DFW Multifamily Report 2Q 2018

Multifamily Research

Market Report Second Quarter 2018 Dallas/Fort Worth Metro Area

Unexpected Pockets Outperforming; Upside Potential Attracts Investors Multifamily 2018 Outlook

Households search for affordable housing away from core. 27,000 units Construction: A wave of luxury units has opened in urban submarkets such as will be completed Developers will complete more Intown Dallas, North Dallas and Intown Fort Worth over the past apartments in the metroplex few years. Simultaneously in these areas, owners have renovated than any other market again this older assets to provide additional amenities and upgrade units, year. Over 25,000 units were resulting in higher rents at these properties. Renters searching also added to stock in 2017. for lower monthly housing costs are searching farther from the core as a result. Southwest Dallas is one area that has benefited, Vacancy: 50 basis point with vacancy falling from nearly 9 percent in 2013 to less than 4 increase in vacancy Net absorption reaches the percent in the first quarter of 2018. Tight vacancy has supported strongest pace in the past healthy rent growth in the area and, despite the average rising decade during 2018, yet vacancy more than 30 percent over the past five years, the rate remains will climb for a third consecutive more than $250 below the metrowide average. West Fort Worth year, to 6.0 percent. and East Fort Worth have also registered steep declines in vacancy over the past few years, prompting rent growth that Rents: 3.4% increase outpaces the metro. in effective rents Rent growth slows as the average advances to $1,127 per month. Developers stay focused on Frisco this year. Nearly 10,000 Despite the moderating pace of apartments have been added in Frisco-Prosper since 2012, growth, the rate continues to rise more than doubling total inventory. Vacancy in the submarket has faster than the national average. climbed to more than 7 percent as a result, remaining highest in Class A units at 8.3 percent. Class B vacancy has also risen more than 300 basis points during the past two years, and could tick up further as the gap closes between Class A and Class B rents and tenants jump to newer units coming online. Nearly 5,500 Investment Trends apartments are underway, with deliveries slated through 2020. • Low vacancy and rents below the metrowide average in many Employment Trends Local Apartment Yield Trends submarkets will allow for healthy rent gains. Investors seeking Metro United States Apartment Cap Rate 10-Year Treasury Rate upside may target assets in these areas. Apartment trades in 6.0% these submarkets generate cap rates in the 4 percent to 6 12% percent range. 4.5% 9% • First-time investors are targeting the Dallas/Fort Worth 3.0% metroplex for opportunities. These investors are drawn to 6% nation-leading job creation and healthy property operations, Rate 1.5% especially for Class B and Class C assets, where vacancy 3% remains tight and rent growth is strongest. Year-over-Year Change 0% 0% • Over the past 12 months, the number of sales in East Dallas 14 15 16 17 18* 00 02 04 06 08 10 12 14 16 18* was more than twice the number of properties traded in any other submarket of the metroplex. Here, assets traded at an average cap rate in the low-6 percent area. Completions and Absorption Sales Trends Completions Absorption Sales Price Growth * Cap rate trailing 12-month average through 1Q; Treasury rate as of March 29th $125 16% Sources: CoStar Group, Inc.; Real Capital Analytics Year-over-Year Growth 32 $100 12% 24

$75 8% 16 Units ( 000s )

8 $50 4%

0 Average Price per Unit (000s) $25 0% 14 15 16 17 18* 14 15 16 17 18*

Vacancy Rate Trends Metro United States 8%

Vacancy Rate 5%

14 15 16 17 18*

Rent Trends Monthly Rent Y-O-Y Rent Change

$1,200 12% Year-over-Year Change

$1,100 9%

$1,000 6%

$900 3% Monthly Effective Rent $800 0% 14 15 16 17 18* Dallas/Fort Worth 1Q18 – 12-MONTH PERIOD Employment Trends Local Apartment EMPLOYMENT: Yield Trends Metro United States 2.9%Apartment increase Cap Rate in total10-Year employment Treasury RateY-O-Y 6.0% • 12%Employers created over 36,000 positions during the first 4.5% three months of 2018, contributing to the addition of more 9% than 100,000 people to payrolls since March of last year. 3.0% 6% •Rate The unemployment rate fell 40 basis points over the past 1.5% 12 months to 3.6 percent in March, erasing the 20-basis- 3% point rise recorded during the previous yearlong span. Year-over-Year Change 0% 0% 14 15 16 17 18* 00 02 04 06 08 10 12 14 16 18*

Completions and Absorption SalesCONSTRUCTION: Trends Completions Absorption 26,100 Salesunits completedPrice Growth Y-O-Y $125 16%

Year-over-Year Growth 32 • Developers completed more than 6,700 apartments $100during the first quarter. Completions 12%during the span 24 were heaviest in Intown Dallas and Richardson. $75 8% 16 • Intown Dallas remains a target for developers, with more Units ( 000s ) than 6,000 units underway at the end of March. Frisco 8 $50 4% is also slated to receive a boost to supply as 5,500

0 Average Price per Unit (000s) apartments$25 should come online through 0%mid-2020. 14 15 16 17 18* 14 15 16 17 18*

Vacancy Rate Trends VACANCY: Metro United States 8% 60 basis point increase in vacancy Y-O-Y

7% • After rising 40 basis points one year ago, the vacancy rate increased again over the past 12 months, reaching 6% 5.7 percent. • Class A and Class B vacancy has risen over the past

Vacancy Rate 5% year, with the rate for Class A units rising 80 basis points

4% to 6.5 percent, and vacancy for Class B assets reaching 5.9 percent on a 90-basis-point advance. 14 15 16 17 18*

Rent Trends RENTS: Monthly Rent Y-O-Y Rent Change 2.9% increase in effective rents Y-O-Y

$1,200 12% Year-over-Year Change • Rent growth is moderating, with the average advancing to $1,082 per unit in March. One year ago, the average $1,100 9% effective rent grew 5.2 percent year over year.

$1,000 6% • Rent growth has been strongest among Class C properties, rising at an average rate of more than 4 $900 3% percent during each of the past four years. The average

Monthly Effective Rent Class C rent was $866 per month in the first quarter. $800 0% 14 15 16 17 18*

* Forecast Multifamily Research | Market Report

DEMOGRAPHIC HIGHLIGHTS

1Q18 MEDIAN HOUSEHOLD INCOME 1Q18 AFFORDABILITY GAP MULTIFAMILY (5+ Units) PERMITS

Metro $67,373 Renting is $711 Per Month Lower 27,171 2H 2017 U.S. Median $60,686 Average Effective Rent vs. Mortgage Payment* Compared with 2H g 9% 2014-2016

1Q18 MEDIAN HOME PRICE FIVE-YEAR HOUSEHOLD GROWTH** SINGLE-FAMILY PERMITS

Metro $257,563 287,000 or 2.1% Annual Growth 34,534 2H 2017 U.S. Median $257,628 U.S. 1.1% Annual Growth Compared with 2H g 20% 2014-2016

*Mortgage payments based on quarterly median home price with a 30-year ﬁxed-rate conventional mortgage, 90% LTV, taxes, insurance and PMI. **2017-2022  Annualized Rate

Lowest Vacancy Rates 1Q18 Metroplex Economy Firing On All Cylinders, Keeps Investors Active

Y-O-Y Vacancy Effective Y-O-Y % Submarket EmploymentBasis Point Trends Local Apartment Yield Trends Rate Rents Change • The average price per unit continues to climb, Metro ChangeUnited States increasingApartment 8 percent Cap Rate over the10-Year past Treasuryfour quarters Rate to 6.0% $98,100. The average now rests 58 percent above the pre-recession12% peak achieved in 2006. Central Arlington 4.5% 4.5% -30 $912 5.2% • Cap rates9% compressed further among properties sold Denton 3.0% 5.1% 60 $991 3.1% during the past 12 months, with the average dipping 6%

20Rate basis points to 6.5 percent. Southwest Fort Worth1.5% 5.2% -20 $907 2.1% Outlook:3% A diverse pool of buyers will continue to target Las Colinas-CoppellYear-over-Year Change 0% 5.5% 80 $1,261 0.6% a range of opportunities in the metroplex this year, and strong investor0% demand will keep cap rates compressed 14 15 16 17 18* 00 02 04 06 08 10 12 14 16 18* Intown Dallas 6.3% 0 $1,649 1.4% as borrowing costs rise.

Allen-McKinney 6.3% 50 $1,150 1.2% Completions and Absorption Sales Trends Northeast Dallas 6.9%Completions200 Absorption$919 8.8% Sales Price Growth SALES TRENDS $125 16% Frisco-Prosper 7.5% 60 $1,269 2.1% Year-over-Year Growth 32 SUBMARKET TRENDS $100 12% Oak Lawn-Park Cities24 7.6% 130 $1,523 1.5%

$75 8% North Dallas 16 7.9% 270 $1,079 4.5% Units ( 000s )

Intown Fort Worth-University8 8.1% 180 $1,248 0.7% $50 4%

Overall Metro 0 5.7% 60 $1,082 2.9% Average Price per Unit (000s) $25 0% 14 15 16 17 18* 14 15 16 17 18*

* Trailing 12 months through 1Q18 Vacancy Rate Trends Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics Metro United States 8%

Vacancy Rate 5%

14 15 16 17 18*

Rent Trends Monthly Rent Y-O-Y Rent Change

$1,200 12% Year-over-Year Change

$1,100 9%

$1,000 6%

$900 3% Monthly Effective Rent $800 0% 14 15 16 17 18* Multifamily Research | Market Report Multifamily Research | Market Report

1Q18 Apartment Acquisitions By WILLIAM E. HUGHES, Senior Vice President, By Buyer Type Marcus & Millichap Capital Corporation Other, 1% Cross-Border, 8% • Fed raises benchmark interest rate, plots path for additional increases. The Federal Reserve increased the Equity Fund federal funds rate by 25 basis points, lifting the overnight & Institutions, 24% lending rate to 1.5 percent. While the Fed noted that the inﬂ ation outlook had moderated in recent months, an upgraded Private, 62% economic forecast factoring in recent tax cuts and a rollback Listed/REITs, 5% in regulation strengthened growth projections for the next two years. As a result, the Fed has guided toward two additional rate hikes this year, while setting the stage for as many as four increases in 2019. Apartment Mortgage Originations By Lender • Lending costs rise alongside Fed rate increase. As the Federal Reserve lifts interest rates, lenders will face a rising cost 100% of capital, which may lead to higher lending rates for investors. However, in an effort to compete for loan demand, lenders may 75% Gov't Agency Financial/Insurance also choose to absorb a portion of the cost increases. While Reg'l/Local Bank 50% higher borrowing costs may prompt buyers to seek higher cap Nat'l Bank/Int'l Bank rates, the positive economic outlook should provide rent growth CMBS 25% Pvt/Other that outpaces inﬂ ation over the coming year. As a result, sellers remain committed to higher asking prices, which has begun Percent of Dollar Volume 0% to widen an expectation gap as property performance and CAPITAL MARKETS CAPITAL 12 13 14 15 16 17 MARKETS CAPITAL demand trends remain positive. • The capital markets environment continues to be highly competitive. Government agencies continue to clue sales millio a reater consume the largest share, just slightly over 50 percent, of ources otar roup c Real apital alytics the apartment lending market. National and regional banks control approximately a quarter of the market. Global markets National Multi Housing Group and foreign central banks are keeping pressure down on long- term interest rates. Pricing resides in the 4 percent realm with Visit www.MarcusMillichap.com/MultifamilyAtlanta Office: Columbusmaximum leverage Office: of 75 percent. Portfolio lenders will typically require loan-to-value ratios closer to 70 percent with interest John Sebree Michael Fasano First Vice President/Regional Manager Michael Glass First Vice President/District Manager First Vice President, National1100 Director Abernathy | National Road Multi N.E., Housing Bldg. 500, Group Suite 600 5005rates Rockside in the high-3 Road, Suite to mid-4 1100 percent range. The passage of tax Tel: (312) 327-5417 Atlanta, GA 30328 Independence,reform and OHrising 44131 fi scal stimulus will keep the U.S. economy [email protected](678) 808-2700 | [email protected] (216)growing 264-2000 strongly | [email protected] and rental demand will remain high with the

