This is a report of the single-family rental asset classes in the Southwest region of the United States. The following market report is a comprehensive review of current market trends in Dallas, Houston, San Antonio, and Phoenix.
Demand for housing in Dallas is very high with a net absorption of 65,997 units, but the new constructions are keeping up with 57,660 new units. The resulting rental market is very tight with supply and demand largely keeping pace with one another, so yields for investors will likely experience little change if this trend continues. Dallas is an attractive market for investors with a price-to-rent ratio of 13.13, which is only slightly higher than the national average. Investors should also keep in mind that when both housing supply and demand are high in a market, yields will be more reactive to market fluctuations resulting in increased volatility. This means that the Dallas market is better suited to investors with a higher risk tolerance.
While both supply and demand are strong in the Houston market, the supply seems to be significantly outpacing demand which will drive yields for investors. The market should still be considered by investors because the price to rent ratio is significantly below the national average at 12.29, and this is likely the reason for the very high number of new constructions. Even though yields for investors are currently above average they are likely to decrease moving forward due to a large number of new constructions added to the market. The market also had a very high net increase in the rental supply of 137,256 units indicating that a significant amount of units that were previously owner-occupied were added to the rental market. The drastic increase in the supply of rental units points to the conclusion that Houston was recently a good rental market for investors, but the supply is quickly becoming oversaturated. Unless there is a reversal in the rental supply trend the market will provide unfavorable returns but is still worth looking at because it offers a good initial yield and a trend reversal is not highly
San Antonio, Texas
San Antonio has a Price-to-Rent ratio right around national averages offering investors initial yields around what they can expect in the rest of the nation, but the market is geared to investors that are looking for yield growth in their rentals. The market has a high probability of increased yields going forward because it has a very high number of net units absorbed at 34,830 and a moderate net increase in total rental units of 18,751. The rental market looks as though it will continue to tighten as newly constructed units only account for 1.32% of total housing units or 11,796 units. The rate of new development in the area is weak when compared to the country as a whole, but is particularly weak when compared to the rate of new development in the rest of the state of Texas. Investors should expect at least moderate increases in yield from rents given that the vacancy rate fell from 13.4% to 7.7 in the past year indicating in a large increase in the demand for rental units.
Yields tend to be low in Phoenix with a high Price-to-Rent ratio of 15.32. However, the yields should grow reliably over time with a demand that steadily outpaces supply. The demand side of the market absorbs 28,941 units but there are only 27,029 units added to the market including newly constructed units and units that were rented by previous owner occupants. As long as demand keeps increasing faster, rental rates will continue to rise. The new constructions in the market are moderate at 1.47%, which indicates the supply is not on pace to meet demand so the trend of less vacancy and higher rents will likely continue in the long term. The Phoenix market is best suited to investors that are looking for highly probable yield growth but are not necessarily concerned with initial yields.