houston’s balancing act...houston multifamily | spring 2018 3 houston vs. national rent growth...

Rent Growth Continues

Home Values Reach Cycle Peak

Development Targets Core Submarkets

Houston’s Balancing Act Multifamily Report Spring 2018

2

HOUSTON MULTIFAMILY

Market Analysis Spring 2018

Contacts Paul Fiorilla Associate Director of Research [email protected] (800) 866-1124 x5764

Jack Kern Director of Research and Publications [email protected] (800) 866-1124 x2444

AuthorLaura Calugar Associate Editor

Bayou City Makes Buoyancy Its Brand

Recent Houston Transactions

Houston’s housing market has been resilient, despite the natural disasters that have severely affected parts of the metro. During the first months of last year, the city struggled with overbuilding and limited rent growth, but the fourth quarter of 2017 displayed stronger performance for the sector, as Hurricane Harvey pushed the multifamily market closer to an equilibrium.

Employment growth was led by professional and business services, a sector that added almost 15,000 jobs. Houston has established itself as a distribution hub, and the need for warehouse product has spiked. Amazon, FedEx, Ikea and Best Buy are among the largest companies that either opened major distribution sites in the metro or plan to do so. Moreover, Houston Airports’ five-year, $2 billion capital improvement program might attract more investors to the area. The construction industry is expected to improve steadily, thanks to rebuilding efforts and the development of large-scale projects, including the $820 million Houston Ship Channel marine terminal in Pasadena, Texas.

Despite worries about investing in areas with high flooding risk, interest in local assets has been fairly strong. As construction remains active—with 3,600 units delivered year-to-date, 14,000 underway—rents will likely improve at a moderate clip. We expect rents to rise by 2.3% in 2018.

City: Houston Buyer: American Realty Investors Purchase Price: $57 MMPrice per Unit: $132,399

Remington Park

City: Houston Buyer: The Hanover Co. Purchase Price: $80 MMPrice per Unit: $202,020

Hanover Hermann Park The Vista on Genner

Knox at Westchase

City: HoustonBuyer: Dalcor Purchase Price: $70 MMPrice per Unit: $86,420

City: Houston Buyer: Knightwest Capital Purchase Price: $55 MMPrice per Unit: $105,818

On the cover: Photo by Zview/iStockphoto.com

Houston Multifamily | Spring 2018 3

Houston vs. National Rent Growth (Sequential 3 Month, Year-Over-Year)

Rent Trends

� Rents in Houston rose 2.9% year-over-year through February, the first time in almost three years when rents increased at a higher rate than the national average—2.7% through the interval. Houston rents had been sliding for 18 months prior to Hurricane Harvey, but reversed course and improved during the last months of 2017. However, at $1,089, the average rent still trails the national figure by $275.

� Employment and population growth, along with displaced residents seeking housing, contributed to a significant rise in rental demand. Growth was led by the higher-end Lifestyle segment, which increased to $1,376 in the 12 months ending in February, a 3.2% uptick year-over-year. The working-class Renter-by-Necessity segment continued to consolidate and rose by 2.5% to $852. Average occupancy in stabilized properties was 93.4% as of January, making Houston one of the two metros—along with Dallas—where occupancy did not slide.

� With sudden demand created in the aftermath of extreme weather events, rents increased in about 90% of the metro’s submarkets. Magnolia and Porter—two northern submarkets where Harvey’s impact was minimal—had the highest increase in rent year-over-year through February: 9.1% and 7.6%. However, core submarkets such as the Museum District ($1,905) and West End/Downtown ($1,813) remain the most expensive in the metro. Yardi Matrix expects rents to rise by 2.3% in 2018.

Houston Rent Growth by Asset Class (Sequential 3 Month, Year-Over-Year)

Source: YardiMatrix

Source: YardiMatrix

20102011

20122013

20142015

20162017

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Dec-1

4

Mar-15

Jun-15

Sep-1

5

Dec-1

5

Mar-16

Jun-16

Sep-1

6

Dec-1

6

Mar-17

Jun-17

Sep-1

7

Dec-1

7

Houston National

Employment Growth: YoY 6mo-avg (Houston)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD

National Houston

Supply: Percentage of Stock (Houston)

10,895 Units

15,504 Units

14,296 Units

Planned Prospective Under Construction

Supply: Development Pipeline as of Feb 2018 (Houston)