Prepared and edited by national apartment vacancy rate at 5 percent at the end of 2017. Jessica Hill Austin Office: Market Analyst | Research Services Dallas Office: Craig Swanson Regional Manager For information on national 9600apartment North trends,Mopac contact:Expressway, Suite 300 Tim Speck First Vice President/District Manager John Chang Austin, TX 78759 5001 Spring Valley Road, Suite 100W First Vice President, National(512) Director 338-7800 | Research | [email protected] Services Dallas, TX 75244 Tel: (602) 707-9700 (972) 755-5200 | [email protected] [email protected] Office: Fort Worth Office: Matthew Drane Regional Manager Price: $250 100 E. Pratt St., Suite 2114 Kyle Palmer Vice President/Regional Manager Baltimore, MD 21202 300 Throckmorton Street, Suite 1500 © Marcus & Millichap 2018 Tel:| www.MarcusMillichap.com (443) 703-5000 | [email protected] (817) 932-6100 | [email protected] Boston Office: Denver Office: Tim Thompson Regional Manager 100 High Street, Suite 1025 Robert Kaplan Vice President/Regional Manager The information contained inBoston, this report MA was 02110 obtained from sources deemed to be reliable. Every1225 effort 17th wasStreet, made Suite to 1800obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment (617) 896-7200 | [email protected] Denver, CO 80202 growth is calculated based on the last month of the quarter/year. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted. This is not intended to be a forecast of future eventsCharleston and this Office:is not a guaranty regarding a future event. This is not(303) intended 328-2000 to provide | [email protected] specific investment advice and should not be considered as investment advice. Sources: Marcus & MillichapBenjamin Research Services; Yelm BureauRegional of Manager Labor Statistics; CoStar Group, Inc.;Detroit Experian; Office: National Association of Realtors; Moody’s Analytics; Real Capital Analytics; RealPage, Inc.; TWR/Dodge151 Meeting Pipeline; Street, U.S. Suite Census 450 Bureau Charleston, SC 29401 Steven Chaben Senior Vice President/Regional Manager (843) 952-2222 | [email protected] Two Towne Square, Suite 450 Southfi eld, MI 48076 Charlotte Office: (248) 415-2600 | [email protected] Benjamin Yelm Regional Manager 201 South Tryon Street, Suite 1220 Charlotte, NC 28202 Fort Lauderdale Office: (704) 831-4600 | [email protected]

Ryan Nee Vice President/Regional Manager 5900 N. Andrews Avenue, Suite 100 Chicago Area Offices: Ft. Lauderdale, FL 33309 (954) 245-3400 | [email protected] Richard Matricaria Senior Vice President/Division Manager 333 West Wacker Drive, Suite 200, Chicago, IL 60606 (312) 327-5400 | [email protected] Houston Office:

David Bradley Regional Manager | Chicago Downtown David H. Luther First Vice President/District Manager 333 West Wacker Drive, Suite 200, Chicago, IL 60606 Three Riverway, Suite 800 (312) 327-5479 | [email protected] Houston, TX 77056 (713) 452-4200 | [email protected] Steven Weinstock First Vice President/Regional Manager One Mid America Plaza Suite 200 Oakbrook Terrace, IL 60181 Indianapolis Office: (630) 570-2250 | [email protected] Josh Caruana Vice President/Regional Manager 600 E. 96th Street, Suite 500 Indianapolis, IN 46240 (317) 218-5300 | [email protected]

Cincinnati Office: Kansas City Office:

Colby Haugness Regional Manager Richard Matricaria Sr. Vice President/Division Manager 600 Vine Street, 10th Floor 7400 College Boulevard, Suite 105 Cincinnati, OH 45202 Overland Park, KS 66210 (513) 878-7700 | [email protected] (816) 410-1010 | [email protected]

Cleveland Office: Las Vegas Office: Regional Manager Michael Glass First Vice President/District Manager Todd Manning 3800 Howard Hughes Parkway, Suite 1550 5005 Rockside Road, Suite 1100 Las Vegas, NV 89169 Independence, OH 44131 (702) 215-7100 | [email protected] (216) 264-2000 | [email protected] Multifamily Research

Market Report First Quarter 2018 Dallas/Fort Worth Metro Area

Dallas Keeps Developers’ Attention; Buyers Chase Deals Across Metroplex Multifamily 2018 Outlook

Employment gains, apartment completions continue to 32,000 units Construction: lead the country. The Dallas/Fort Worth metroplex has been will be completed Completions rise again in 2018, the nation’s job engine over the last few years, attracting and remaining well above the five- encouraging a diverse range of companies to relocate and year average, and developers expand in the area. An average of 85,000 individuals have are set to bring a record number moved to the metroplex in each of the past five years in search of units online. of jobs, creating strong demand for area housing. Despite robust employment gains, wage growth has not kept pace with Vacancy: 70 basis point home price appreciation, pushing thousands of residents into increase in vacancy Vacancy rises again this year as apartments as housing affordability slips. Absorption reached deliveries are elevated, reaching the highest level in the last decade during 2017 at a time when 6.3 percent. Vacancy rose 60 completions were at peak levels, suggesting there’s still pent-up basis points in 2017 and 20 ba- demand for metroplex housing. sis points in 2016.

Heightened deliveries soften operations in some Rents: 3.4% increase submarkets, largely restricted to Class A units. Completions in effective rents Following a 4.0 percent bump over the past few years have been concentrated in north Dallas. last year, rent growth stays well Vacancy for Class A units in the areas of Allen/McKinney, Frisco/ below the previous five-year Prosper and Intown Dallas has risen anywhere from 100 to 300 average of 5.7 percent during basis points during the last four years, while vacancy at Class 2018, with the average rising to B and Class C properties remains tighter. Stock additions are $1,128 per month. focused on the Dallas half of the metroplex through next year, and the use of concessions to attract tenants will stay elevated this year, especially among newly constructed properties. Investment Trends

• The metroplex apartment market draws new and experienced Employment Trends Local Apartment Yield Trends investors from across the country in search of apartment prop- Metro United States Apartment Cap Rate 10-Year Treasury Rate erties. While out-of-state investment activity remains healthy, 6.0% the majority of assets are trading to Texas investors. 12% 4.5% • True value-add listings are limited and buyer competition is 9% strong when opportunities are available. Going-in cap rates for 3.0% properties with upside potential are in the 5 percent area, mov- 6% ing up into the 6 percent span depending on property location 1.5%

Average Rate and condition. 3% Year-over-Year Change 0% • Vacancy in Class B and Class C units remains tight and rent 0% 14 15 16 17 18* 00 02 04 06 08 10 12 14 1617 growth in these classes has been strongest over the last year. Buyer demand for these units will be strong as recently completed units are mostly luxury apartments and spreads in effective rents keep vacancy tight as many renters are financially Completions and Absorption Sales Trends unable to jump into newer units. Completions Absorption Sales Price Growth $125 16% Sources: CoStar Group, Inc.; Real Capital Analytics Year-over-Year Growth 32 $100 12% 24 $75 8% 16 Units ( 000s ) $50 4% 8

Average Price per Unit (000s) $25 0% 0 13 14 15 16 17 14 15 16 17 18*

Vacancy Rate Trends Metro United States 8%

Vacancy Rate 5%

14 15 16 17 18*

Rent Trends Monthly Rent Y-O-Y Rent Change

$1,200 12% Year-over-Year Change

$1,100 9%

$1,000 6%

$900 3% Monthly Effective Rent $800 0% 14 15 16 17 18* Dallas/Fort Worth 4Q17 – 12-MONTH PERIOD Employment Trends Local Apartment EMPLOYMENT: Yield Trends Metro United States Apartment2.4% Cap increase Rate in 10-Yeartotal employment Treasury Rate Y-O-Y 6.0% 12%• Employers added 84,000 workers to staffs during 2017. 4.5% Hiring in the leisure and hospitality sector led job creation 9% during the year, with nearly 18,700 positions generated in 3.0% 6%the segment. 1.5% • The metroplex’s unemployment rate fell 70 basis points Average Rate 3% year over year to 3.3 percent in 2017. Year-over-Year Change 0% 0% 14 15 16 17 18* 00 02 04 06 08 10 12 14 1617

Completions and Absorption SalesCONSTRUCTION: Trends Completions Absorption 29,000Sales units completedPrice Growth Y-O-Y $125 16%

Year-over-Year Growth 32 • Nearly 29,000 apartments were delivered last year and $100 12% completions were concentrated in the Dallas area. More 24 than 3,500 units were added to inventory in Frisco. $75 8% 16 • Of the nearly 47,000 units underway in the metroplex at Units ( 000s ) $50the end of 2017, just 7,700 are located4% in the Fort Worth 8 portion of the market.

Average Price per Unit (000s) $25 0% 0 13 14 15 16 17 14 15 16 17 18*

Vacancy Rate Trends VACANCY: Metro United States 8% 60 basis point increase in vacancy Y-O-Y

7% • Net absorption totaled more than 22,000 units last year, a decade high, but it fell short of supply additions, result- 6% ing in a vacancy increase to 5.6 percent. • The addition of thousands of high-end, luxury units in

Vacancy Rate 5% Frisco and Allen/McKinney has pushed vacancy for

4% Class A units above 7.5 percent in these locales, some of the highest in the metroplex. 14 15 16 17 18*

Rent Trends RENTS: Monthly Rent Y-O-Y Rent Change 4.0% increase in effective rents Y-O-Y

$1,200 12% Year-over-Year Change • Rent growth slowed last year to a still-strong 4.0 percent, advancing the average asking rent to $1,091 per month. $1,100 9% Gains were 6.5 percent or higher during the previous three years. $1,000 6% • Fort Worth apartments were more affordable than those $900 3% in Dallas, with the average effective rent staying below

Monthly Effective Rent $1,000 per month in 2017. $800 0% 14 15 16 17 18*

* Forecast Multifamily Research | Market Report

R R M M ercet of total populatio 716,700 Metro $65,630 Metro 21.5% U.S. Median $58,714 U.S. 21%

R R 36% Ret 291,000 R R R Metro 32.3% 64% U.S. Average 29%

Lowest Vacancy Rates 4Q17 Economic Growth, Favorable Demographic Trends Keep Investors Interested

Y-O-Y Vacancy Effective Y-O-Y % Submarket Basis Point RateEmployment TrendsRents Change • Investor interestLocal Apartment in metroplex Yield apartment Trends assets re- Change Metro United States mains Apartmentstrong with Cap the Rate Mid-Cities10-Year of FarmersTreasury Rate Branch, 6.0% Addison, Carrollton and Arlington attracting a large share of investors last year. Ellis County 2.2% -80 $984 3.0% 12% 4.5% • The average price per unit appreciated has acceler- 9% Burleson/Johnson County 3.0% -90 $944 3.6% ated by 10 percent or more for the last three years, 3.0% reaching6% $97,800 per door in 2017. Hunt County 3.2% 130 $753 1.6% 1.5% Outlook: Investor interest in Class B and Class C Average Rate 3% Kaufman County 3.6% -280 $1,026 18.9% properties will be robust as vacancy remains tight and Year-over-Year Change 0% rents continue0% to rise at a healthy pace. Denton 14 4.2%15 30 16 $997 17 4.9% 18* 00 02 04 06 08 10 12 14 1617

