Cadre 15 Spotlight: Dallas-Fort Worth

Executive Summary:

• The Dallas-Fort Worth metropolitan area is hot, with rising population growth, income growth, and job growth, along with a relatively low cost of living and a high quality of life among major metro areas in the U.S.
• Residential home construction demand is far outpacing supply
• Multifamily fundamentals in Dallas-Fort Worth have recovered quickly, with rent growth in 2Q21 as of mid-June above 7%, trending to the highest rent growth since 2015.
• Cadre’s analysis indicates positive return contributions in the DFW region.

Yep. Texas really is bigger. In Dallas, the airport alone is larger than all of Manhattan. And arrivals to the Lone Star State just keep coming. Last year, the Dallas-Fort Worth (DFW) region grew faster than any other U.S. metropolitan area, according to preliminary data from the US Census bureau. Increasing job prospects and affordability also contribute to DFW’s rising star status—and its inclusion in the Cadre 15.^[1] In addition to the strong demographic trends, our data scientists have noted several potential points of interest in their proprietary analysis.

DFW on the Rise

Population growth, income growth and job growth are all climbing in the Dallas-Fort Worth region. While Americans continue to flee some other urban areas, the Texan metropolis keeps gaining: 120,000 people arrived in the DFW region during the COVID-19 pandemic, which includes births as well as migration. Those numbers are expected to keep growing. According to Moody’s, DFW is projected to add approximately 378,000 residents through 2025.

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People are coming to DFW for a number of reasons. High among them: a thriving job market. The region is currently home to 24 Fortune 500 companies (including ExxonMobil, McKesson and AT&T). DFW also has the largest concentration of corporate headquarters in the U.S. Those businesses help drive a solidly defensive economic base, with job losses of just over half of the national average in 2019. ^[2] The pattern is self-fulfilling: as companies set up in DFW to tap into the local talent pool, more talent migrates to DFW for employment.

Employment isn’t the only draw, of course. The quality of life in Dallas-Fort Worth is strong, with a diverse population, relatively low cost of living and top-notch cultural offerings catering to a crowd that works as hard as it plays. Water parks, vineyards, lakes, rooftop lounges, tapas spots, cigar bars and more are all available for Texans of all stripes. Upwardly mobile professionals are increasingly making this metro area their home, with a median household income 11.8% above the national average.^[3]

Increased Need for Rental Units

With so much going for DFW, it’s not surprising that demand for housing is crunching the available supply.

Dallas was the number one commercial property construction market throughout the pandemic (as of 1Q2021), and the first for multifamily new construction. ^[4] The DFW region overtook NYC in 2019, toppling the Big Apple from the spot it held for the prior four years.

This new housing supply has been quickly absorbed. In desirable neighborhoods, large new construction multifamily buildings are at high occupancy. The pipeline appears to be limited, however. Our data scientists project new multifamily construction to decrease to 1.4% by 2022. With slowing supply in both residential and commercial new construction, along with continued strength in demand, we believe that the market is well-positioned for commercial real estate (CRE) investors in the DFW region—particularly for those interested in multifamily opportunities.

Source: Costar as of April 2021.

Multifamily Opportunities

Multifamily assets can offer consistency in a volatile market. Rent growth in DFW in the second quarter of 2021 is currently above 7%, the highest rent growth since 2015. With stabilized occupancy in the DFW region, rent collection is expected to continue at high rates, resulting in predictable income for CRE investors. Tenants typically sign twelve month leases providing property owners the ability to reset unit rent to market rate upon expiration of each lease, so even in the face of increasing inflation, there may be ways to hedge rising rates as a commercial real estate investor.

Office Space

10,000 corporate headquarters—including those 24 Fortune 500 companies—plus consistent top-five rankings for job and population growth trends have helped propel DFW to one of the nation’s top office markets. Investment opportunities in office buildings are also on the rise, with office transaction volume ranking fourth in the nation as of April 2021 YTD. (An informal Cadre survey shows that our staff did their part to keep DFW’s Frito-Lay corporation in the green throughout the pandemic.)

Industrial

At 1 billion square feet, the DFW industrial market is one of the largest in the U.S., trailing only Chicago in size. Approximately 25% of the DFW inventory has been constructed over the past seven years, supported by population growth and its centralized location within the U.S. Despite increasing industrial supply, DFW led the nation in industrial net absorption as of Q1 20201 at just over 9 million square feet. These positive fundamental dynamics have made DFW the fifth most active industrial investment market in the U.S., with over $1 billion in transaction volume year-to-date as of April 2021.

Market Selection and Risk Factors

Cadre’s market selection process is one of our differentiators among asset managers. Our experienced commercial real estate team and data scientists combine their complementary skill sets to identify markets that we believe will grow faster than the rest of the U.S. over time.

Data scientists at Cadre use financial technology to observe pricing dynamics and price drivers, producing rich datasets with robust models to help rigorously test hypotheses about the factors that drive market performance. Our proprietary quantitative analysis can help our investment team better understand their sources and level of risk within the CRE marketplace.

Here’s how it works: Cadre’s proprietary price indices track returns in over 50 markets across the U.S. From these, we derive our momentum factor, which indicates the pricing trend (up or down) for each market. Our value factor seeks to capture underpriced markets, and our gateway factor measures the selected market against average Tier 1 market performance. The interplay of these factors over time can help explain how we are being rewarded for taking specific market investment risk.

In DFW, our proprietary factor model indicates positive return contributions for both growth (momentum) and general market (gateway) investment risk in the DFW region ^[5], with an inflection point at value. To date, Cadre has offered four properties in DFW to its investors.

Our Mission

Cadre’s investment professionals have decades of experience selecting assets and the latest data sets and financial technology tools. We partner with an extensive network of operators throughout the US, which gives us much-needed “boots on the ground.” Our stringent acquisition criteria requires digging deep into both data and human dynamics to take positions in investments we believe will outperform over time. We also look for opportunities to strengthen the communities in which we invest, through the following stated goals:

• Depositing 5% of cash holdings with leading minority depository institutions (MDIs)
• Partnering with MDIs to participate in financing
• Allocating 10% of future capital within our commingled fund strategy (the “fund”) to operating partners owned by underrepresented minorities
• Maintaining the number of reasonably-priced rental units within the fund

Our mission is to improve both our properties and our communities by democratizing access to commercial real estate investing. If you are interested in joining us, or to learn more about our mission, please reach out to a Cadre team member.