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

20102011

20122013

20142015

20162017

2018

Houston National

Transactions: Price Per Unit (Houston)

$0

$1,000

$2,000

$3,000

$4,000

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Volume in Millions Number of Properties

Transactions: Total Volume (Houston)

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Houston National

Rent: YoY vs National (Houston)

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Lifestyle Renter-by-Necessity

Rent: Lifestyle vs RBN (Houston)

20102011

20122013

20142015

20162017

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Dec-1

4

Mar-15

Jun-15

Sep-1

5

Dec-1

5

Mar-16

Jun-16

Sep-1

6

Dec-1

6

Mar-17

Jun-17

Sep-1

7

Dec-1

7

Houston National


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD

National Houston


10,895 Units

15,504 Units

14,296 Units



$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

20102011

20122013

20142015

20162017

2018

Houston National


$0

$1,000

$2,000

$3,000

$4,000

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018



-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Houston National


-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%




Houston vs. National Employment Growth (Year-Over-Year)

Economic Snapshot

� Houston added 46,000 jobs in 2017, a 1.5% rate of employment growth year-over-year and only 20 basis points below the national rate. Despite some job losses in the wake of Hurricane Harvey, Houston is one of the country’s top cities for job creation. Professional and business services led growth by adding almost 15,000 positions, but education and health services and manufacturing also added 17,600 jobs combined. Many major employers were active in the area: Ikea inked a 1 million-square-foot warehouse lease in Baytown, Amazon built an 855,000-square-foot fulfillment center in the Pinto Business Park and Norvin Healthcare Properties added the 505,000-square-foot Pin Oak Park medical and office campus in suburban Houston to its portfolio.

� Although it lost 1,200 jobs last year, the construction sector is likely to pick up. Stimulated by the rise of e-commerce and by the rebounding price of oil, demand for industrial space in Houston is on an upward swing. One of the largest projects underway is the 1 million-square-foot Amazon distribution center in Northwest Far. Tariffs on steel and aluminum will definitely have an impact on employment in the metro, where the number of jobs in the energy industry is nearly double the national figure.

� Houston’s office market is fighting to recover. In one of the largest recorded transactions, the 4.2 million-square-foot Houston Center traded for $875 million.

Houston Employment Growth by Sector (Year-Over-Year)

Sources: YardiMatrix, Bureau of Labor Statistics (not seasonally adjusted)

Current Employment Year ChangeCode Employment Sector (000) % Share Employment %

60 Professional and Business Services 487 15.8% 14,900 3.2%30 Manufacturing 231 7.5% 8,800 4.0%65 Education and Health Services 396 12.8% 8,800 2.3%90 Government 423 13.7% 8,000 1.9%55 Financial Activities 160 5.2% 3,800 2.4%70 Leisure and Hospitality 316 10.3% 2,800 0.9%80 Other Services 109 3.5% 1,800 1.7%40 Trade, Transportation and Utilities 627 20.3% -600 -0.1%50 Information 32 1.0% -1,100 -3.3%15 Mining, Logging and Construction 300 9.7% -1,200 -0.4%

Sources: YardiMatrix, Bureau of Labor Statistics

20102011

20122013

20142015

20162017

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Dec-1

4

Mar-15

Jun-15

Sep-1

5

Dec-1

5

Mar-16

Jun-16

Sep-1

6

Dec-1

6

Mar-17

Jun-17

Sep-1

7

Dec-1

7

Houston National


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD

National Houston


10,895 Units

15,504 Units

14,296 Units



$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

20102011

20122013

20142015

20162017

2018

Houston National


$0

$1,000

$2,000

$3,000

$4,000

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018



-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Houston National


-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%




0%

5%

10%

15%

20%

25%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Rent/Income Mort/Income

$0

$50,000

$100,000

$150,000

$200,000

$250,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

0%

5%

10%

15%

20%

25%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017


$0

$50,000

$100,000

$150,000

$200,000

$250,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Houston Rent vs. Own Affordability as a Percentage of Income

DemographicsAffordability

� The median home value in Houston hit $206,564 in 2017, a new cycle peak, up 36.8% from the 2009 mark. Although Harvey’s effects were disastrous, the hurricane also contributed to the Houston housing market’s new surge. Home prices are likely to continue to increase, since the vast majority of projects under construction are geared toward higher-income residents.