Garland 4.4% 70 $952 2.7% Completions and Absorption Sales Trends South Fort Worth 4.4% -20 $818 6.8%

Completions Absorption SALES TRENDS Sales Price Growth $125 16% W. Ft. Worth/Parker County 4.5% 20 $948 8.6% Year-over-Year Growth

SUBMARKET TRENDS 32 Central Arlington 4.5% 10 $910 5.7% $100 12% 24 South Irving 4.6% 20 $906 5.5% $75 8% 16 Units ( 000s ) Mesquite 4.7% 0 $934 3.2% $50 4% 8

Overall Metro 5.6% 60 $1,091 4.0% Average Price per Unit (000s) $25 0% 0 13 14 15 16 17 14 15 16 17 18*

Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics Vacancy Rate Trends Metro United States 8%

Vacancy Rate 5%

14 15 16 17 18*

Rent Trends Monthly Rent Y-O-Y Rent Change

$1,200 12% Year-over-Year Change

$1,100 9%

$1,000 6%

$900 3% Monthly Effective Rent $800 0% 14 15 16 17 18* Multifamily Research | Market Report

2017 Apartment Acquisitions By WILLIAM E. HUGHES, Senior Vice President, Marcus By Buyer Type & Millichap Capital Corporation Other, 1% Cross-Border, 9% • Fed raises benchmark interest rate, plots path for additional increases. The Federal Reserve increased the federal Equity Fund funds rate by 25 basis points, lifting the overnight lending rate to & Institutions, 24% 1.5 percent. While the Fed noted that the inflation outlook had moderated in recent months, an upgraded economic forecast Private, 62% factoring in recent tax cuts and a rollback in regulation strength- Listed/REITs, 4% ened growth projections for the next two years. As a result, the Fed has guided toward two additional rate hikes this year, while setting the stage for as many as four increases in 2019.

Apartment Mortgage Originations • Lending costs rise alongside Fed rate increase. As the By Lender Federal Reserve lifts interest rates, lenders will face a rising cost of capital, which may lead to higher lending rates for investors. 100% However, in an effort to compete for loan demand, lenders may also choose to absorb a portion of the cost increases. While 75% Gov't Agency Financial/Insurance higher borrowing costs may prompt buyers to seek higher cap Reg'l/Local Bank rates, the positive economic outlook should provide rent growth 50% Nat'l Bank/Int'l Bank that outpaces inflation over the coming year. As a result, sellers CMBS 25% Pvt/Other remain committed to higher asking prices, which has begun to widen an expectation gap as property performance and de-

Percent of Dollar Volume 0% mand trends remain positive. CAPITAL MARKETS CAPITAL 12 13 14 15 16 17 • The capital markets environment continues to be highly competitive. Government agencies continue to consume the largest share, just slightly over 50 percent, of the apartment clue sales millio a reater lending market. National and regional banks control approxi- ources otar roup c Real apital alytics mately a quarter of the market. Global markets and foreign central banks are keeping pressure down on long-term inter- National Multi Housing Group est rates. Pricing resides in the 4 percent realm with maximum leverage of 75 percent. Portfolio lenders will typically require Visit www.NationalMultiHousingGroup.com loan-to-value ratios closer to 70 percent with interest rates in the high-3 to mid-4 percent range. The passage of tax reform John Sebree and rising fiscal stimulus will keep the U.S. economy growing First Vice President, National Director National Multi Housing Group strongly and rental demand will remain high with the national Tel: (312) 327-5417 apartment vacancy rate at 5 percent at the end of 2017. [email protected]

Prepared and edited by Jessica Hill Atlanta Office: Dallas Office: Market Analyst | Research Services Michael Fasano First Vice President/Regional Manager Tim Speck First Vice President/District Manager For information on national apartment1100 Abernathy trends, Road contact: N.E., Bldg. 500, Suite 600 5001 Spring Valley Road, Suite 100W Atlanta, GA 30328 Dallas, TX 75244 John Chang (678) 808-2700 | [email protected] First Vice President, National Director | Research Services (972) 755-5200 | [email protected] Tel: (602) 707-9700 [email protected] Fort Worth Office: Austin Office: Kyle Palmer Vice President/Regional Manager Craig Swanson Regional Manager Price: $250 300 Throckmorton Street, Suite 1500 9600 North Mopac Expressway, Suite 300 (817) 932-6100 | [email protected] © Marcus & Millichap 2018 |Austin, www.MarcusMillichap.com TX 78759 (512) 338-7800 | [email protected] Denver Office:

Baltimore Office: Robert Kaplan Vice President/Regional Manager The information contained in this report was obtained from sources deemed to be reliable. Every1225 effort 17th was Street, made Suite to obtain1800 accurate and complete information; however, no representation, warranty or guarantee,Matthew express Drane or implied,Regional may Manager be made as to the accuracy Denver,or reliability CO of 80202 the information contained herein. Note: Metro-level employment growth is calculated based on100 the E.last Pratt month St., of Suite the quarter/year.2114 Sales data includes transactions(303) valued 328-2000 at $1,000,000 | [email protected] and greater unless otherwise noted. This is not intended to be a forecast of future eventsBaltimore, and thisMD is21202 not a guaranty regarding a future event. This is not intended to provide specific investment advice and should not be considered as investment advice. Tel: (443) 703-5000 | [email protected] Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.;Detroit Experian; Office: National Association of Realtors; Moody’s Analytics; Real Capital Analytics; Real Page, Inc.; TWR/DodgeBoston Office:Pipeline; U.S. Census Bureau Steven Chaben Senior Vice President/Regional Manager Tim Thompson Regional Manager Two Towne Square, Suite 450 100 High Street, Suite 1025 Southfi eld, MI 48076 Boston, MA 02110 (248) 415-2600 | [email protected] (617) 896-7200 | [email protected] Charleston Office:

Benjamin Yelm Regional Manager Fort Lauderdale Ofﬁce: 151 Meeting Street, Suite 450 Charleston, SC 29401 Ryan Nee Vice President/Regional Manager (843) 952-2222 | [email protected] 5900 N. Andrews Avenue, Suite 100 Ft. Lauderdale, FL 33309 Charlotte Ofﬁce: (954) 245-3400 | [email protected]

Benjamin Yelm Regional Manager 201 South Tryon Street, Suite 1220 Charlotte, NC 28202 Houston Office: (704) 831-4600 | [email protected] David H. Luther First Vice President/Regional Manager Three Riverway, Suite 800 Houston, TX 77056 Chicago Area Offices: (713) 452-4200 | [email protected] Richard Matricaria Senior Vice President/Division Manager 333 West Wacker Drive, Suite 200, Chicago, IL 60606 (312) 327-5400 | [email protected] Indianapolis Office:

David Bradley Regional Manager | Chicago Downtown Josh Caruana Vice President/Regional Manager (312)) 327-5479 | [email protected] 600 E. 96th Street, Suite 500 Steven Weinstock First Vice President/Regional Manager Indianapolis, IN 46240 One Mid America Plaza Suite 200 (317) 218-5300 | [email protected] Oakbrook Terrace, IL 60181 (630) 570-2250 | [email protected] Kansas City Ofﬁce:

Cincinnati Ofﬁce: Richard Matricaria Sr. Vice President/Division Manager 7400 College Boulevard, Suite 105 Colby Haugness Regional Manager Overland Park, KS 66210 600 Vine Street, 10th Floor (816) 410-1010 | [email protected] Cincinnati, OH 45202 (513) 878-7700 | [email protected] Las Vegas Ofﬁce:

Cleveland Ofﬁce: Todd Manning Regional Manager 3800 Howard Hughes Parkway, Suite 1550 Michael Glass First Vice President/District Manager Las Vegas, NV 89169 5005 Rockside Road, Suite 1100 (702) 215-7100 | [email protected] Independence, OH 44131 (216) 264-2000 | [email protected]

Columbus Ofﬁce:

Michael Glass First Vice President/District Manager 5005 Rockside Road, Suite 1100 Independence, OH 44131 (216) 264-2000 | [email protected] Multifamily Research

Market Report Third Quarter 2017 Dallas/Fort Worth Metro Area

Strong Historical Performance Attracts Developers, Investors to Metroplex Multifamily 2017 Outlook

31,800 units Construction: Metroplex job gains, household formation outpace nation, Development rises considerably encourage robust apartment demand. Total employment has will be completed over the next two years as more grown by more than 640,000 positions since the beginning of than 60,000 units are slated for 2011. An expanding economy attracts new residents, causing completion. During 2016, build- positive net migration to double the number of individuals mov- ers delivered 18,800 units. ing to the metro each year. This has facilitated a steady pace of household formation and strong demand for housing. Many Vacancy: of these new households are funneling into apartments, and 90 basis point This year, supply additions out- absorption has outstripped supply additions by nearly 17,200 increase in vacancy pace the strongest rate of ab- rentals over the last six years. This year, deliveries will outpace sorption since 2010, and vacan- demand for the first time since 2009, but absorption reaches its cy will rise for the first time this strongest level since 2010 and keeps vacancy below 5 percent. cycle to 4.9 percent.

Absorption strong as luxury units come online. Construction Rents: during the past few years has been heavily concentrated in select 7.2% increase Vacancy remains tight despite submarkets north of downtown Dallas, where thousands of jobs in effective rents the rise, and the average effec- have been created and more are anticipated. Despite a signifi- tive rent advances to $1,102 per cant number of new units coming online in these areas, overall month in 2017. Last year, rent vacancy remains near 6 percent or below, with the exception of grew 4.7 percent. Oak Lawn/Park Cities where Class A vacancy has risen to 8.8 percent in recent quarters. Class B and C vacancy remains tight in this submarket, as well as throughout the Metroplex, with the majority of submarkets recording a rate below 4 percent in the second quarter. Investment Trends

• A bright economy attracts investors to the Metroplex, including Employment Trends Local Apartment Yield Trends a greater number of foreign investors. The increased competi- Metro United States Apartment Cap Rate 10-Year Treasury Rate tion has many buyers adjusting expectations to enter the mar- 6.0% ket by accepting lower initial returns and paying more per unit. 12% 4.5% • Private local investors continue to dominate sales activity for 9% apartment assets priced below $10 million. Properties located 3.0% in East Dallas and Uptown/Park Cities were targeted over the 6% last 12 months, and these assets typically trade for first-year 1.5% returns in the 6 percent to 7 percent span. Average Rate 3%

Year-over-Year Change • Sales of properties priced above $20 million have been con- 0% 0% centrated in North Dallas over the last year. A number of trades 13 14 15 16 17* 01 03 05 07 09 11 13 15 17* also occurred Uptown/Park Cities, Las Colinas and East Dallas, where newly constructed assets are coming online and stabi- lizing. These assets change hands at cap rates in the high-4 Completions and Absorption Pricing Trends percent to high-5 percent range. Completions Absorption $100 * Trailing 12 months through 2Q17 32 Sources: CoStar Group, Inc.; Real Capital Analytics $75 24 $50 16

Units (thousands) 8 $25

0 Average Price per Unit (000s) $0 13 14 15 16 17* 13 14 15 16 17**

Vacancy Rate Trends Metro United States 8%

Vacancy Rate 2%

0% 13 14 15 16 17*

Rent Trends Monthly Rent Y-O-Y Rent Change

$1,200 8% Year-over-Year Change

$1,050 6%

$900 4%

$750 2% Monthly Effective Rent $600 0% 13 14 15 16 17* Dallas/Fort Worth 2Q17 – 12-Month Period Employment Trends Local Apartment EMPLOYMENT: Yield Trends Apartment Cap Rate 10-Year Treasury Rate Metro United States 3.4% increase in total employment Y-O-Y 6.0% 12%• Metroplex employers created 118,200 positions over the 4.5% last year, rising from the 92,400 jobs generated one year 9% ago. Professional and business services led gains, with 3.0% 6%nearly 32,000 workers added to headcounts.

