For two years, the Dallas apartment market for investment sales was as dry as the bones of a longhorn on the Texas desert. But broker Will Balthrope knew the worst was over when he sold the 258-unit Delante Apartments to a cash buyer in a deal that closed in just 26 days.

A luxury oasis in trendy Las Colinas with gourmet kitchens, water fountains and a Zen garden for contemplation, the Delante attracted 44 offers before Omaha-based developer Slosburg Co. won the deal.

The sales price was not released. However, the taxable value of the deal was $23 million. The abundance of offers for the Delante and the speed of closing signal that better days lie ahead for the multifamily market.

“For the first time in two years we're seeing real demand by buyers,” says Balthrope, vice president of investments at Marcus & Millichap Real Estate Investment Services in Dallas. Pension fund advisers, private capital groups, real estate investment trusts (REITs), wealthy families and syndicators are lining up to buy, he says. “On anything of quality that we have in the market today, we're receiving between 20 and 50 offers.”

Phones are ringing at other brokerages. “I have clients that call me looking for product. We don't have enough to satisfy their interest,” says Lamont Rattler, associate director at apartment broker Cushman & Wakefield in Dallas. Investors want Class-A properties, not dilapidated Class-D buildings. “The owners robbed Peter to pay Paul” in too many cases, says Rattler.

Treading cautiously

His outlook has brightened after the long dry spell. “Our company's transactions are down 70% to 80% from the height in 2006,” he says. But now out-of-state buyers are returning to Texas.

Multifamily investors still must tread cautiously in Dallas because of a huge supply of units flooding the market and the retrenchment of jobs. Employment fuels the apartment sector. Last year, 12,869 units were completed compared with 5,387 in 2008, according to New York-based research firm Reis.

This year, another 11,000 units are under construction, reports Greg Willett, vice president at data firm MPF Research, based in Carrollton, Texas. “Everything is going to have to be priced pretty conservatively to get it filled up,” he says. Willett estimates that local rents will drop at least 4% in 2010.

The multifamily vacancy rate in metro Dallas climbed to 10.7% in 2009, the highest in more than 19 years, reports Reis. Meanwhile, the average effective rent dropped to $734, below the 2008 level of $740.

Still, the new supply represents far less than 1% of the metro's total inventory. And many of the units have found tenants, as renters move up from older stock. Willett expects further absorption as the job market recovers.

For more than five years, until the height of recession, the Dallas-Fort Worth area was a leader in U.S. job growth. But the area lost an estimated 100,000 jobs in 2009, says Willett. He projects that it will regain more than 60,000 positions this year.

The Federal Reserve Bank of Dallas in early March reported an uptick in hiring in various sectors including energy service, food, high-tech and transportation companies. Dallas is home to a number of Fortune 500 companies, including Exxon Mobil, Texas Instruments, Southwest Airlines and Dean Foods Co.

“In Texas, we've got the fastest-growing population in the country,” says D'Ann Petersen, business economist at the Federal Reserve Bank of Dallas. She projects Dallas job growth at 2.5% to 3% annually after the economy recovers, versus typical U.S. growth of 1.7%.

Best time to buy?

Investors are banking on the market's recovery as they swoop in to seize bargains, particularly Class-A properties in northern suburbs such as Irving. But they also want well-priced redevelopment sites near highways, rapid transit lines, shopping centers and corporate headquarters.

With the market starting to rebound, many investors view this as a good time to buy because prices may have already bottomed out, and listed properties in outstanding locations may not be available later. Sellers have been coming to terms with buyers on price, a stumbling block for sales over the past two years.

Jason Mattox, chief administrative officer at investor Behringer Harvard, based in suburban Addison, Texas, agrees that deals are brewing. The company has interests in or manages more than $10 billion in commercial real estate assets.

“We're hearing that investors in every core product type that may have been on the sidelines before are getting active again,” says Mattox.

Behringer Harvard's typical acquisition is a complex of at least 100 units priced at more than $20 million. “I do know there are opportunities [in Dallas] that are being whispered about,” adds Mattox.

Other investors have roped big deals. Los Angeles-based real estate fund manager CIM Group snapped up three Class-A Dallas apartment complexes in March from privately held Gables Residential, an Atlanta-based firm.

One of the CIM properties, at 3839 McKinney Ave. in the West Village area, is listed in the Dallas Central Appraisal District records with a value of $8.25 million. The reported value of the three properties exceeds $49 million, but CIM has not disclosed the purchase prices.

Investors swarm Lovers Lane

Buyers' revived interest extends to redevelopment sites such as the 12.8-acre tract on Lovers Lane in northeast Dallas where the abandoned Signature Pointe apartments await a wrecking ball.

Listed for sale in October at $19 million after a mixed-use project failed amid a lengthy rezoning battle and the economic crisis, the property had been taken over by its lender, Compass Bank.

Even with the apartments fenced off and boarded up, the acreage drew 33 offers by Dec. 31, says Balthrope, who brokered the sale. The transaction is in escrow, waiting to close. After demolition, luxury apartments are expected to rise on the site.

Location was critical in the Lovers Lane sale. The 332 units stand two blocks west of a rapid transit station and near the Central Expressway. The site is so potentially valuable that when it was offered for sale at $22.5 million in 2006, 60 buyers registered within 24 hours.

Location also mattered in the sale of the thriving Delante complex. More than 90% occupied, it lies in Irving, along the path of a planned rapid transit Orange Line.