� Though home prices are rising at a faster pace than incomes, Houston remains rather affordable compared to other major metros. Owning is still more affordable than renting, as the average mortgage payment accounts for 15% of the area’s median income, while rents equate to 20%.

Houston Median Home Price

Sources: YardiMatrix, Moody’s Analytics

Source: Moody’s Analytics

2012 2013 2014 2015 2016

National 313,998,379 316,204,908 318,563,456 320,896,618 323,127,513

Houston Metro

6,180,817 6,324,167 6,488,046 6,647,465 6,772,470

Sources: U.S. Census, Moody’s Analytics

Population

� Houston added 125,000 residents in 2016, a 1.9% increase, more than double the 0.7% national rate.

� The metro expanded by almost 825,000 people since 2010, a 13.9% uptick. The U.S. growth rate was only 4.5%.

Houston vs. National Population


Houston vs. National Completions as a Percentage of Total Stock (as of February 2018)

Supply

� Apartment deliveries were off to a good start during the first two months of 2018, with nearly 3,600 units coming online, 0.6% of total housing stock. This follows an inventory expansion of 18,689 units in 2017, 3.0% of stock, a new cycle high. Houston looks poised to rebound well and once again become a hotbed of activity, which would benefit real estate investors that are drawn by the metro’s healthy demographic growth.

� Houston had approximately 14,300 units under construction as of February, almost a third of which were concentrated in West End/Downtown (4,499 units). Several other western submarkets have substantial pipelines as well, including Avonak (806 units) and East End (725 units), with construction heavily geared toward luxury apartments. Adding prospective and planned projects, Houston’s pipeline consists of roughly 41,000 units.

� Central and western submarkets are in high demand, due to their proximity to higher-paying jobs. The largest development underway in Houston is ParkLane Fulshear, a 410-unit community built by Judwin Realty Group in Katy. The asset is slated for completion by year’s end.

Development Pipeline (as of February 2018)

Source: YardiMatrix

Source: YardiMatrix Source: YardiMatrix

Houston Completions (as of February 2018)

20102011

20122013

20142015

20162017

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Dec-1

4

Mar-15

Jun-15

Sep-1

5

Dec-1

5

Mar-16

Jun-16

Sep-1

6

Dec-1

6

Mar-17

Jun-17

Sep-1

7

Dec-1

7

Houston National


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD

National Houston


10,895 Units

15,504 Units

14,296 Units



$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

20102011

20122013

20142015

20162017

2018

Houston National


$0

$1,000

$2,000

$3,000

$4,000

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018



-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Houston National


-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%



20102011

20122013

20142015

20162017

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Dec-1

4

Mar-15

Jun-15

Sep-1

5

Dec-1

5

Mar-16

Jun-16

Sep-1

6

Dec-1

6

Mar-17

Jun-17

Sep-1

7

Dec-1

7

Houston National


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD

National Houston


10,895 Units

15,504 Units

14,296 Units



$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

20102011

20122013

20142015

20162017

2018

Houston National


$0

$1,000

$2,000

$3,000

$4,000

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018



-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Houston National


-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%



20102011

20122013

20142015

20162017

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Dec-1

4

Mar-15

Jun-15

Sep-1

5

Dec-1

5

Mar-16

Jun-16

Sep-1

6

Dec-1

6

Mar-17

Jun-17

Sep-1

7

Dec-1

7

Houston National


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD

National Houston


10,895 Units

15,504 Units

14,296 Units



$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

20102011

20122013

20142015

20162017

2018

Houston National


$0

$1,000

$2,000

$3,000

$4,000

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018



-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Houston National


-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%




Houston Sales Volume and Number of Properties Sold (as of February 2018)

Transactions

� Investment sales were strong out of the gate in 2018, with a total of $345 million in multifamily assets changing hands year-to-date. Roughly $2.4 billion in properties traded year-over-year through February, pointing to a recovering housing market following the impact of Hurricane Harvey.

� Per-unit prices in Houston were $99,439 through February, still well below the $151,681 national average. Harvey’s aftermath created rare investment opportunities, as owners choosing to sell their damaged properties have seen substantial interest from buyers in search of value-add projects with high yields.

� Western submarkets—such as Royal Oaks Country Club and West Bellaire—were the most sought-after in the 12 months ending in February. However, the largest transaction was The Hanover Co.’s $80 million purchase of Hanover Hermann Park, a 396-unit green building in the Museum District.