1.5% • Unemployment ticked up 10 basis points year over year Average Rate 3% to 4.1 percent in the second quarter, still below the na- Year-over-Year Change 0% 0%tional rate of 4.3 percent. 13 14 15 16 17* 01 03 05 07 09 11 13 15 17*

Completions and Absorption PricingCONSTRUCTION: Trends Completions Absorption 24,780 units completed Y-O-Y $100 32 • Deliveries in the second quarter reached 7,100 units, the $75highest quarterly level of completions since late 2009. 24 Allen/McKinney and Frisco/Prosper led deliveries, add- $50 16 ing more than 1,400 apartments each.

Units (thousands) • Apartment builders have 42,500 rentals underway in the 8 $25 Metroplex, down from the more than 52,000 under con-

0 Average Price per Unit (000s) $0struction one year ago. 13 14 15 16 17* 13 14 15 16 17**

Vacancy Rate Trends VACANCY: Metro United States 20 basis point decrease in vacancy Y-O-Y 8% • The absorption of more than 24,100 apartments over 6% the last 12 months pushed down vacancy to 4.3 percent. The rate also declined 20 basis points last year. 4% • Vacancy in Class C assets fell 130 basis points year

Vacancy Rate 2% over year to 3.0 percent in June. Class B vacancy also dropped below 4 percent during the period, while the 0% Class A rate ticked up 60 basis points to 6.3 percent. 13 14 15 16 17*

Rent Trends RENTS: Monthly Rent Y-O-Y Rent Change 5.8% increase in effective rents Y-O-Y

$1,200 8% Year-over-Year Change • The pace of rent growth remains strong, pushing up the average effective rent to $1,080 per month. Rent grew $1,050 6% 7.4 percent and 7.3 percent in the prior annual periods. $900 4% • More units were delivered in Intown Dallas over the past year than any other submarket, keeping vacancy elevated $750 2% when compared with the overall average. As a result, rent

Monthly Effective Rent declined 2.0 percent to $1,651 per month. $600 0% 13 14 15 16 17*

* Forecast Multifamily Research | Market Report

DEMOGRAPHIC HIGHLIGHTS

2Q17 MEDIAN HOUSEHOLD INCOME 2Q17 AFFORDABILITY GAP MULTIFAMILY (5+ Units) PERMITS

Metro $63,502 Renting is $623 Per Month Lower 36,085 1H 2017 U.S. Median $58,672 Average Effective Rent vs. Mortgage Payment* Compared with 1H g 28% 2014-2016

2Q17 MEDIAN HOME PRICE FIVE-YEAR HOUSEHOLD GROWTH** SINGLE-FAMILY PERMITS

Metro $249,900 317,000 or 2.3% Annual Growth 34,362 1H 2017 U.S. Median $246,000 U.S. 1.1% Annual Growth Compared with 1H g 12% 2014-2016

*Mortgage payments based on quarterly median home price with a 30-year xed-rate conventional mortgage, 90% LTV, taxes, insurance and PMI. **2017-2022  Annualized Rate

Lowest Vacancy Rates 2Q17 Bright Economy Attracts Investors to Metroplex Apartment Assets

Y-O-Y Vacancy Effective Y-O-Y % Submarket Basis Point RateEmployment TrendsRents Change • TransactionLocal activity Apartment increased Yield 3.8 Trendspercent during the Change Metro United States 12-monthApartment period Cap ending Rate in June,10-Year building Treasury onRate a 9.4 6.0% percent rise in sales in the prior year. 12% Northwest Dallas 1.3% -110 $826 3.5% • The average price advanced 13 percent over the last 4.5% four quarters9% to $93,800 per unit. During the same Ellis County 1.9% 90 $939 6.7% span, cap rates compressed approximately 50 basis 3.0% points6% to the low-6 percent area. Southern Dallas County 2.1% -180 $979 9.4% 1.5% Outlook:Average Rate 3% Sales of assets priced above $20 million will

South Fort Worth Year-over-Year Change 2.1% -370 $802 3.8% continue to rise as newly built properties come online 0% and stabilize.0% These assets often command first-year 13 14 15 16 17* 01 03 05 07 09 11 13 15 17* Southwest Dallas 2.8% -250 $813 7.4% yields in the high-4 percent to low-5 percent band.

Grand Prairie 2.9% -110 $999 8.1% Completions and Absorption Pricing Trends West Fort Worth/ Completions Absorption 2.9% -90 $916 5.4% SALES TRENDS Parker County $100

SUBMARKET TRENDS 32 Irving 3.1% -60 $953 7.8% $75 24 South Arlington/Mansfield 3.1% -20 $1,033 4.3% $50 16 Zang Triangle/

Units (thousands) 3.2% -90 $1,125 8.6% Cedars/Fair Park 8 $25

Overall Metro 0 4.3% -20 $1,080 5.8% Average Price per Unit (000s) $0 13 14 15 16 17* 13 14 15 16 17**

** Trailing 12 months through 2Q17 Vacancy Rate Trends Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics Metro United States 8%

Vacancy Rate 2%

0% 13 14 15 16 17*

Rent Trends Monthly Rent Y-O-Y Rent Change

$1,200 8% Year-over-Year Change

$1,050 6%

$900 4%

$750 2% Monthly Effective Rent $600 0% 13 14 15 16 17* Multifamily Research | Market Report

Apartment Acquisitions By WILLIAM E. HUGHES, Senior Vice President, By Buyer Type* Marcus & Millichap Capital Corporation

Other, 1% Cross-Border, 6% • Monetary policy in transition. Despite the Fed raising its benchmark short-term rate three times in seven months and Equity Fund signaling another rise before the end of the year, long-term rates & Institutions, 23% have remained stable. The yield on the 10-year U.S. Treasury bond remained in the low- to mid-2 percent range throughout Private, 64% the second quarter of 2017. The Federal Reserve wants to nor- Listed/REITs, 6% malize monetary policy and, in addition to rate hikes, will likely start paring its balance sheet. • Sound economy a balancing act for Fed. With unemploy- * Trailing 12 months through 2Q17 ment hovering in the low-4 percent range, the lowest level since 2007, the Federal Reserve will remain vigilant regarding the pos- Apartment Mortgage Originations sible rapid increase in inflation if wage growth takes off. Addi- By Lender tionally, business confidence and job openings are near all-time 100% highs. Businesses finally have the assurance to expand their footprints after years of tepid growth following the Great Re- 75% Gov't Agency cession. These conditions are allowing pent-up households to Financial/Insurance Reg'l/Local Bank form, creating new apartment demand. The Fed, however, must 50% Nat'l Bank/Int'l Bank now balance economic growth and job creation against wage CMBS growth and inflationary pressures.

25% Pvt/Other MARKETS CAPITAL • Underwriting discipline persists; ample debt capital re- Percent of Dollar Volume 0% mains. Overall, leverage on acquisition loans has continued 11 12 13 14 15 16 to reflect disciplined underwriting, with LTVs typically ranging from 65 percent to 75 percent for most apartment properties. At the end of 2016, the combination of higher rates, conser- Sources: CoStar Group, Inc.; Real Capital Analytics vative lender underwriting and fiscal policy uncertainty encouraged some investor caution that slowed deal flow, a trend that National Multi Housing Group has extended into 2017. A potential easing of regulations on financial institutions, though, could liberate additional lending Visit www.NationalMultiHousingGroup.com capacity and higher interest rates may also encourage additional lenders to participate. John Sebree First Vice President, National Director National Multi Housing Group Tel: (312) 327-5417 [email protected]

Prepared and edited by Jessica Hill Market Analyst | Research Services

For information on national apartment trends, contact: Dallas Office: Fort Worth Office: John Chang First Vice President | Research Services Tim Speck Kyle Palmer Tel: (602) 707-9700 First Vice President | District Manager Regional Manager [email protected] Tel: (972) 755-5200 Tel: (817) 932-6100 [email protected] [email protected]

Price: $250 5001 Spring Valley Road 300 Throckmorton Street Suite 100W Suite 1500 © Marcus & Millichap 2017 | www.MarcusMillichap.com Dallas, TX 75244 Fort Worth, TX 76102

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated based on the last month of the quarter/year. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted. This is not intended to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide specific investment advice and should not be considered as investment advice. Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Experian; National Association of Realtors; Moody’s Analytics; Real Capital Analytics; MPF Research; TWR/Dodge Pipeline; U.S. Census Bureau. Multifamily Research

Market Report Second Quarter 2017 Dallas/Fort Worth Metro Area

Bright Economic Outlook Encourages Owners, Lures Investors to Metroplex Multifamily 2017 Outlook

Healthy job growth spurs robust household formation in 29,100 units Construction: the Metroplex. Employment gains of nearly 3.0 percent or more will be completed Developers will top last year’s since 2012 have boosted housing demand for both single-family supply addition of 20,700 units. and multifamily dwellings in the market. Single-family permitting The largest share of completions issuance of nearly 31,500 residences far exceeds multifamily per- will occur in the Dallas area as mits pulled over the past year. Despite this, single-family housing 24,300 units are delivered. supply remains tight, pushing up home prices and keeping many would-be owners in apartments. Strong rental demand and ab- Vacancy: 90 basis point sorption across the Metroplex has encouraged apartment devel- change in vacancy Vacancy remains historically low opment. The pace of apartment completions will reach a peak at 4.9 percent this year as de- this year as builders are set to bring more units online in Dallas/ mand strengthens over the next Fort Worth than nearly every other major metro in the country. It is three quarters. Last year, vacan- surpassed only by New York City. cy tumbled 70 basis points.

Vacancy holding firm below previous long-term average, Rents: 5.5% increase encouraging healthy effective rent gains. Strong demand for in effective rents This year’s advance pushes up apartments in the metro pushed vacancy to a record low last year the average effective rent for the as deliveries outpaced every major market with the exception of Metroplex to $1,085 per month. Houston. Though additions to apartment stock will remain elevat- Last year, the average increased ed during 2017, the steady expansion of companies and creation 4.7 percent. of jobs across the Metroplex is maintaining steady demand for rentals. As a result, absorption remains healthy, keeping vacancy historically low. With vacancy staying well below the previous nine-year average, effective rent growth remains strong throughout much of the market. Investment Trends

• Private, local buyers continue to target the Metroplex, chas- ing deals priced between $1 million and $10 million. First-year Employment Trends Local Apartment Yield Trends returns for these properties average from the mid-6 to low-7 Metro United States Apartment Cap Rate 10-Year Treasury Rate percent range. Those assets in need of minor renovations to reduce vacancy or push up rents are in highest demand. 8% 12% • Healthy property operations and a bright economic outlook 6% 9% are attracting and keeping out-of-state buyers active. These groups are focused on Class B-plus/A stabilized deals that re- 4% 6% quire less hands-on management and typically generate higher 2% 3% returns with better properties than their home states. Average Rate

Year-over-Year Change • While investors primarily target the Metroplex for deals, com- 0% 0% petition for the limited number of apartment properties avail- 13 14 15 16 17* 00 02 04 06 08 10 12 14 16 able for sale is intense. This is encouraging some local buyers to expand their search into nearby secondary and tertiary markets. Cap rates in these locations are typically 50 to 75 basis Completions and Absorption Pricing Trends points higher than the Metroplex average. Completions Absorption Sources: CoStar Group, Inc.; Real Capital Analytics $100 32 $75 24

$50 16

Units (thousands) 8 $25

0 Average Price per Unit (000s) $0 13 14 15 16 17* 12 13 14 15 16

Vacancy Rate Trends Metro United States 8%

Vacancy Rate 2%

0% 13 14 15 16 17*

Rent Trends Monthly Rent Y-O-Y Rent Change

$1,200 8% Year-over-Year Change

$1,000 6%

$800 4%

$600 2% Monthly Effective Rent $400 0% 13 14 15 16 17* Dallas/Fort Worth

Employment Trends Local Apartment EMPLOYMENT: Yield Trends Apartment Cap Rate 10-Year Treasury Rate Metro United States 3.7% increase in total employment Y-O-Y 8% 12% • Metroplex employers created 24,300 positions during 6% 9%the first three months of 2017, bringing the annual total to 127,800 positions. Gains were led by the primary of- 4% 6%fice-using sectors during the last 12 months.

