Establishing Roots in Dallas-Fort Worth: A Strategic Visit for Breneman Capital
The Breneman Capital team had a productive month of July, highlighted by a recent visit to one of our most important target markets – Dallas-Fort Worth.
We have remained diligent in pursuing new offerings for our investors and have kept pace with the latest market intel and trends. In doing so, we have dedicated ourselves to cultivating relationships with the most influential real estate professionals – brokers, property managers, other owners, and equity relationships – in their respective markets. By planting these seeds, we can have confidence in navigating this market lull and be ready to strike when the time is right.
Through the myriad conversations with key market stakeholders along with exhaustive research and internal discussions, Breneman Capital is reestablishing our emphasis on value-add investments. In a market plagued with uncertainty, we have obsessed over discerning the best strategy for our investors, whether that be new construction, core-plus, or value-add. Value-add provides the most attractive proposition with multiple exit strategies through either sale or cash-out refinance – the latter of which is much more difficult to project for new construction and core-plus opportunities. In a market with more questions than answers, we believe having multiple avenues for success is in the best interests of our investors and is best achieved through a business plan in which we generate appreciation through renovations and/or operational efficiencies and do not rely solely on market appreciation for investment returns.
We are eager to establish our presence in Dallas-Fort Worth for the following reasons:
In a Breneman Capital study examining the results of our Market Outlook Model – a predictive appreciation model comprising nearly 160 variables for the 52 largest markets in the US:
Dallas-Fort Worth is above the national average for the majority of fundamentals that are most predictive of appreciation. Dallas-Fort Worth has one of the best near-term outlooks of any market, not only in the Sunbelt but also in the US.
Dallas-Fort Worth has exhibited one of the most attractive investment profiles characterized by outsized growth while being one of the least volatile markets in the nation. Hence Breneman Capital commonly refers to Dallas-Fort Worth as a core market with a Sunbelt growth edge. It is “core” for being low volatility, having the 4th largest MSA in the US, and being an internationally relevant market. It has a “Sunbelt growth edge” for its history of above-average appreciation and its advantage of being subject to the many tailwinds affecting the Sunbelt as a whole.
In measuring the difference between key indicators spanning Economic, Demographic, Apartment Fundamentals, Affordability, New Supply, and Single-Family Home statistics, it was determined that Dallas-Fort Worth was only the 18th most similar market to Phoenix – a surprising result given the two markets’ relative similarity in geography, size, and relevance. This is an important consideration given Breneman Capital’s existing investments and commitment to the Phoenix market. Dallas-Fort Worth should serve as an excellent complement to our portfolio, ensuring that Breneman Capital and our investors are well-hedged from a diversification perspective.
Investment properties in Dallas-Fort Worth are offered at very low price per unit when compared to other Sunbelt markets of similar relevance. For context, most Class B offerings in Dallas-Fort Worth are in the range of $100,000 to $150,000 per unit whereas many other Sunbelt markets’ offerings are flirting with or even exceeding $200,000 per unit. This is an important consideration not only for exposure to new supply (developers tend to build when valuations exceed the cost of construction – likely why Dallas-Fort Worth has a smaller pipeline of new construction as a percentage of existing stock relative to the Sunbelt average) but also a dollar goes a lot farther in achieving scale. Being able to invest in larger properties will allow Breneman Capital to attain economies of scale more quickly, including access to the best managers and contractors.
Being the 4th largest MSA in the US in terms of population, the universe of properties in Dallas-Fort Worth that fit our investment criteria is extremely large. There are other markets that Breneman Capital would otherwise like to invest in. However, these markets have far fewer properties that fit our criteria and these properties will command greater competition when/if they are for sale, both of which are significant hurdles to overcome in achieving scale in a market.
Action on The Ground:
We toured seven properties (one of which was off-market) for prospective acquisition. We submitted an offer to purchase one of them – a Class B 104-unit property in an excellent location with significant value-add potential – and are awaiting feedback.
Met with representatives from seven different brokerage firms.
The consensus is that transaction volume in Dallas-Fort Worth is down about 50%-60% year-over-year, which is a notable reduction but slightly less severe when compared to Phoenix.
The average going-in cap rate is about 5.00%-5.25% for new listings that fit our investment criteria, which is materially less than that of cap rates in Phoenix in large part due to what brokers have been referring to a “basis play” (i.e. low price per unit compared to other markets). Because of lower valuations for properties, investors are willing to be more aggressive from a cap rate perspective.
Marketed properties are still receiving a healthy number of offers, typically about 10-15 per deal. One property we had planned to tour had an investor preempt Call For Offers with a price well above ask. We believe this to be a testament to the resilience of the Dallas-Fort Worth market.
Met with representatives from two different property management firms. We discussed the alignment of interest to manage properties that fit our investment criteria, units under management and their core competencies, how construction would be undertaken whether that be in-house or through third parties, operations of their existing properties, the challenges and opportunities in today’s market, and submarket nuances.
Allocated a significant portion of time to drive the market and familiarize ourselves with specific locations across the Dallas-Fort Worth Metroplex. By doing so, we can pinpoint submarkets that we would like to prioritize or even avoid altogether. Understanding our target markets more intimately and block-by-block is an imperative component for realizing successful investments.
Although it has been a very slow 12 months in terms of new transactions, we are constantly looking for ways to improve as investors and build the foundation for future success. We are actively sourcing and evaluating new investment opportunities, and we are confident that our persistence and commitment to our investors will pay off.
Feel free to schedule a time speak with us to learn more about investing with Breneman Capital: https://www.breneman.com/schedule-a-call