Houston vs. National Sales Price per Unit Top Submarkets for Transaction Volume1

Source: YardiMatrix

Source: YardiMatrix

SubmarketVolume ($MM)

Royal Oaks Country Club 190

West Bellair 177

Nassau Bay/Seabrook 165

Bammel 128

West End–Downtown 99

Avonak 97

Sugar Land–West 91

Cinco Ranch–South 87

Source: YardiMatrix 1 From March 2017 to February 2018

20102011

20122013

20142015

20162017

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Dec-1

4

Mar-15

Jun-15

Sep-1

5

Dec-1

5

Mar-16

Jun-16

Sep-1

6

Dec-1

6

Mar-17

Jun-17

Sep-1

7

Dec-1

7

Houston National


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD

National Houston


10,895 Units

15,504 Units

14,296 Units



$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

20102011

20122013

20142015

20162017

2018

Houston National


$0

$1,000

$2,000

$3,000

$4,000

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018



-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Houston National


-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%



20102011

20122013

20142015

20162017

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Dec-1

4

Mar-15

Jun-15

Sep-1

5

Dec-1

5

Mar-16

Jun-16

Sep-1

6

Dec-1

6

Mar-17

Jun-17

Sep-1

7

Dec-1

7

Houston National


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD

National Houston


10,895 Units

15,504 Units

14,296 Units



$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

20102011

20122013

20142015

20162017

2018

Houston National


$0

$1,000

$2,000

$3,000

$4,000

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018



-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Houston National


-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%



Read All About It! Northwest Properties Snags

216-Unit Houston Community

Get the latest Houston real estate news at

SkyWalker Property Closes

First Houston Office Buy

Berkadia Arranges Fannie Mae

Loan for Houston Community

$300M Luxury Hotel Anchors

Houston Tower Project

Photo by lightkey/iStockphoto.com

https://www.cpexecutive.com/houston/

https://www.multihousingnews.com/houston/


Houston Submarkets

Area # Submarket1 Greater Third Ward2 East End3 Mount Houston4 Cloverleaf5 Pasadena6 South Houston–

Crenshaw Park7 South Houston8 William P. Hobby Airport9 Pierce Junction

10 Clear Creek11 Pearland/Friendswood12 Nassau Bay/Seabrook13 Deer Park14 La Porte15 Atascocita16 Humble/Westfield

Area # Submarket17 Spring18 The Woodlands–East19 Porter20 Kingwood21 Baytown22 League City/Dickenson23 Texas City/San Leon25 League City–West26 Alvin27 Galveston28 Conroe–East29 Lake Jackson/Angleton30 Northwest Brazoria

County31 Outlying Chambers

County

Area # Submarket1 West End/Downtown2 The Heights3 Museum District4 Reliant Park5 Bellaire6 River Oaks7 West Bellaire8 Piney Point Village–South9 Piney Point Village–North

10 Hunters Creek11 Bunker Hill Village12 Spring Valley13 Rosslyn14 Missouri City15 Suger Land–South16 Sugar Land–West17 Suger Land–North18 Royal Oaks Country Club19 Addicks20 George Bush Park

Area # Submarket21 Bear Creek Park22 Jersey Village/Salsuma23 Bammel24 Louetta25 Richmond26 Rosenberg27 Cinco Ranch–South28 Katy29 Cinco Ranch–North30 Tomball32 Magnolia33 The Woodlands34 Conroe–West35 Avonak36 Northwest Harris County37 Outlying Fort

Bend County38 West Montgomery

County


Definitions

Lifestyle households (renters by choice) have wealth sufficient to own but have chosen to rent. Discretionary households, most typically a retired couple or single professional, have chosen the flexibility associated with renting over the obligations of ownership.

Renter-by-Necessity households span a range. In descending order, household types can be:

� A young-professional, double-income-no-kids household with substantial income but without wealth needed to acquire a home or condominium;

� Students, who also may span a range of income capability, extending from affluent to barely getting by;

� Lower-middle-income (“gray-collar”) households, composed of office workers, policemen, firemen, technical workers, teachers, etc.;

� Blue-collar households, which may barely meet rent demands each month and likely pay a disproportionate share of their income toward rent;

� Subsidized households, which pay a percentage of household income in rent, with the balance of rent paid through a governmental agency subsidy. Subsidized households, while typically low income, may extend to middle-income households in some high-cost markets, such as New York City;

� Military households, subject to frequency of relocation.