Buyers' rekindled activity may not yet be reflected in the data. “Appraisals and statistics look backwards. This is real-time information,” says Balthrope.

“Buyers are desperately looking for quality real estate,” he asserts. “This is a national trend. In the Sunbelt markets, Phoenix is having tremendous bidding wars.” More moderate structures also are proving attractive.

Candor pays off

When broker Chris Lowdon, proprietor of Dallas-based Lowdon Realty, listed the 151-unit Holly Park Apartments for sale in mid-March at nearly $4.3 million, he says he didn't fudge the net operating income as many brokers do. He let the chips fall where they may.

The renovated property grabbed the attention of investors, and within one week received two solid offers. “It is a little bit surprising,” Lowdon says of the quick response. “

He revealed Holly Park's net operating income of more than $395,000 and other financial details, providing actual figures rather than “pro forma” or hypothetical numbers. Too often, pro forma and actual numbers differ, he says.

The gulf between pro forma numbers and those based on the balance sheet widened throughout the industry as the economy suffered and occupancy dropped. The disparity infuriates many investors, after they learn an asset's real income. Buyers want proof that a property has a stable cash-flow history based on actual profit and loss statements.

“I find it annoying and disingenuous, maybe smarmy, when numbers are presented on a pro forma basis and they're so different from the actual numbers. And I hear that a lot from potential investors,” says Lowdon. Buyers beg the brokers to insert actual figures, he says. “They'll put it in all caps and underline: ‘I don't want pro formas!’”

Holly Park's price helped to snare offers. So did the apartments' individual heating and cooling units, rather than a centralized system, as was common in properties built over three decades ago. In the sweltering Texas summer, when temperatures climb to near 100 degrees Fahrenheit, loss of air-conditioning can become a health hazard, and a liability for the landlord.

A trickle of well-maintained Class-C property deals helped Lowdon's one-man brokerage survive the recession as fancier deals elsewhere stalled for lack of capital. In December, he sold a $1 million, 36-unit apartment complex to a Los Angeles couple. In January, he brokered a $500,000, 12-unit complex.

Stomping to the Savoye

As for the newer, luxury apartments, it's not hard to see why renters might be attracted. At the 400-unit Savoye in suburban Addison, tenants can work off job stress as they jog a 12-acre trail, play poker in a private salon or watch a 42-inch high-definition TV at home.

Built through a city collaboration with Denver-based United Dominion Realty, the units are part of the $1 billion Vitruvian Park redevelopment. One-bedroom units at the Savoye are priced from $910 to $1,620.

Over at the Delante, built in 2007, market rents of $1,004 to $1,572 have not deterred tenants, says Marcus & Millichap's Balthrope, and that's good news for investors.

Today's market is a far cry from just months ago in mid-2009, he recalls. “Not many buyers were doing anything. Everybody was scared. We were kind of at what I would term the psychological bottom.”

Denise Kalette is senior associate editor.

COUNTY POPULATION UNEMPLOYMENT RATE:
2.4 million 8.7%
Source: U.S. Census Bureau Source: Bureau of Labor Statistics

LARGEST PRIVATE EMPLOYERS

  1. Texas Instruments

    9,958 employees

  2. Pilgrim's Pride

    5,350 employees

  3. Baylor University Medical Center

    4,450 employees

Source: Office of Economic Development, Dallas

METRO AREA VITAL SIGNS

Office:

24.2% vacancy, 4Q 2009

22.9% vacancy, 4Q 2008

$15.19 per sq. ft., 4Q 2009

$16.46 per sq. ft. 4Q 2008

Source: Reis Inc.

Multifamily:

10.7% vacancy, 4Q 2009

8.0% vacancy, 4Q 2008

$734 effective rent 4Q 2009

$740 effective rent

4Q 2008

Source: Reis Inc.

Retail:

13.8% vacancy, 4Q 2009

12.7% vacancy, 4Q 2008

$14.21 rent per sq. ft., 4Q 2009

$16.35 rent per sq. ft., 4Q 2008

Source: Reis Inc.

Industrial:

13.5% vacancy, 4Q 2009

11.6% vacancy, 4Q 2008

$3.60 rent per sq. ft., 4Q 2009

$3.73 rent per sq. ft., 4Q 2008

Source: Cushman & Wakefield

Hotel:

48.6% occupancy, 4Q 2009

52.6% occupancy, 4Q 2008

$83.36 average daily rate, 4Q 2009

$92.47 average daily rate, 4Q 2008

Source: Smith Travel Research

MAJOR PROJECTS

La Reunion Town Center: The master plan for the multi-phase, mixed-used project calls for 900 new and rehabbed residences in north Oak Cliff, a historic neighborhood. Phase one, nearing completion, includes 162 apartments and 12,000 sq. ft. of retail space. Oak Cliff was a planned community across the Trinity River from downtown Dallas. The project is being developed through a public-private partnership.

Developer: La Reunion Town Center LLC

Completion Date: Phase two, 2012

Project cost: Estimated $150 million

Park Lane: With 2.4 million sq. ft. planned on 33 acres, the mixed-use project is taking shape across from NorthPark Center, a major shopping mall. It will include more than 300 apartments, along with offices over retail space, and a hotel. Some 700,000 sq. ft. of retail and 750,000 sq. ft. of office space are planned. Retailers include Nordstrom Rack, Whole Foods, and Children's Place, among others.

Developer: Harvest Partners

Completion Date: 2013

Project cost: $750 million