Lone Star Dreams Unravel Amid High Interest Rates, Costly Insurance

The Texas multifamily real estate market has had a whirlwind of a year since the Federal Reserve started raising interest rates last year.

While Dallas and Houston continue to bring in new job opportunities, the demand for housing has slowed, putting pressure on investors and developers. It could lead to higher rents and lower occupancy rates.

Through July, Houston added 38,400 jobs this year. Dallas-Fort Worth added 90,600 and Austin added 24,900, according to Marcus & Millichap's third-quarter market reports on each market.

Dallas-Fort Worth will top the country in completions as local supply grows by 2.8%, according to a third-quarter market report from Marcus & Millichap. But vacancy will rise to 7% by year-end even as rents rise.

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With inventory growing by 4.6% over the last year, vacancies also are expected to increase in Austin, reaching 7.2% by December, according to Marcus & Millichap.

The syndicated deals that cropped up in the last decade have driven change, said Andrew Welker, founder and CEO of Dallas-based multifamily development firm Welker Properties.

A real estate syndication is a partnership between a group of investors pooling their funds into a single investment. Multifamily real estate syndication has been impacted by market volatility, rising interest rates and more people working from home.

Syndicate investors often are not in the same location as the properties they buy into. They may have little experience in multifamily housing.

"Syndicators got into the business over the last decade," Welker said. "Now, it's difficult and you have to be there. You can't be in seven different markets. They don't have liquidity or operating experience. Those are the deals that will feel the most pain. Even good operators are going to have a hard time."

Costly insurance is adding to Houston's woes. Insurance rates in the city are among the priciest in the country, and insurance costs per unit surged 47% year over year in the second quarter, according to Marcus & Millichap. Houston now ranks as the seventh-most expensive market for insurance nationally and third highest outside of Florida.

Insurance costs are influencing development plans as builders move to less expensive markets.

"We have serious issues with insurance," Welker said. "That eats into your cash flow significantly."

Even so, Welker plans to start shopping for deals early next year as distressed properties come on the market.

"Now is the time to buy," he said. "We're just starting to see distressed deals come across."