These differences can weigh heavily in determining a property’s ability to attract specific renter market segments. The five-star resort serves a very different market than the down-and-outer motel. Apartments are distinguished similarly, but distinctions are often not clearly definitive without investigation. The Yardi® Matrix Context rating eliminates that requirement, designating property market positions as:

Market Position Improvements Ratings

Discretionary A+ / A

High Mid-Range A- / B+

Low Mid-Range B / B-

Workforce C+ / C / C- / D

The value in application of the Yardi® Matrix Context rating is that standardized data provides consistency; information is more meaningful because there is less uncertainty. The user can move faster and more efficiently, with more accurate end results.

The Yardi® Matrix Context rating is not intended as a final word concerning a property’s status—either improvements or location. Rather, the result provides reasonable consistency for comparing one property with another through reference to a consistently applied standard.

To learn more about Yardi® Matrix and subscribing, please visit www.yardimatrix.com or call Ron Brock, Jr., at 480-663-1149 x2404.

Energized for Tomorrow

800.866.1144Yardi.com/MatrixThe Data and Analytics Service for Real Estate Professionals

In 30 minutes we’ll show you how you can: » Leverage the power of multifamily, office & self storage market data

» Reveal a property’s true ownership and contacts behind the LLC

» Deliver sales, rent and occupancy comps » Aggregate comp set level revenue and expense comps—only available with Yardi Matrix

» Show in-place loans, maturity dates and originators

» Update new supply pipelines continuously » Create presentation-ready reports


DISCLAIMER

Although every effort is made to ensure the accuracy, timeliness and completeness of the information provided in this publication, the information is provided “AS IS” and Yardi Matrix does not guarantee, warrant, represent or undertake that the information provided is correct, accurate, current or complete. Yardi Matrix is not liable for any loss, claim, or demand arising directly or indirectly from any use or reliance upon the information contained herein.

COPYRIGHT NOTICE

This document, publication and/or presentation (collectively, “document”) is protected by copyright, trademark and other intellectual property laws. Use of this document is subject to the terms and conditions of Yardi Systems, Inc. dba Yardi Matrix’s Terms of Use (http://www.yardimatrix.com/Terms) or other agreement including, but not limited to, restrictions on its use, copying, disclosure, distribution and decompilation. No part of this document may be disclosed or reproduced in any form by any means without the prior written authorization of Yardi Systems, Inc. This document may contain proprietary information about software and service processes, algorithms, and data models which is confidential and constitutes trade secrets. This document is intended for utilization solely in connection with Yardi Matrix publications and for no other purpose.

Yardi®, Yardi Systems, Inc., the Yardi Logo, Yardi Matrix, and the names of Yardi products and services are trademarks or registered trademarks of Yardi Systems, Inc. in the United States and may be protected as trademarks in other countries. All other product, service, or company names mentioned in this document are claimed as trademarks and trade names by their respective companies.

© 2018 Yardi Systems, Inc. All Rights Reserved.

High Demand for Temporary Housing

Development Targets Core Areas

Rents Hit Positive Figures

Houston’s Post-Harvey BoostMultifamily Report Winter 2018

2

HOUSTON MULTIFAMILY

Market Analysis Winter 2018

Contacts Paul Fiorilla Associate Director of Research [email protected] (800) 866-1124 x5764

Jack Kern Director of Research and Publications [email protected] (800) 866-1124 x2444

AuthorLaura Calugar Associate Editor

Bayou City Embarks on Healing Process

Recent Houston Transactions

The Houston apartment market is still struggling to recover from the 2015 oil price drop. Despite its havoc, Hurricane Harvey provided a short-term boost to fundamentals, as demand for living space from residents displaced by the storm temporarily increased multifamily occupancy.

Job creation in the manufacturing sector was a significant force for the positive shift in Houston’s economy, with the metro adding 13,300 new positions in that industry alone. On the other hand, Houston continues to struggle in other sectors, such as construction, transportation and hospitality, which lost more than 20,000 jobs combined. But the energy market has begun to show signs of improvement. Oil prices are on the rise, inventories of petroleum products are declining and energy companies are reporting profits after years of losses. Following Harvey, most refineries along the Texas Gulf Coast have resumed operations. Moreover, state officials have requested federal assistance in the amount of $61 billion to repair and rebuild public infrastructure in the wake of the hurricane.

