A surge in apartment construction across Texas during and after the pandemic has created a wave of new supply, prompting closer scrutiny from the Federal Reserve Bank of Dallas. Despite concerns about oversupply and rent pressures, the region’s banking sector appears to be holding up well.
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Across major Texas metros, landlords have increasingly relied on concessions to attract tenants, offering incentives such as free rent for extended periods. These incentives are more prevalent in Texas compared to the national average.
Austin leads the state in concession activity, followed by Dallas, as developers work to fill a growing number of newly completed units. According to the Dallas Fed, “Concessions are expected to continue through mid-2026, restraining rent growth despite healthy demand fundamentals.”
The influx of new apartments has created short-term imbalances between supply and demand. While Texas continues to benefit from population growth and relatively strong economic conditions, the pace of construction has outstripped absorption in many markets.
Vacancy rates, which peaked in mid-2024, have begun to stabilize as landlords adjust pricing strategies and lease terms to attract renters. Flexible leasing options and aggressive discounting have helped improve occupancy levels.
Still, rent growth remains under pressure, particularly in high-growth metros like Austin, San Antonio and Dallas.
“Apartment market fundamentals should improve as deliveries of new buildings decline this year,” according to the report. “However, progress will be uneven. Texas markets face lingering headwinds from elevated supply and continued discounting pressure.”
This uneven recovery is expected to play out differently across regions. Markets with slower population and job growth could take longer to rebalance, while areas with tighter supply conditions may recover more quickly.
Despite these market pressures, financial institutions in Texas appear to have avoided excessive exposure to multifamily lending risks.
“Texas banks’ double-digit loan growth supported the increase in multifamily supply during a period of strong housing demand and low financing costs,” according to the report. “Historically, bank lending for multifamily housing has been characterized by low delinquency and charge-off rates.”
Multifamily loans have been the fastest-growing category for Texas banks since 2021. While delinquency rates have started to edge upward and loan modifications are higher than the national average, overall risk levels remain manageable.
“Most Texas banks do not appear to have elevated multifamily loan concentrations — only a few report multifamily loans in excess of capital and loan loss reserves,” according to the report. “In addition, none of the bankers surveyed for the Federal Reserve Bank of Dallas’ Banking Conditions Survey in November 2025 selected ‘extremely concerned’ about the performance of multifamily loans.”
Even with generally stable conditions, early warning signs are beginning to emerge in certain properties.
Some apartment communities, including The Waterford Grove Apartments in Houston and The Riley in Richardson, have recently been transferred to special servicing, indicating financial or operational challenges.
“We’re starting to track these Texas loans — this is the third loan to transfer to special servicing because of this tax exemption issue,” David Putro, head of analytics at Morningstar Credit, said.
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In the case of The Riley, issues tied to a housing finance program may have triggered financial complications. The property had benefited from a tax exemption program that required compliance with specific conditions.
“It is unclear whether that is what has occurred here, so we are simply highlighting this as a possible cause for the transfer,” Morningstar wrote.
Looking forward, the Texas multifamily market is expected to gradually stabilize as the pipeline of new construction slows. Reduced deliveries should help bring supply and demand back into balance, easing pressure on rents and property valuations.
However, continued reliance on concessions and uneven market performance suggest that recovery will take time. For lenders, developers and investors, the key challenge will be navigating this transition period while managing risk tied to oversupply and evolving demand trends.
Originally reported by Leslie Shaver, Senior Reporter in Multifamily Dive.