2% •3% Unemployment in the metro increased 30 basis points Average Rate over the last four quarters to 3.9 percent, remaining near Year-over-Year Change 0% 0%one of its lowest levels since early 2001. 13 14 15 16 17* 00 02 04 06 08 10 12 14 16

Completions and Absorption PricingCONSTRUCTION: Trends Completions Absorption 23,500 units completed Y-O-Y $100 32 • Builders completed 23,500 apartments over the last $75four quarters. Nearly 50,600 units are under construc- 24 tion; completions are slated through 2019. $50 16 • In addition to Intown Dallas and Fort Worth, builders are

Units (thousands) 8 $25active in growing suburbs of Dallas. More than 19,000 units are underway in Allen/McKinney, Frisco/Prosper,

0 Average Price per Unit (000s) $0Richardson, West Plano and Northeast Dallas. 13 14 15 16 17* 12 13 14 15 16

Vacancy Rate Trends VACANCY: Metro United States 20 basis point decrease in vacancy Y-O-Y 8% • Though first quarter absorption was sluggish compared 6% with previous quarters, more than 22,600 units were filled over the last 12 months, resulting in a drop in the 4% vacancy rate to 4.9 percent.

Vacancy Rate 2% • Class C apartment vacancy is tightest, with the average reaching 3.5 percent in the first quarter. Class B assets 0% recorded a 4.5 percent vacancy rate during the period. 13 14 15 16 17*

Rent Trends RENTS: Monthly Rent Y-O-Y Rent Change 5.8% increase in effective rents Y-O-Y

$1,200 8% Year-over-Year Change • Effective rent advanced above $1,000 per month during the last year, and an annual increase of 5.8 percent in the $1,000 6% first quarter pushed up the average to $1,056 per month. $800 4% • Class B and C properties are registering the strongest pace of rent gains. Over the last year, Class B rent ticked $600 2% up 6.9 percent to $1,003 per month, while Class C prop-

Monthly Effective Rent erties recorded a 7.4 percent surge to $810 per month. $400 0% 13 14 15 16 17*

* Forecast Multifamily Research | Market Report

MR $$

R R M M ercet of total popluatio 728,000 Metro $62,135 Metro 21% U.S. Median $58,218 U.S. 21%

R R 39% Ret 317,000 R R R Metro 32% 61% U.S. Average 29%

Lowest Vacancy Rates 1Q17 Demand for Local Apartment Assets Intensifies; Increased Competition Lifts Prices

Y-O-Y Vacancy Effective Y-O-Y % Submarket EmploymentBasis Point Trends Local Apartment Yield Trends Rate Rents Change • Apartment sales increased 18 percent during the past Change Metro United States 12 months.Apartment A surge Cap Rateoccurred 10-Yearin the fourth Treasury quarter Rate as 8% investors12% took advantage of favorable lending terms. Ellis County 2.0% 10 $899 3.7% • Increased demand for area assets supported a 14 6% 9% percent rise in the average price to $88,800 per unit Northwest Dallas 2.3% -80 $793 2.1% 4% during6% the past year. Outlook: Limited listings, rising interest rates and uncer- Southern Dallas County2% 2.3% -280 $964 8.9% 3% taintyAverage Rate over changes to federal tax laws could weigh on

Year-over-Year Change sales in the Metroplex this year, though investors will re- Burleson/Johnson County0% 2.4% -130 $879 8.0% 0% main optimistic given the healthy economy. 13 14 15 16 17* 00 02 04 06 08 10 12 14 16 South Fort Worth 2.7% -290 $786 3.4%

Garland Completions3.2% -10 and Absorption$916 8.3% Pricing Trends Completions Absorption Mesquite 3.3% -30 $911 7.1% SALES TRENDS $100 32 SUBMARKET TRENDS Haltom City/Meacham 3.3% -30 $836 5.0% $75 24 Zang Triangle/Cedars/ 3.4% -140 $1,072 1.9% Fair Park $50 16

Southwest DallasUnits (thousands) 3.5% -300 $799 7.5% 8 $25

Overall Metro 0 4.9% -20 $1,056 5.8% Average Price per Unit (000s) $0 13 14 15 16 17* 12 13 14 15 16

Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics Vacancy Rate Trends Metro United States 8%

Vacancy Rate 2%

0% 13 14 15 16 17*

Rent Trends Monthly Rent Y-O-Y Rent Change

$1,200 8% Year-over-Year Change

$1,000 6%

$800 4%

$600 2% Monthly Effective Rent $400 0% 13 14 15 16 17* Multifamily Research | Market Report

Apartment Acquisitions By WILLIAM E. HUGHES, Senior Vice President, By Buyer Type Marcus & Millichap Capital Corporation

Other, 1% Cross-Border, 9% • Monetary policy actions set to accelerate. The 10-year U.S. Treasury rate held below 2 percent until a surge following Equity Fund the election raised the rate above that threshold and poten- & Institutions, tially established a new and higher range for the benchmark. 29% Moderate economic growth and muted inflation throughout the growth cycle allowed the Federal Reserve to hold off on rate hikes, which has supported additional cap rate compres- Private, 56% sion. However, the Trump administration’s fiscal plans built on Listed/REITs, 5% higher spending and reduced taxes could accelerate economic growth. Intensifying inflationary pressure under that scenario could encourage the Federal Reserve to quicken the pace of its Apartment Mortgage Originations efforts to raise its short-term benchmark. By Lender • Inflation on the upswing, but for the right reasons. Though 100% inflationary pressures are beginning to grow, increases are oc- curring from a historically low base. Further, inflationary pressure 75% Gov't Agency has arisen from wage growth and stabilization of oil prices, both Financial/Insurance Reg'l/Local Bank positives for the overall economy. Higher wages will encourage 50% Nat'l Bank/Int'l Bank spending while inflationary pressure on prices will raise overall CMBS consumption, the primary driver of economic growth. 25% Pvt/Other

CAPITAL MARKETS CAPITAL • Underwriting discipline persists; ample debt capital re- Percent of Dollar Volume 0% mains. Multifamily originations increased in 2016, with agency 11 12 13 14 15 16 lending dominating the overall marketplace. The government agencies underwrote about $105 billion in loans last year and remain a primary source of multifamily originations in 2017 due Sources: CoStar Group, Inc.; Real Capital Analytics to their efficient execution. Acquisition debt remained plentiful throughout 2016, but borrowers’ rates rose late in the year in National Multi Housing Group conjunction with higher Treasury yields and loan-to-value ratios compressed. The combination of higher rates and tighter lend- Visit www.NationalMultiHousingGroup.com er underwriting created some investor caution that could carry over into 2017. A potential easing of Dodd-Frank regulations on John Sebree First Vice President, National Director financial institutions could create additional lending capacity for National Multi Housing Group other capital sources. Tel: (312) 327-5417 [email protected]

Prepared and edited by Jessica Hill Dallas Office: Fort Worth Office: Market Analyst | Research Services Tim Speck Kyle Palmer For information on national apartment trends, contact: First Vice President | District Manager Regional Manager John Chang Tel: (972) 755-5200 Tel: (817) 932-6100 First Vice President | Research Services [email protected] [email protected] Tel: (602) 687-6700 [email protected] 5001 Spring Valley Road 300 Throckmorton Street Suite 100W Suite 1500 Dallas, Texas 75244 Fort Worth, Texas 76102 Price: $250

Market Report Fourth Quarter 2016 Dallas/Fort Worth Metro Area

Investors Target Metroplex for Healthy Economy, Value-Add Opportunities

Diversified economy drives demand is driving demand for office tenants, stirring accelerating deal flow. Out-of-state inves- for apartments across all classes. The the need for apartments nearby. Young pro- tors are targeting the North Texas region Metroplex has consistently ranked at the top fessionals taking positions with expanding for stabilized assets, with cap rates for for job creation in the nation over the past companies will support healthy demand for Class B properties averaging in the high- few years, and numerous corporate reloca- the thousands of luxury units coming online, 5 percent to low-6 percent range. Class tions and expansions will drive healthy eco- while hiring in retail trade, leisure and hospi- C assets in favorable locations and good nomic growth in the months to come. Sev- tality, and other service-related industries will conditions are trading approximately 50 eral large companies are preparing to add generate strong absorption trends in Class basis points higher. Local investors re- thousands of workers to area payrolls in the B/C apartments. Though some areas are main focused on properties with some val- next few years as they open new campus- expected to suffer supply-side upward pres- ue-add component, and complexes with es. As a result, apartment developers have sure on vacancy, the effect will be localized cash flow that need some minor enhance- filled the construction pipeline with numer- to specific submarkets and overall market ments to push rents or reduce vacancy ous projects to meet the needs of a grow- vacancy will remain historically low this year. are in high demand. Rising competition for ing workforce and population base. Much of assets inside the Metroplex are encourag- this development is concentrated near the Healthy economy, property operations ing some investors to seek opportunities areas of Plano, Frisco, Richardson and other encourage investment in the Metroplex. in nearby secondary and tertiary markets north Dallas suburbs, where large corporate A diverse and growing economy is attracting that offer initial yields an average of 50 to offices are rising. A resurgence at Solana investors to the Metroplex, increasing buyer 75 basis points higher. Business Park in Westlake and Southlake competition for area apartment assets and

2016 Multifamily Forecast

3.8% increase Employment: in total employment Metroplex employers are on track to add 130,500 workers during 2016, expanding headcounts 3.8 percent from the end of 2015 and leading national growth. Payrolls expanded by 126,800 jobs last year.

22,000 units Construction: will be completed Completions have been mounting during the past several years, and the delivery of 22,000 units during 2016 will be the highest annual total since 2000. Last year, builders brought online 16,400 apartments.

50 basis point Vacancy: decrease in vacancy Overall housing demand will outweigh additions to supply, and the vacancy rate will reach 4.2 percent by year-end, down 50 basis points from 2015. Last year, the vacancy rate declined 50 basis points.

7.4% increase Rents: in effective rents Tight vacancy will support an increase in the average effective rent of 7.4 percent in 2016 to $1,055 per month. During 2015, the average rent climbed 6.9 percent. Multifamily Research | Market Report

Economy Employment Trends • Employers generatedVacancy 130,800 Rate Trends positions during the year ending in the third Metro United States quarter, a growthMetro rate of 3.8 Unitedpercent. States In the prior year, headcounts also ex- 6.0% panded8% 3.8 percent with the creation of 123,700 jobs.

4.5% • Job gains6% have been widespread during the last 12 months, with the trade, transportation and utilities sector leading additions. The sector generated 3.0% 37,7004% positions over the year, with the professional and business services segment creating nearly 28,500 jobs during the same span.

1.5% Vacancy Rate 2% • The unemployment rate contracted 20 basis points year over year to 3.8 Year-over-Year Change 0% percent0% in September. 12 13 14 15 16* 12 13 14 15 16* Outlook: Employment additions will lead the nation this year, rising 3.8 percent in 2016 as 130,500 workers are added to payrolls.