The outlook for the multifamily sector will brighten as residents in need of housing absorb new supply. Due to flood-damaged units rendered uninhabitable and delays in deliveries caused by lack of workforce and building materials, rents showed positive growth for the first time in more than a year. However, we expect rents to contract by -0.7% for 2017, as renters return to storm-ravaged homes.

City: Houston Buyer: American Realty Investors Purchase Price: $57 MMPrice per Unit: $132,399

Remington Park

City: Pearland, Texas Buyer: Starwood Capital Group Purchase Price: $67 MMPrice per Unit: $120,000

Villas at Shadow Creek Ranch Domain at Kirby

The Lodge at Shadowlake

City: HoustonBuyer: Ilan Investments Purchase Price: $67 MMPrice per Unit: $227,912

City: Houston Buyer: Knightvest Capital Purchase Price: $55 MMPrice per Unit: $105,818

On the cover: Photo by typhoonski/iStockphoto.com

To SubscribeHollie Zepke Audience Development Specialist [email protected] (800) 866-1124 x5389

Houston Multifamily | Winter 2018 3

Houston vs. National Rent Growth (Sequential 3-Month, Year-Over-Year)

Rent Trends

� Houston rents rose 0.8% year-over-year through October, the metro’s first positive month since July 2016. The increase resulted from heightened demand as Hurricane Harvey left many Houstonians in need of housing. An initial analysis by Yardi Matrix found that between 45,000 and 72,000 multifamily units had been rendered uninhabitable. Rental rates stood at $1,077, trailing the national average by $281.

� October was the first month in which the consequences of the hurricane could be measured. For at least the short term, the storm has given the metro a lift, and it is likely to reverse Houston’s anemic rent growth over the past two years. The aftereffects include stalled construction projects due to property damage, restricted access, temporary loss of utilities or lack of labor or materials for repairs.

� Rents for Lifestyle assets rose to $1,368 in the 12 months ending in October, marking a 0.5% uptick. The working-class Renter-by-Necessity segment continued to strengthen slightly and brought rents to $853, a 0.9% year-over-year increase. Though rents are still highest in core areas such as Museum District ($1,881), they grew at the fastest rates in Pirce Junction—5.2% to $743.

� Despite the increased demand from damaged units, Yardi Matrix expects rents to contract by -0.7% for the year.

Houston Rent Growth by Asset Class (Sequential 3-Month, Year-Over-Year)

Source: YardiMatrix

Source: YardiMatrix

2009

2010

2011

2012

2013

2014

2015

2016

2017

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Houston National


0.0%

1.0%

2.0%

3.0%

4.0%

2009 2010 2011 2012 2013 2014 2015 2016 2017

National Houston


12,494 Units

16,041 Units

20,161 Units


Supply: Development Pipeline as of Oct 2017 (Houston)

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

2009 2010 2011 2012 2013 2014 2015 2016 2017

Houston National


$0

$1,000

$2,000

$3,000

$4,000

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016 2017



-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Houston National


-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%



2009

2010

2011

2012

2013

2014

2015

2016

2017

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Houston National


0.0%

1.0%

2.0%

3.0%

4.0%

2009 2010 2011 2012 2013 2014 2015 2016 2017

National Houston


12,494 Units

16,041 Units

20,161 Units



$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

2009 2010 2011 2012 2013 2014 2015 2016 2017

Houston National


$0

$1,000

$2,000

$3,000

$4,000

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016 2017



-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Houston National


-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%




Houston vs. National Employment Growth (Year-Over-Year)

Economic Snapshot

� The metro added only 19,500 jobs in the 12 months ending in September. Overall growth was 1.5%, still below the 1.9% national average, due to continued vulnerability of the oil and energy industries. Until Harvey, the local economy was on a steady path to recovery following the oil slump, but the storm unleashed floodwaters that shut down, damaged or destroyed thousands of businesses, putting many Houstonians out of work.

� The manufacturing sector led employment gains (13,300 jobs). Most of the metro’s industrial product weathered Harvey with no significant structural damage. Daikin Industries Ltd. completed its $417 million business campus on 500 acres outside Houston, where it is expected to eventually employ about 4,000 people. The traditional health sector also remained strong, adding 9,000 jobs.

� Nearly all job losses (-21,700) can be attributed to Hurricane Harvey, with four sectors accounting for the bulk: construction, transportation, hospitality and information. With operations temporarily suspended, firms had no need for workers, but these losses are transitory and should be eliminated by end-year.

