O’Connor & Associates Apartment Forecast October Luncheon

O’Connor & Associates Apartment Forecast –Speakers:  Clint Roberts, Marcus & Millichap; J.C. Clemens, HFF; Joey Rippel, HFF.

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Takeaway: the multifamily business is currently very strong in Houston, with outside investors wanting a piece of the action.  Occupancy is up, rates are up, and transactions are strong-it is a seller’s market, especially in Class B & C units (generally speaking, those built before 1990)

 

  • Due to high homeownership costs, renting is a necessity for Millenials-home ownership rates have declined from 66% to 58%
  • B&C units have only 5% vacancy here
  • There is strong investor demand for B&C since they see room to raise rates upwards toward very high A rates-current gap in rates between A and B&C is $400-600 per month
  • Investor/buyers are domestic and increasingly international, and over 60% of investor capital is going to older B&C units, which have good upside after a little upgrading by the new owners
  • Cautious institutional lenders such as REITs with conservative loan committees who equate Houston’s economy only with oil are missing the boat, and private money and more flexible buyers are taking up the slack
  • Building of new A units may be slowing now
  • 2015 is seeing no let up from ‘13 & ’14 in leasing and investor activity in spite of oil price correction
  • Pasadena and South Houston are seeing some of the strongest growth with big chemical plant construction, but bear in mind plants that require a lot of workers to build require very few to operate once finished and online
  • Houston has been the #1 UHaul destination city for six years
  • Over the last few years we have seen an average 6% rental rate growth, pushing values up, up, up
  • Houston has absorbed over 100,000 apartment units over last five years and vacancies remain at historic lows
  • Millenials need affordable rents near their workplace-“Live-Work-Play” is their motto, and they seek apartment projects which are an easy transition from the fancy student housing projects they enjoyed while in school
  • There is competition for apartments coming from baby-boomers who are retiring nationwide at the rate of 10,000 per day (!) and half of those are choosing multi-family instead of smaller homes
  • Some softness in cap rates for A but tightening for B&C
  • Predicted rent growth:  5-6% in 2015; 4% in 2016
  • Houston is projected to lead the nation for the next five years in population growth, a statistic which is not lost on investors jostling to get into our market
  • Well-maintained stick-built units will last many decades but if the land values soar above the as-improved value, the unit will be razed and re-developed
  • Some investors buying inside the Loop units just to warehouse land for its expected future value, with income from the unit paying taxes and carrying costs

The following was written by Ray Hankamer.

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