Housing and Demographics • Existing single-family home sales declined 9 percent over the last 12 months, though not due to a lack of would-be buyers. The month’s supply of inventory Home Price Trends has receded below threeRent months,Trends remaining well below the national level and Metro United States the six-monthMonthly threshold Rent consideredY-O-Y Rent equilibrium. Change 12% • Home price appreciation in the Metroplex is robust, with the median sin-

$1,100 8% Year-over-Year Change gle-family home price advancing 9 percent year over year to $223,700 in the 9% third quarter.$925 6%

6% • With $750home prices rising significantly faster than4% apartment rents over the past few years, the gap between owning and renting is widening further. In Sep- 3% tember,$575 the monthly payment for a median-priced2% single-family residence,

0% assumingMonthly Effective Rent 10 percent down and payments for taxes, insurance and PMI, $400 0% reached nearly $1,500, nearly $440 more than the average apartment rent Median Home Price (Y-O-Y Change) 12 13 14 15 16** 12 13 14 15 16* in the metro.

Outlook: A shortage of home listings across the Metroplex will filter housing demand into apartments in the months to come. Homebuilders in the region are slow to aid in the housing recovery, with permitting activity increasing 6.7 percent during the last year as contractors pulled an annualized 31,000 permits, also contributing to strong renter household formation.

Construction Trends Sales Trends Completions Multifamily Permits Construction • Deliveries$100 in the third quarter reached their highest calendar quarter total 32 since 2009 as nearly 6,000 apartments were added to stock. Approximately 18,300$75 apartments were delivered over the last year. 24 • Nearly 15,200 units completed during the last year were in the Dallas area. $50 16 Builders remain focused here, and 43,000 apartments are underway and scheduled for completion through 2018. Areas near the core, including Up- 8 $25 town Dallas and the suburban communities of Frisco McKinney and Allen, Number of Units (000s)

0 areAverage Price per Unit (000s) receiving$0 the bulk of builder interest. Nearly 17,500 rentals are under 12 13 14 15 16* construction12 in these13 areas. 14 15 16** • Vacancy has compressed below 4 percent across the Fort Worth area as limited new construction fills existing units. Builders are beginning to shift some attention to Fort Worth, and nearly 7,600 apartments are underway. * Forecast ** Trailing 12 months through 2Q Outlook: Completions have been mounting during the past several years, and the delivery of 22,000 units during 2016 will be the highest annual total since 2000. Multifamily Research | Market Report

Vacancy • The absorption of more than 10,000 unitsEmployment in the third Trends quarter pushed vacancy Vacancy Rate Trends to a record low of 4.0 percent. On an annualMetro basis, Unitedvacancy States retreated 50 basis Metro United States points as net absorption totaled6.0% 19,100 apartments. 8% • Vacancy is tightest for Class B/C properties. Class B apartment vacancy de- 6% clined 30 basis points during4.5% the last 12 months to 3.6 percent, while the rate for Class C units plummeted 220 basis points to 3.7 percent. Class C build- 3.0% 4% ings, especially in the core and North Dallas, realized sharp declines in vacancy over the year as residents sought apartments in employment and cultural dis- 1.5% Vacancy Rate 2% tricts at more affordable rents than are sometimes half the Class A level. Year-over-Year Change • Few areas of the Metroplex 0%report vacancy above 5 percent. Southern and 0% northeastern areas of the Dallas 12CBD, as well13 as Oak14 Lawn, and15 near the16* Med- 12 13 14 15 16* ical District all recorded vacancy between 5.7 percent and 7.9 percent during the third quarter.

Outlook: Overall housing demand will outweigh supply additions this year, and the vacancy rate will reach 4.2 percent, down 50 basis points from 2015.

Rents Home Price Trends Rent Trends • The addition of thousands of luxury unitsMetro to inventoryUnited during States the last 12 months, Monthly Rent Y-O-Y Rent Change as well as historically tight 12%vacancy, encouraged healthy rent gains over the

span. In September, the average effective rent reached $1,047 per month, up $1,100 8% Year-over-Year Change 7.5 percent from one year ago9% and one of the strongest paces of expansion in the last 15 years. $925 6%

• Average rent growth was strongest6% for Class C properties, which registered $750 4% an 8.3 percent year-over-year increase to $783 per month. Class B complex- 3% es registered an increase of 6.7 percent, and Class A buildings posted a 5.3 $575 2%

percent gain. 0% Monthly Effective Rent $400 0%

• Rent growth in the area justMedian Home Price (Y-O-Y Change) north12 of Downtown13 Dallas14 rose above15 11 16**percent 12 13 14 15 16* during the last four quarters, driven by healthy gains at Class B and Class C complexes in the area.

Outlook: The average effective rent will rise 7.4 percent during 2016 to $1,055 per month. Sales Trends • Healthy economic growth is supportingConstruction robust investment Trends activity, and transac- Sales Trends tion volume increased 7 percent duringCompletions the last 12 months.Multifamily Rising Permits investor interest is keeping buyer competition intense, encouraging a 20 percent advance $100 in the average price per unit over32 the past year to $86,000. $75 • Properties located in the north24 Dallas area, including the areas of Frisco, Allen, Plano, Richardson and McKinney, are in high demand, often commanding pre- $50 mium pricing and yields. The16 Arlington area and other suburbs of Northwest Fort Worth are also garnering healthy investor interest, with first-year returns $25 averaging in the high-5 percent8 to mid-6 percent range. Number of Units (000s)

• Cap rates compressed 30 basis0 points over the last four quarters to the mid- Average Price per Unit (000s) $0 to high-6 percent area in September.12 Class13 A properties14 can15 command16* initial 12 13 14 15 16** yields below 5 percent, depending on asset location and amenities.

Outlook: Low interest rates and a range of debt financing options will drive investment activity through the remainder of the year. An increase in interest rates * Forecast could result in less aggressive offers as the cost of capital climbs and underwriting ** Trailing 12 months through 2Q Sources: CoStar Group, Inc.; Real Capital Analytics tightens. Multifamily Research | Market Report

Capital Markets National Multi Housing Group By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation

Visit www.NationalMultiHousingGroup.com • The initial reading of third quarter GDP of 2.9 percent and consistent growth in employment are fanning expectations that the Federal Reserve will raise its John Sebree benchmark short-term lending rate at its December meeting. Other economic First Vice President | National Director data showing steady improvement in the housing market and the stabilization of National Multi Housing Group Tel: (312) 327-5417 oil prices around $50 per barrel offer signals that the U.S. economy is growing at [email protected] a sustainable pace. • Increasing rental housing demand underpinned a decline in the U.S. apartment vacancy rate of 60 basis points to 3.5 percent year to date through the third quarter, the lowest level this cycle. Apartment builders have responded to grow- Dallas Office: ing demand and favorable demographic trends by ramping up construction. Completions will rise to 320,000 units this year and peak in 2017. Tim Speck First Vice President | District Manager • Capital markets remain highly competitive, offering an assortment of fixed-rate Tel: (972) 755-5200 products available through commercial banks, life-insurance companies, CMBS [email protected] and agency lenders. Fannie Mae and Freddie Mac are underwriting loans of 10 5001 Spring Valley Road years at maximum leverage of 80 percent. Rates will typically reside in the high-3 Suite 100W to low-4 percent range, depending on underwriting criteria. Portfolio lenders will Dallas, Texas 75244 also price in this vicinity but will typically require loan-to-value ratios in the 65 to 75 percent band. Floating-rate bridge loans and financing for asset repositioning are typically underwritten with LTVs 70 to 75 percent of stabilized value (80 to 85 Fort Worth Office: percent of cost) and price 300 basis points above Libor for recourse deals and extending to 450 basis points above Libor for non-recourse transactions. Kyle Palmer Regional Manager Tel: (817) 932-6100 [email protected] Local Highlights 300 Throckmorton Street Suite 1500 • The North Texas region grew by 146,100 individuals during the year ending in Fort Worth, Texas 76102 the third quarter, an increase of 2 percent. Net migration to the metro jumped 6.6 percent as the metro gained 22,000 people. A healthy pace of population growth and stable migration trends supported the creation of approximately 51,900 households over the annual span. • While the bulk of deliveries are concentrated in the market-rate segment, afford- Prepared and edited by able, seniors and student housing projects also account for a share of devel- Jessica Hill opment. Approximately 1,375 affordable housing units will be delivered during Market Analyst | Research Services 2016, with another 790 seniors housing and 170 student housing rentals also coming online this year. For information on national apartment trends, contact: John Chang • Parker Hannifin Corp. is seeking to consolidate its two Fort Worth locations in First Vice President | Research Services a single space in north Fort Worth. The company has proposed a $25.5 million Tel: (602) 687-6700 project that would renovate a former 150,000-square-foot call center into man- [email protected] ufacturing and office space. No positions would be cut as a result of the move, and the company will retain its 525 jobs in the metro.

Price: $250

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated based on the last month of the quarter/year. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted. Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Moody’s Analytics; National Association of Realtors; Real Capital Analytics; MPF Research; TWR/Dodge Pipeline; U.S. Census Bureau. Multifamily Research

Market Report Third Quarter 2016 Dallas/Fort Worth Metro Area

Strong Hiring Boosts Rental Demand, Amplifying Construction

Healthy demographics and corporate forecast to receive several high-rise com- to 200 basis points higher than several expansions continue benefiting apart- plexes; each has a slate of amenities that will gateway cities. Out-of-state buyer interest ment operations in the Dallas/Fort Worth appeal to young professionals. Additionally, is also picking up steam as investors from Metroplex. Strong job growth, fostered by some older warehouse and office buildings California, New York and Illinois flock to the companies such as Charles Schwab and are being renovated into multifamily housing metro seeking higher returns than available TD-Ameritrade expanding their presence in developments in Downtown Dallas as the in their home markets. Limited value-add the area, is driving a migration increase and area experiences a resurgence. The rise in deals are driving investors to scour the boosting the number of households in the construction this year will tick up vacancy market for larger well-located properties or metro. These factors have underpinned the slightly as new units begin to lease; howev- stabilized assets for cash flow. In particu- need for housing, placing downward pres- er, as the rate remains relatively tight, strong lar, multifamily assets in Arlington and East sure on vacancy over the previous four quar- tenant demand will drive up the average ef- Dallas, where cap rates trade between the ters, and pushed the average effective rent fective rent. low-6 to high-7 percent range, are in high above $1,000 per month, setting a record demand. Metrowide, the growing interest high. As demand has outpaced past sup- Attractive cap rates and well-located in apartments pushed cap rates down ply additions, builders are ramping up con- assets pique out-of-state buyer inter- into the mid-6 percent span, while assets struction this year with deliveries significantly est. Investors are motivated to inject capital in some Fort Worth submarkets traded exceeding the previous five-year average. In into the Metroplex as market fundamentals about 150 basis points higher. particular, the Intown Dallas submarket is remain strong and first-year returns are up

2016 Multifamily Forecast

3.0% increase Employment: in total employment Metroplex employers will increase payrolls by 3.0 percent this year with the creation of 105,000 jobs. In 2015, approximately 126,800 positions were added with hiring led by the trade, transportation and utilities sector.

24,700 units Construction: will be completed After completing 16,400 apartments last year, builders are on track to deliver 24,700 rentals in 2016, the largest number of completions since 2000. The Intown Dallas, the Colony/Far North Carrollton and Richardson submarkets will each receive a significant number of deliveries.

20 basis point Vacancy: increase in vacancy The surge in apartment completions this year will tick up vacancy 20 basis points to 4.9 percent as new units enter a period of lease-up. In the prior 12-month period, the vacancy rate fell 50 basis points on net absorption of nearly 17,000 units.