� Houston’s office market continues to struggle, with net absorption down and overall vacancy rates up. With the vacancy rate at about 20%, market conditions are likely to favor tenants in the near term.

Houston Employment Growth by Sector (Year-Over-Year)

Sources: YardiMatrix, Bureau of Labor Statistics (not seasonally adjusted)

Current Employment Year ChangeCode Employment Sector (000) % Share Employment %

30 Manufacturing 232 7.7% 13,300 6.1%

65 Education and Health Services 393 13.0% 9,000 2.3%

60 Professional and Business Services 479 15.9% 8,800 1.9%

90 Government 409 13.6% 6,400 1.6%

55 Financial Activities 159 5.3% 3,200 2.1%

80 Other Services 110 3.6% 500 0.5%

50 Information 32 1.1% -800 -2.5%

70 Leisure and Hospitality 309 10.3% -4,800 -1.5%

40 Trade, Transportation and Utilities 598 19.8% -6,600 -1.1%

15 Mining, Logging and Construction 294 9.8% -9,500 -3.1%

Sources: YardiMatrix, Bureau of Labor Statistics

2009

2010

2011

2012

2013

2014

2015

2016

2017

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Houston National


0.0%

1.0%

2.0%

3.0%

4.0%

2009 2010 2011 2012 2013 2014 2015 2016 2017

National Houston


12,494 Units

16,041 Units

20,161 Units



$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

2009 2010 2011 2012 2013 2014 2015 2016 2017

Houston National


$0

$1,000

$2,000

$3,000

$4,000

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016 2017



-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Houston National


-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%




0%

5%

10%

15%

20%

25%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017


$0$25,000$50,000$75,000

$100,000$125,000$150,000$175,000$200,000$225,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

0%

5%

10%

15%

20%

25%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017


$0$25,000$50,000$75,000

$100,000$125,000$150,000$175,000$200,000$225,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Houston Rent vs. Own Affordability as a Percentage of Income

DemographicsAffordability

� The median home price in the metro increased to a new cycle peak during the first half of the year, reaching $203,369. Houston’s growth is fueled in part by steady population growth, relaxed zoning and permissive development rules.

� Owning remains the less costly option, accounting for 15% of the metro’s median income. Average monthly rates reached $1,077 in October, with rents taking up 20% of the median income. The rental market continued to rise during the past two months, bolstered by flood victims seeking temporary housing and flood-damaged homes having been pulled off the market.

Houston Median Home Price

Sources: YardiMatrix, Moody’s Analytics

Source: Moody’s Analytics

2012 2013 2014 2015 2016

National 313,998,379 316,204,908 318,563,456 320,896,618 323,127,513

Houston Metro 6,180,817 6,324,167 6,488,046 6,647,465 6,772,470

Sources: U.S. Census, Moody’s Analytics

Population

� Houston added 125,000 residents in 2016, marking a 1.9% increase, well above the 0.7% national average.

� The metro’s population expanded by 825,000 since 2010—up 13.9%. The national growth rate was only 4.5%.

Houston vs. National Population


Houston vs. National Completions as a Percentage of Total Stock (as of October 2017)

Supply

� Multifamily development remained strong during the first 10 months of 2017 with more than 14,000 new units coming online, adding 2.3% to the stock. Before Harvey, there were concerns that supply was outpacing demand, but the hurricane helped to create demand for unused units, albeit to a lesser extent than expected. Moreover, builders are now concerned about the cost of materials, the availability of labor and potential drainage requirements that may be enacted.

� More than 20,000 units were under construction as of October. Houston’s occupancy rate for stabilized properties was 93.2% as of September, but the lingering effects of Harvey’s damage will likely boost multifamily occupancy in the near term.

� Houston’s West End/Downtown submarket remains by far the most attractive to developers, with 4,225 units under construction as of October. The largest development underway is CWS Capital Partners Marq 31, a 453-unit community in River Oaks. Most Houston submarkets have been affected by Harvey, so delays in deliveries are likely to occur in part due to the difficulty in obtaining aid that comes from insurance and government sources.

