Will Higher Dallas Rents Lead to Subsidized Housing? Or More Home Buying?

We are estimating there are approx. 21 renter households for every available home.”

Denver has a pretty snazzy downtown. We were there this summer for NAREE, the annual June convention of the National Association of Real Estate Editors. We toured pricey new construction in barrio-like ‘hoods that were quickly turning to glam. I thought the prices were as high as the altitude.

Now comes word that Denver is overloaded with luxury apartments. The Mile-High city added 12,000 apartments since 2015 and another 22,000 more are under construction, this according to CoStar Group Inc. as reported in The Wall Street Journal. Further, “More than 90% of those units are considered luxury, meaning they incorporate higher-end finishes and amenities.”

You know, granite and quartz countertops, higher end appliances, vessel tubs, bigger closets and balconies. Things that cost more but draw in the higher-rent crowd. Sound familiar?

There are currently 16,000 vacant units in metropolitan Denver, up 5,500 from three years ago, according to MPF Research. Rents for a typical one-bedroom in Denver range from around $1,200 to $1,600. Rents for luxury apartments are at the top end of that range.

Because the buildings are higher-end, landlords won’t have to undergo the rigorous frequent inspections that make some wary of other government-subsidized housing programs, said Nancy Burke, vice president of government affairs at the Colorado Apartment Association.

There’s one reason why, perhaps, developers prefer building higher end buildings: less oversight intrusion. Save that thought.

Now let’s look at Dallas. We have been going great guns in the apartment building department. We are churning out some GREAT mixed-use developments in Uptown — have you seen The Katy yet? Knock your socks off. Walked in there during the holidays and ran into three people I know living there in luxury and loving it. And the building is leasing up rapidly because quality sells.

Take a gander up and down Coit Road in my ‘hood, District 11, near the new Costco: it’s apartment city. Look at that structure across from Trinity Groves, Sylvan 30. We need apartments, yes, because statistics show that when people move to Dallas on average they lease for at least a year before buying.

But do we have too much?

Sydney Bennett just told us that Dallas metro added more new rental stock than any U.S. metro: 22,851 deliveries in 2017, up from 15,459 in 2016. ALMOST TWENTY THREE THOUSAND UNITS. Most of these were, like Denver, higher end units with hefty rent tags. But can teachers or editors or police or administrative assistants — the bulk of the workforce, in other words — afford these units?

Sydney says “Dallas remains more affordable than many surrounding cities, but apartments in hot neighborhoods including Uptown and Highland Park are often well above the Dallas median. Plano is the most expensive of the 10 largest cities that we have data for in the Dallas metro, with a two-bedroom median of $1,410. Of all the cities we have data for, Flower Mound remains the most expensive, with a two-bedroom median of $2,180.” Now that’s a head-scratcher. Because it’s closer to DFW?

The good news is that Dallas rents are still below the national average, and are growing slower, only 2.2% in 2017. Clearly first time homebuyers have to look increasingly to the outskirts to find affordable housing. Will renters have to do the same?

Maybe not. Steve Brown just reported that nationwide apartment starts dropped by about 8 percent in 2017, and more declines forecast for 2018 and 2019. 

“The (national) cycle for apartments is leveling off,” said Robert Dietz, chief economist with the National Association of Homebuilders. “Rental vacancy rates are rising and rent increases are slowing.”

Steve reports that while 38,000 units were added in third quarter 2016, only 30,000 came in third quarter 2017. He calls us the SECOND busiest apartment growing region in the country, says NYC is first. Regardless of who is first, it’s busy. But experts say it’s gonna slow 10 to 20%… except:

“There are a half dozen spots where we’re concerned that starts could prove a little too aggressive simply because demand has been so strong over the past few years,” he said. “Dallas tops that list, while other locations we’ll be monitoring closely are Seattle, Denver, Charlotte, Nashville and Boston.”

Oh brother. Didn’t I say something about too many apartments? We may have to follow suit with Denver. Now here is the most positive news I gleaned from Steve’s article: there is also a broad shift across the nation from rental to more home ownership… if these buyers can find affordable homes.

More renters desire to buy a house than at any time since the recession, but Neal (that’s Michael Neal, senior economist for the Homebuilders’ Association) said a lack of moderate-priced homes on the market will hold them back.

“We have an elevated potential of demand but at the same time we have a low inventory,” he said. “We are estimating there are approx. 21 renter households for every available home.

With inventory so low in the under $300,000 market, what we would consider affordable, 21 potential buyers for each home will only create bidding wars. Geeze Louise.

As for all these apartments, if they sit vacant, we may have to see what Denver is doing:

Denver has a plan for its glut of sparkling new, high-end rental apartments with amenities like gyms, roof decks and sometimes even pet spas: It will use them to house teachers, medical technicians and others who can’t afford the city’s soaring rents.

Under a program to be unveiled later this month, the city, along with employers and charitable foundations, will pay the difference between what a lower-income resident can afford and the market rent of an apartment.

Like other cities across the country, Denver is grappling with a shortage of affordable housing for middle-class workers. “Instead of having these units sit vacant, if we can create opportunities to help some of our employees, our residents get into those units, that’s an immediate response,” said Denver Mayor Michael Hancock.

Whole new can of worms. How much will this cost Dallas which was “on the verge of bankruptcy” just last November? What employers will pitch in? Will high rent paying tenants chafe that they are living next to subsidized renters? Will this protect properties (and their investors) artificially from natural market forces? 

“What you would hope is that excess supply leads to lower rents. If the city is pumping subsidies in, aren’t they going to be propping up the upper end of the market?” said Chris Herbert, managing director of Harvard University’s Joint Center for Housing Studies.