7.1% increase Rents: in effective rents As vacancy remains relatively tight, the average effective rent will surge 7.1 percent in 2016 to $1,052 per month. Last year, average rent edged up 6.9 percent with the North Oak Cliff/West Dallas submarket registering the largest growth of 16.0 percent. Multifamily Research | Market Report

Economy Employment Trends • In the first half Vacancyof the year Rate Metroplex Trends employers created 38,200 positions, con- Metro United States tributing to the 108,700Metro jobs createdUnited Statesduring the previous 12-month period. In 6.0% the prior8% annual period, more than 123,000 jobs were added to the metro. • Hiring during the last four quarters was led by the trade, transportation and 4.5% 6% utilities sector with the creation of more than 34,400 positions as demand 3.0% for wholesale4% employment increased significantly. The leisure and hospitality sector also fared well with the addition of 20,000 jobs.

1.5% Vacancy Rate 2% • The unemployment rate in the Metroplex fell 30 basis points during the year Year-over-Year Change 0% to 3.70% percent ending in June, the lowest rate since 2001. The rate plunged 12 13 14 15 16* 100 basis12 points in13 the previous14 yearlong15 period.16* Outlook: Employers will increase hiring by 3.0 percent this year with the addition of 105,000 jobs to the workforce. In 2015, 126,800 positions were created. Housing and Demographics • The population has risen 2.0 percent during the last four quarters ending at midyear with 144,600 individuals added to the area. During this same Home Price Trends Rent Trends time, the number of households increased by 61,000, a 2.4 percent advance. Metro United States Monthly Rent Y-O-Y Rent Change These increases should bode well for apartment operators. 12% • The$1,100 median home price grew 6.3 percent in 8%the Year-over-Yearlast Change 12 months to $220,000 9% while$975 home sales climbed 3.1 percent from6% the previous year. In the same yearlong period, the median household income inched up slightly to $61,000 6% annually.$850 4%

3% • Assuming$725 10 percent down and payments2% for taxes and insurance, the monthly mortgage payment for a median-priced single-family home in the 0% Monthly Effective Rent second$600 quarter of 2016 was $153 more than0% the average apartment rent of

Median Home Price (Y-O-Y Change) 12 13 14 15 16** $1,021 per12 month.13 However,14 the15 payment16* is about $200 less than the average effective rent for a Class A unit.

Outlook: The high cost of homeownership, particularly in the urban core and near employment centers, and the convenience of rentals will drive demand for apartments in the Metroplex.

Construction Trends ConstructionSales Trends Completions Multifamily Permits • In the previous 12-month period, builders constructed nearly 17,200 rentals. The $100bulk of deliveries were located in the Intown Dallas, Frisco/Prosper and 32 North Fort Worth/Keller submarkets. In the prior year, 14,300 units were added to$75 inventory. 24 • Nearly 51,000 rentals are under construction throughout the Metroplex with $50 16 completion dates through 2018. Approximately 90 percent of these deliveries will be market-rate units. 8 $25 • One of the largest projects under development and forecast for completion Number of Units (000s)

0 thisAverage Price per Unit (000s) year$0 is Lot at Cityline in the Richardson submarket. The 530-unit mid-rise 12 13 14 15 16* apartment structure12 13 is located14 on State15 Street16** and designed to have a live- play-work lifestyle with amenities that include a business center, resort-style swimming pool, pet park and wellness center.

* Forecast Outlook: After completing 16,400 units in 2015, builders are on track to deliver ** Trailing 12 months through 2Q 24,700 apartments this year. A significant number of completions will be located in the Intown Dallas, Richardson and The Colony/Far North Carrollton submarkets. Multifamily Research | Market Report

Vacancy • Metrowide, the average vacancy rate Employmentfell 20 basis points Trends during the previous Vacancy Rate Trends 12 months ending in June to 4.5 percent. MetroIn the prior year,United the States rate declined 70 Metro United States basis points as net absorption6.0% outpaced the number of completions. 8% • Limited deliveries and healthy tenant demand dropped vacancy in the South- east Dallas submarket 2504.5% basis points during the last four quarters to 5.8 6% percent at midyear. Here, the average effective rent jumped 5.7 percent to 4% $742 per month. 3.0%

• Several submarkets registered1.5% vacancy at or below 3 percent in the second Vacancy Rate 2% quarter. This includes the Ellis County, Garland, Grapevine/Southlake, Mes- quite and Northwest DallasYear-over-Year Change 0% areas. Vacancy in Ellis County was the tightest 0% marketwide at 1.0 percent. 12 13 14 15 16* 12 13 14 15 16*

Outlook: As deliveries reach a cycle high in 2016, the vacancy rate will tick up 20 basis points to 4.9 percent. Last year, the rate fell 50 basis points. Rents • The average effective rent jumped 7.4 percent during the last four quarters to $1,021 per month, exceeding $1,000 Homeper month Price for Trends the first time. In the prior Rent Trends annual period, effective rent edged up 6.9 percent.Metro United States Monthly Rent Y-O-Y Rent Change • The Dallas and Fort Worth areas12% each registered strong rent increases during the last 12-month period. In Dallas, the average effective rent moved up 7.4 $1,100 8% Year-over-Year Change percent to $1,055 per month9% while apartments in Fort Worth rented about $975 6% $130 less per month after rising 7.3 percent from the prior year. 6% • Rent was highest in the Intown Dallas and Oak Lawn/Park Cities submarket at $850 4%

$1,684 per month and $1,5733% per month, respectively. More affordable rentals could be found in the Southwest Dallas, Southeast Dallas, South Fort Worth, $725 2%

Northwest Dallas and East Fort0% Worth submarkets averaging between $740 to Monthly Effective Rent $600 0% $800 per month. Median Home Price (Y-O-Y Change) 12 13 14 15 16** 12 13 14 15 16* Outlook: After a 6.9 percent increase in rent last year, the average effective rent will jump 7.1 percent to $1,052 per month in 2016. Sales Trends • Investor interest is picking up in the Metroplex as transaction velocity has jumped 12 percent during the year ending in June, with a nearly 25 percent increase in the number of out-of-stateConstruction buyers. A significant Trends number of these Sales Trends transactions were located within EastCompletions Dallas. In the priorMultifamily annual Permits period, sales moved up 8 percent. $100 • The average price climbed 1732 percent over the last four quarters to $84,300 per door ending at midyear. Newer, well-located properties sold upward of $75 24 $160,000 per unit, while several assets in the areas of Oak Cliff and Southeast $50 Dallas traded in the $30,000 range16 per apartment. • Strong investor demand pushed the average first-year return down 40 ba- 8 $25 sis points to the mid-6 percent range. Multifamily assets in Dallas submarkets Number of Units (000s)

traded with cap rates in the low-50 to high-6 percent range, while properties in Average Price per Unit (000s) $0 Fort Worth submarkets traded up to12 100 basis13 points14 higher.15 16* 12 13 14 15 16**

Outlook: Healthy market fundamentals will continue to motivate buyers to inject capital into the Metroplex. Properties in eastern Dallas and Arlington in particular will draw investor interest. * Forecast ** Trailing 12 months through 2Q Sources: CoStar Group, Inc.; Real Capital Analytics Multifamily Research | Market Report

Capital Markets National Multi Housing Group By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation

Visit www.NationalMultiHousingGroup.com • Global capital markets have remained stable over the past few weeks, even as Brexit and the continued devaluation of the Chinese yuan have induced bouts John Sebree of volatility into stock and bond markets. Meanwhile, U.S. economic data has First Vice President, National Director proved resilient, with increases in retail sales and steady hiring supporting a mea- National Multi Housing Group Tel: (312) 327-5417 sured pace of growth. Additionally, higher bond prices have lowered prospective [email protected] yields, boosting the appeal of commercial real estate. • As the homeownership rate continues to plumb new lows, investor interest in the multifamily sector remains upbeat. The U.S. vacancy rate reached 4.2 percent by the end of the first quarter, the lowest rate of the current cycle. As a result, Dallas Office: builders have ramped up the planning pipeline, with completions forecast to rise to 285,000 units, the highest level in more than 20 years. However, new supply is Tim Speck heavily concentrated in a few large metros, reducing the national impact. First Vice President, District Manager Tel: (972) 755-5200 • Capital markets remain highly competitive, with a broad assortment of fixed-rate [email protected] products available through commercial banks, life-insurance companies, CMBS 5001 Spring Valley Road and agency lenders. Fannie Mae and Freddie Mac are underwriting loans of 10 Suite 100W years at maximum leverage of 80 percent. Rates will typically reside in the high-3 Dallas, Texas 75244 to low-4 percent range, depending on underwriting criteria. Portfolio lenders will also price in this vicinity but will typically require loan-to-value ratios closer to 65 to 75 percent. Floating bridge loans and financing for repositionings are typical- Fort Worth Office: ly underwritten with LTVs above 80 percent, while pricing at 300 basis points above Libor for recourse deals and extending to 450 basis points above Libor for Kyle Palmer Regional Manager non-recourse transactions. Tel: (817) 932-6100 [email protected]

300 Throckmorton Street Suite 1500 Local Highlights Fort Worth, Texas 76102 • Charles Schwab is planning to open a new 500,000-square-foot regional office in the Westlake area. The building will be part of a mixed-use development and the company hopes to bring approximately 1,500 positions to the region. Ad- ditionally, TD Ameritrade is constructing a 78-acre office complex in Southlake, bringing in additional jobs. These hirings will draw in young professionals to the area and benefit apartment operators. Prepared and edited by Catherine Zelkowski • Downtown Dallas is experiencing a resurgence with many apartments under Research Associate | Research Services construction and several older buildings being redeveloped. This includes the former Butler Brothers Building warehouse near Dallas City Hall. The development For information on national apartment trends, contact: will contain 238 apartments and is expected to open in October. The project will John Chang include three restaurants, an art studio, cinema and karaoke room, making the First Vice President | Research Services complex attractive to those seeking a live-play-work lifestyle. Tel: (602) 687-6700 [email protected] • Construction has begun on a 76-acre mixed-use development in McKinney, a rapidly growing community located northwest of central Dallas. The project, named The Village at McKinney, will be located off Highway 75 and is forecast for delivery in 2018. The center will contain apartments, retail, office and hotel space. This project will serve as a catalyst for additional development in the area. Price: $250 • Apartment development in Fort Worth continues to rise year over year as several mid-rise buildings are working their way through the pipeline. This includes the © Marcus & Millichap 2016 | www.MarcusMillichap.com 327-unit Oleander Apartments that will be located within the Medical District. The complex is expected to open during the summer of 2017 and provide housing options to those working within the district.

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated based on the last month of the quarter/year. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted. Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Moody’s Analytics; National Association of Realtors; Real Capital Analytics; MPF Research; TWR/Dodge Pipeline; U.S. Census Bureau. Multifamily Research

Market Report First Quarter 2016 Dallas/Fort Worth Metro Area

Apartment Demand Strengthens as Companies Expand in the Metroplex

Steady hiring supports apartment de- near newly developed or under construction tions, and this trend is expected to contin- mand as construction rises. Corporate corporate campuses, including Legacy West ue in the months to come. Rent growth has expansions in the Dallas/Fort Worth Metrop- and CityLine. Though the delivery of these been stronger over the past two years, ris- lex are fueling demand for area apartments, units could cause some softening in select ar- ing at historically high levels, boosting NOIs keeping vacancy tight this year as a record eas, a slowdown in the construction pipeline and increasing property values. Recent number of apartments are delivered. JPMor- next year will help stabilize operations again. price appreciation will increasingly encour- gan Chase, McKesson Corp. and Pegasus age property owners to compress holding Foods have recently announced expansion Investor demand strong; limited avail- periods. Owners choosing to divest now plans, joining a long list of widely recognized ability restrains sales. Demand for apart- will be met with strong investor interest as companies growing or relocating to the re- ment assets in the Metroplex has strength- the pool of private, high-net-worth buyers gion. A friendly business environment, skilled ened, and sales activity has been held back has grown considerably. Institutions and labor pool and an attractive place to live are only by the limited number of available REITs are also increasing activity, targeting drawing these companies from across the properties. Capital from all over the world is high-quality assets trading at initial yields country. The thousands of jobs created by moving into the North Texas region, lured by starting near 4 percent. Deliveries will reach these expansions are spurring strong de- a bright economic outlook and strong de- a 15-year high, building on the previous mand for rental housing, especially among mographic trends. Out-of-state investors, years elevated activity. As these properties young professionals. Apartment developers including international investors, accounted are brought to market and stabilized, in- are meeting these needs, bringing thousands for one-third of sales transactions last year, vestor demand for newly developed prop- of units online over the next several quarters targeting a wide range of quality and loca- erties will be met.

