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LONE STAR LIVING: NAVIGATING TEXAS' HOUSING
SHORTAGE AND CAPITAL MARKETS
In recent years, Texas has become one of the fastest-growing states in the United States, attracting people from all over the country due to its strong job market, affordable cost of living, and favorable business climate. However, this population boom has put a strain on the state’s housing supply, leading to a severe housing shortage. The shortage has been further compounded by the COVID-19 pandemic, which has disrupted construction and supply chains, causing delays and increasing costs.
The housing shortage has led to a surge in home prices, making it increasingly difficult for first-time homebuyers to enter the market. This, in turn, has boosted demand for rental properties, especially multifamily apartments geared towards young to middle aged professionals. As a result, multifamily real estate has become an attractive investment opportunity, with investors seeking to capitalize on the high demand for rental units.
Capital markets have responded to the increased demand for multifamily properties in Texas by providing favorable financing options to investors compared to the lending on other asset classes. In recent years, Texas has experienced a surge in capital investment, with institutional investors pouring billions of dollars into the state’s resilient real estate market. This has led to a highly competitive market, with investors seeking to identify and secure the best investment opportunities.
Looking ahead, the capital markets in Texas are expected to increase along with the FED rates, although the continued demand for multifamily properties. The state’s population is expected to continue to grow, with projections showing that Texas will add more than 11 million people by 2050. This will further increase demand for housing, particularly in urban areas. (Houston, Austin , Dallas, San Antonio / Tier 1 markets)
While the COVID-19 pandemic has disrupted the real estate market, it is expected that the market will recover in the coming years. The Federal Reserve has kept interest rates low, providing favorable borrowing conditions for investors up until the last year of increased rates. The increased rates will ultimately create a demise for investors with too much leverage and not enough cash.
As people continued to purchase real estate at the peak of the market last summer, these investors will struggle meeting the DSCR and be handing their keys back to the lenders, due to capital constraints within their businesses. Thus the bubble will pop and re stabilize the market bringing competitors and capital investment to a more stabilized equilibrium while stimulating the market and supporting continued growth.
Forecasted Capital Markets 1.2
The COVID-19 pandemic caused unprecedented disruption in the real estate market, with many investors initially hesitant to invest due to uncertainty and volatility. However, as the economy recovered and interest rates remained low, the market regained momentum, with investors returning to the market to capitalize on opportunities.
Despite this recovery, high-interest rates remain a significant concern for real estate investors, as they impact the affordability of borrowing and can reduce the value of properties. Higher interest rates can also lead to a reduction in demand for properties, as the cost of borrowing becomes more expensive, leading to a slowdown in the market.
The Federal Reserve has signaled that it may raise interest rates in the near future to counter inflation concerns, which could further impact the real estate market. Higher interest rates could increase borrowing costs and reduce the affordability of buying property, leading to a slowdown in demand.
However, it’s worth noting that interest rate increases are not always detrimental to the real estate market. In some cases, rising interest rates can indicate a stronger economy, leading to increased demand for properties. Additionally, higher interest rates can sometimes lead to increased rental rates, providing investors with higher yields.
In conclusion, while high-interest rates remain a concern for real estate investors, the market has shown resilience in the face of uncertainty and volatility. While the impacts of interest rate increases remain to be seen, investors who remain vigilant and adaptable can continue to capitalize on opportunities in the real estate market.
Impact on Multifamily Real Estate
The housing shortage in Texas has had a significant impact on multifamily real estate. With demand for rental units outstripping supply, rental rates have increased, providing investors with higher yields. Furthermore, as more people are priced out of the housing market, the demand for rental properties is expected to continue to grow.
Investors have been responding to this demand by developing new multifamily properties, with a particular focus on urban areas. This has led to a surge in construction activity, as developers seek to capitalize on the high demand for rental properties.
In conclusion, Texas’s housing shortage has led to a surge in demand for multifamily properties, making it an attractive investment opportunity for investors as long as they are being conservative when it comes to analyzing their investments. Suggestions before investing:
- Be extremely conservative in your underwriting
- Watch out for the rise in insurance costs in particular markets (Houston & Coastal Cities)
- Purchase Rate Caps and lower leverage 5%-10%
- Add additional contingency as we are in an extremely volatile market
The capital markets in Texas are expected to remain high and strong, with continued demand for multifamily properties. While the COVID-19 pandemic and the Fed’s recent increases in rates disrupted the real estate market, it is expected that the market will recover in the coming years, supporting continued growth and restabilization.
Watch your leverage. Hold on to your hat and your dry power. Wait for the right opportunities as they will continue to arise in the next 8-18 months.
written by Joshua C. King,
Director of Capital Markets