the other thing I think we're learning, you know, just generally is, is understanding the sponsors, you know, personal financial situation, you know, if how much liquidity they have, and if there are storms that are faced, are they going to have the capital to come up? Are they going to go directly to the capital call? So just a couple of things to look for.

Whitney Sewell: It's interesting you mentioned like the operators, really the personal financial ability or stance or health, right? And, you know, that is definitely something that should be considered by every operator. I know, you know, I've gone through cycles where I've, man, I really want to invest in some deals. But it's like, man, I need to keep a certain amount of liquidity on hand at all times. Right. You know, I mean, personally, I, and, and for a reserve budget, right. Too. So we can pay our team for 12, 18, 24 months going through a time like this case, we don't do any deals, right. Or sell anything or, or, or whatnot. Um, uh, but like you said, too, in case, you know, we have projects that, uh, uh, that need some capital. I'd prefer not to do a capital call, right. Air funded myself. I have to, um, yeah.

Mark Allen: Yeah, benefit of being a broker, I underwrite a lot of deals and I with all the data and information I have, I can see, you know, who's operating well and who's not. And there's, I mean, there's, you know, a sponsor that I've invested with that, you know, he'll, not that he's looking in tough areas, but if the right deal comes about, you know, he'll go into lower income areas. And, you know, they'll crush it. Um, so I mean, the operational from an operational standpoint, I think that's a key, um, that a lot of folks and not necessarily, you could do it with third-party management. You don't need to be a, you know, owner, owner, operator, owner, manager, but you know, that asset management ability and the ability to manage people is key.

Whitney Sewell: Maybe speak to some of the, some of the, uh, things you see top-notch operators doing, right. The, you know, you're underwriting. so many deals and maybe you could even start there. Like what you see even in the underwriting that people are focusing on or doing well versus some that are not or how they were even prepared for, maybe that's a better topic. How, you know, they were prepared better for this type of downturn or environment that we're in versus, you know, 18 months ago.

Mark Allen: I mean, I think some of the items that I mentioned, I invested with a local group here in Dallas-Fort Worth, and they buy in some various markets across the country. They've owned in Houston, San Antonio, all the Texas metros. They also own in Tennessee. And generally, I mean, the sponsor's got a lot of experience. He's been doing this for 40 years. I mean, he started as a mortgage broker and then took some of the income that he was making, bought some small properties in San Francisco years ago and then has scaled up and I think with his kids, I think has got a little more into syndication and has taken institutional equity. So he's got a varying range of experience for all the way from class A institutional quality, $70 million plus assets down to class C properties built in the 60s and lower income areas. Frankly, because of that, it's been a favorable market. He's riding the wave with interest rates down and appreciation of property, especially getting in early in California. So he's, he's generated a lot of wealth and had a lot of liquidity. And as kind of later stage in life, but, you know, so that that's one thing I know if it, you know, deals going wrong, he's, he's going to be able to kind of step in first. He does self-manage. They have a few thousand units. He's got a great team all the way from property management players to the asset management team. The people are stellar and really sharp, just you know, institutional level experience on the asset management side. Not that you need that, but I'm sure there's things you learn from a very high level that are beneficial at the institutional level with all the resources and information and, you know, quality of folks that you have at Hayden. So those would be a couple of things. And like I said, location isn't, at least for me, I think sponsor first over location. I wouldn't say micro location, probably more like macro location. Like I'd go into some smaller markets in Tennessee with them or whatever the case may be, just because I know they're a good operator. But you also have to look at the micro location. income level, schools, how walkable or close to amenities, and if it's workforce housing, maybe public transportation or whatever the case might be. So there's so many things you can look at and you can honestly get overwhelmed. But I think from a very high level, I think sponsor number one and micro location number two. But along with, you know, an experienced qualified sponsor, you know, the fees are probably a little bit higher. Is it worth the fees? You know, when you look at today's environment, I think so.

Whitney Sewell: I agree. I agree. I can agree more with what you just said about the operator and then the market and you're you're paying that operator for his experience, right? And you're even trusting the decision to what markets are going into right in the 40 years experience like you're talking about. There's a lot of value to that, for sure. Mark, what would you say is the biggest risk for even buyers today? What are some of the things that you see are killing deals other than maybe interest rates, you know, or some things they should be considering?

Mark Allen: I was going to say interest rates, but I guess it depends. I'm going to say if you're looking at folks that use JV equity or preferred equity, I guess the risk is just equity appetite changing as the market as the market changes and the way they price deals and look at different assumptions. I had a deal that we had a signed LOI. We're negotiating the contract, kind of a hairy deal with a development component as well. And all of a sudden, the equity kind of backed off. Not only did interest rates go up quite a bit and whatever it was, 90 basis points in a matter of a month or something like that, a month and a half. But also just headlines with the FW rent growth negative. And some of these things started to come out, which just changes sentiment. And they say, hey, we were projecting year one, just organic and rental inflation. We want to tail that back to zero for the first two years. And we want to change our exit cap rate assumptions and XYZ. So those are probably like the biggest risks and really hard to qualify up front. Generally, if you look at the most active buyers in DFW, they're syndicators. They're those who have discretionary equity and don't have one big check rider. Frankly, they built really good reputations, they're really good at raising money, they're really good at what they do. Because of their reputation, brokers are definitely pushing them to their sellers as top buyers, like you want someone who can close in today's environment with all the volatility. So reputation is, I wouldn't say everything, but it's a big key factor in getting deals done today.

Whitney Sewell: Yeah, no doubt about it. So we've covered a lot. Mark, thank you again. And how can the listeners get in touch with you and learn more about you?

Mark Allen: Yeah, best way is either through LinkedIn, GREA.com. Feel free to visit the website to get in touch with any of the team members or look at the properties we have for sale. You can reach me via email mark.Allen at GREA.com. That's MARK.ALLEN at GREA.com.

Whitney Sewell: Thank you for being with us again today. I hope that you have learned a lot from the show. Don't forget to like and subscribe. I hope you're telling your friends about the Real Estate Syndication Show and how they can also build wealth in real estate. You can also go to lifebridgecapital.com and start investing today.