2016 Multifamily Forecast

2.0% increase Employment: in total employment Job gains are expected slow in 2016 as companies create 70,000 positions in the Metroplex, an annual increase of 2.0 percent. Though a slip from last year’s gain of 126,800 jobs, or 3.8 percent advance, the region should continue to grow at a faster pace than the national average.

23,000 units Construction: will be completed After completing 18,500 units in the Metroplex last year, builders are set to bring 23,000 apartments online by year end 2016, expanding stock nearly 3 percent.

20 basis point Vacancy: increase in vacancy A record number of units are scheduled for delivery this year, and demand will not keep pace. Vacancy should rise 20 basis points by year end to 4.9 percent. In 2015, the vacancy rate fell 50 basis points.

3.9% increase Rents: in effective rents Rent growth is anticipated to slow from a record level as a slew of new units are added to inventory this year, though rents will top $1,000 per month for the ﬁ rst time. The average effective rent should rise 3.9 percent to $1,021 per month, following a 7.0 percent advance last year. Multifamily Research | Market Report

Economy • Metroplex employers created 126,800 positions in the region during the last Employment Trends 12 months for an annual increase of 3.8 percent. In the previous four quarters, Metro United States the private and public sector expanded payrolls 4.1 percent with the addition 6.0% of 130,100 jobs.

4.5% • Job gains during the last 12 months were led by the trade, transportation and utilities sector, which added 34,200 positions. The leisure and hospitality and 3.0% professional and business services industries followed, generating 28,100 and 25,100 jobs, respectively. Manufacturing and natural resources and mining 1.5% were the only sectors to shed jobs during the year, combining for a loss of 11,500 workers. Year-over-Year Change 0% 12 13 14 15 16* • The unemployment rate for the region remained relatively unchanged during the last year, resting at 4.1 percent in recent quarters.

Outlook: Job gains will slow this year as companies create 70,000 positions in the Metroplex, an annual increase of 2.0 percent. Housing and Demographics • Single-family permitting issuance ticked up 19.8 percent from one year ago as Home Price Trends builders pulled permits for 32,400 homes. At the same time, housing starts in- Metro United States creased 20.4 percent as builders poured 34,000 slabs, and single-family home 12% sales surged 16.3 percent over the period.

6% • The median single-family home price grew 8.8 percent in the last four quarters, reaching $212,000. Median household income did not keep pace, reaching 0% $61,100 annually, an increase of 1.5 percent from last year. The median income for the area is approximately $8,100 above that needed to qualify for a mort- -6% gage on a median-priced home.

-12% • The monthly mortgage payment for a median-priced home in the Metroplex, assuming 20 percent down and payments for taxes and insurance, grew ap- Median Home Price (Y-O-Y Change) 11 12 13 14 15 proximately 3 percent to $1,190 per month. Meanwhile, the monthly rent for an apartment built since 2000 rose 5 percent to approximately $1,260.

Outlook: Net migration to the area remains strong, rising 8.4 percent last year. Corporate expansions and the movement of jobs from other states to the region will further increase renter demand, especially among young professionals choosing to locate in North Texas. Construction Trends Construction Completions Multifamily Permits • Builders completed just nearly 18,500 units during 2015, expanding stock 2.3 32 percent annually. In the prior year, developers brought approximately 15,900 apartments online. 24 • Of the more than 39,000 rentals under construction in the Metroplex, most of 16 the development is concentrated in Dallas and its surrounding submarkets as builders have just over 34,100 units underway. The remaining units are in Fort 8 Worth and its nearby communities. Number of Units (000s) 0 • Developers are targeting the Intown Dallas submarket, where more than 2,200 12 13 14 15 16* units have come online in recent quarters and another 5,800 apartments are underway. Elm Place Tower, one of the largest apartment projects under construction in the metro, is scheduled for completion here in the third quarter. * Forecast Outlook: Builders will deliver 23,000 units online by year-end 2016, expanding apartment stock nearly 3 percent. Multifamily Research | Market Report

Vacancy • Strong apartment demand supported the absorption of nearly 18,600 units last Vacancy Rate Trends year, driving the average vacancy rate down 50 basis points year over year to 4.7 percent, the lowest rate this business cycle. One year ago, the vacancy rate Metro United States declined 40 basis points on net absorption of 16,200 rental units. 8%

• Conditions have tightened to 3.5 percent or lower in several submarkets 6% throughout the Metroplex, including Grand Prairie, Carrollton/Farmers Branch, Richardson, Mesquite, Denton, Kaufman County, Ellis County and South Arling- 4% ton/Mansﬁ eld.

Vacancy Rate 2% • The highest vacancy in the Metroplex is in East Fort Worth, reaching 8.3 percent in recent quarters, down 20 basis points from one year ago. Oak Lawn/Park 0% Cities and Southeast Dallas also register high vacancy, at 7.0 percent and 7.4 12 13 14 15 16* percent, respectively.

Outlook: Builders will deliver the largest number of units this business cycle in 2016, and demand will not keep pace. Vacancy will rise 20 basis points year over year to 4.9 percent. Rents Rent Trends • Rent growth in the Metroplex remained robust last year as the average effective rent climbed at its highest annual pace this business cycle. The average rose Monthly Rent Y-O-Y Rent Change 7.0 percent during 2015, reaching $983 per month at year end. In the prior time

$1,100 8% Year-over-Year Change frame, rent grew 6.6 percent annually. • The average rent is highest in Intown Dallas, rising 3.4 percent to $1,624 per $1,000 6% month. Oak Lawn/Park Cities, where a 6.9 percent annual gain pushed rents to $900 4% $1,559 per month, follows. • The percent of units offering concessions fell to 3.8 percent in recent quarters, $800 2%

down signiﬁ cantly from 10.9 percent in the third quarter of 2014. Of those qual- Monthly Effective Rent $700 0% ifying for concessions, the average leasing incentive is 5.2 percent of annual 12 13 14 15 16* rent, holding steady from one year ago at approximately 19 days of free rent.

Outlook: Apartment rent growth will slow as a slew of rentals are added to inventory this year, though rents will top $1,000 per month for the fi rst time. The average effective rent will rise 3.9 percent to $1,021 per month. Sales Trends • Transaction velocity held fi rm during the last 12 months when compared with Sales Trends the prior year. Investors remained focused on the areas of Denton, Irving, Knox-Henderson/Cityplace and Outer Arlington during the year. $100 • The average price per unit jumped signifi cantly amid strong buyer interest last year, rising 15 percent to just over $90,000 per unit. A heightened pace of rent $75 growth over the past two years has spurred NOI growth, boosting property values in the metro. $50

• The average cap rate compressed 30 basis points to 6.8 percent last year, after $25 holding ﬁ rm in the low-7 percent area for three straight years. High-quality as-

sets in core areas can trade as low as 4 percent, while stable, older properties Average Price per Unit (000s) $0 in suburban locations yield ﬁ rst-year returns in the mid-6 to low-7 percent span. 11 12 13 14 15

Outlook: New development in the Dallas area could cause some softening in select submarkets. However, the risk is much lower in Fort Worth and its surrounding * Forecast communities, and investors seeking to avoid the threat of new construction will Sources: CoStar Group, Inc.; Real Capital Analytics seek assets nearby. Multifamily Research | Market Report

Capital Markets National Multi Housing Group By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation

Visit www.NationalMultiHousingGroup.com • Following the ﬁ rst interest rate increase since 2008, the Federal Reserve has promised a measured, patient approach to future rate hikes. Recently, the John Sebree mixed picture of U.S. economic data has given several members of the bank’s First Vice President, National Director monetary policy committee reason to pause. Robust labor market indicators National Multi Housing Group Tel: (312) 327-5417 present positive evidence of continued expansion, while manufacturing and in- [email protected] ﬂ ation expectations have weakened due to the stronger dollar. As a result, the central bank will likely weigh the balance of data over the coming months before enacting additional rate hikes. • Multifamily housing trends have continued to accelerate over the past year, with Dallas Offi ce: the national vacancy rate falling 40 basis points to 4.1 percent. Meanwhile, development remains considerable, although generally limited to primary markets; Tim Speck First Vice President, Regional Manager deliveries in 2015 exceeded 230,000 units for the second straight year, the Tel: (972) 755-5200 highest annual total since 2000. However, despite the incredible pace of con- [email protected] struction, net absorption surpassed supply growth, supporting a 5.6 percent

5001 Spring Valley Road climb in average effective rental rates. Suite 100W Dallas, Texas 75244 • Fannie Mae and Freddie Mac are underwriting fi ve-, seven- and 10-year commercial property loans with maximum leverage of 80 percent. Interest rates for these loans will range from 3.7 percent to 4.2 percent, depending on loan struc- Fort Worth Offi ce: ture and maturity, for loans above $3 million. Portfolio lenders, including commercial banks and life insurance companies, offer debt at 65 to 75 percent loan David H. Luther to value on 10-year terms at 3.60 to 4.25 percent. Floating-rate terms typically First Vice President, Regional Manager carry a maximum LTV of 65 percent for stabilized properties, while pricing at Tel: (817) 932-6100 a 250- to 425-basis-point spread above Libor. CMBS issuance topped $100 [email protected] billion last year, but wider spreads have curtailed activity thus far in 2016. 300 Throckmorton Street Suite 1500 Fort Worth, Texas 76102 Local Highlights • The largest project underway in the Metroplex is the 621-unit Legacy West in the West Plano submarket. Amenities include an outdoor deck with a swimming pool, courtyard, outdoor kitchen, conference rooms, poker room, catering kitchen, fitness center and spa. The tower is near the new Liberty Mutual and FedEx campuses. Prepared and edited by Jessica Hill • State Farm is expected to complete the fi nal phase of its 2 million-square-foot Research Analyst | Research Services campus in Richardson this year, bringing an additional 500,000 square feet of offi ce space online. The company will continue to consolidate offi ces into its For information on national apartment trends, contact: regional headquarters. This year, State Farm plans to generate 1,000 positions John Chang at the new corporate hub. First Vice President | Research Services Tel: (602) 687-6700 • McKesson, a company that distributes medical products and pharmaceuticals, [email protected] recently purchased two new offi ce buildings in the Las Colinas area. The company will move 900 workers already in the Northeast Texas region, as well as create 975 additional jobs as part of the expansion. • Amazon is seeking to expand in the North Texas region again. Two warehouses totaling more than 1 million square feet near the AllianceTexas development Price: $250 north of Fort Worth could become the home to a new distribution center for the company. Amazon currently leases over 2 million square feet in Coppell, Haslet © Marcus & Millichap 2016 | www.MarcusMillichap.com and southern Dallas.

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated based on the last month of the quarter/year. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted. Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Economy.com; National Association of Realtors; Real Capital Analytics; MPF Research; TWR/ Dodge Pipeline; U.S. Census Bureau.