Development Pipeline (as of October 2017)

Source: YardiMatrix

Source: YardiMatrix Source: YardiMatrix

Houston Completions (as of October 2017)

2009

2010

2011

2012

2013

2014

2015

2016

2017

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Houston National


0.0%

1.0%

2.0%

3.0%

4.0%

2009 2010 2011 2012 2013 2014 2015 2016 2017

National Houston


12,494 Units

16,041 Units

20,161 Units



$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

2009 2010 2011 2012 2013 2014 2015 2016 2017

Houston National


$0

$1,000

$2,000

$3,000

$4,000

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016 2017



-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Houston National


-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%



2009

2010

2011

2012

2013

2014

2015

2016

2017

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Houston National


0.0%

1.0%

2.0%

3.0%

4.0%

2009 2010 2011 2012 2013 2014 2015 2016 2017

National Houston


12,494 Units

16,041 Units

20,161 Units



$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

2009 2010 2011 2012 2013 2014 2015 2016 2017

Houston National


$0

$1,000

$2,000

$3,000

$4,000

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016 2017



-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Houston National


-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%



2009

2010

2011

2012

2013

2014

2015

2016

2017

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Houston National


0.0%

1.0%

2.0%

3.0%

4.0%

2009 2010 2011 2012 2013 2014 2015 2016 2017

National Houston


12,494 Units

16,041 Units

20,161 Units



$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

2009 2010 2011 2012 2013 2014 2015 2016 2017

Houston National


$0

$1,000

$2,000

$3,000

$4,000

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016 2017



-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Houston National


-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%




Houston Sales Volume and Number of Properties Sold (as of October 2017)

Transactions

� Despite the slump on oil prices two years ago and the recent natural catastrophe, investor appetite has remained relatively healthy, with $2.1 billion worth of assets changing hands year-to-date through October. However, transaction volumes have moderated over the past two years. Per-unit prices in Houston started the last quarter of 2017 at $97,506, marking a new cycle high, but still below the $135,622 national average.

� A relatively small number of multifamily units were seriously damaged by Harvey, so some sellers whose properties remained dry may look to cash in. Nassau Bay/Seabrook continues to be the most sought-after submarket of the metro in the 12 months ending in October, with roughly $254 million in transactions.

� Connecticut-based Starwood Capital was the most active buyer, acquiring 14 assets in the metro since November 2016. Starwood paid $2.8 billion to Milestone Group for a multi-state portfolio of 78 assets.

Houston vs. National Sales Price per Unit Top Submarkets for Transaction Volume1

Source: YardiMatrix

Source: YardiMatrix

Submarket Volume ($MM)

Nassau Bay/Seabrook 254

Missouri City 172

Royal Oaks Country Club 136

Bammel 129

Addicks 106

Cinco Ranch–South 103

Jersey Village/Salsuma 100

Rosslyn 90

Source: YardiMatrix 1 From November 2016 to October 2017

2009

2010

2011

2012

2013

2014

2015

2016

2017

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Houston National


0.0%

1.0%

2.0%

3.0%

4.0%

2009 2010 2011 2012 2013 2014 2015 2016 2017

National Houston


12,494 Units

16,041 Units

20,161 Units



$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

2009 2010 2011 2012 2013 2014 2015 2016 2017

Houston National


$0

$1,000

$2,000

$3,000

$4,000

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016 2017



-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Houston National


-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%



2009

2010

2011

2012

2013

2014

2015

2016

2017

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Houston National


0.0%

1.0%

2.0%

3.0%

4.0%

2009 2010 2011 2012 2013 2014 2015 2016 2017

National Houston


12,494 Units

16,041 Units

20,161 Units



$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

2009 2010 2011 2012 2013 2014 2015 2016 2017

Houston National


$0

$1,000

$2,000

$3,000

$4,000

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016 2017



-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Houston National


-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%



Read All About It!

Westmount Realty Capital Hooks

Houston’s Copper Mill

Get the latest Houston real estate

news at

Brookfield Pays $875M

For Houston Center

PGIM, Hanover Snap Up

Houston Property

ATCAP Snaps Up

16-Building Industrial Portfolio

In Houston

Photo by lightkey/iStockphoto.com

https://www.cpexecutive.com/houston/

https://www.multihousingnews.com/houston/


Houston Submarkets

Area # Submarket1 Greater Third Ward2 East End3 Mount Houston4 Cloverleaf5 Pasadena6 South Houston–Crenshaw Park7 South Houston8 William P. Hobby Airport9 Pierce Junction

10 Clear Creek11 Pearland/Friendswood12 Nassau Bay/Seabrook13 Deer Park14 La Porte15 Atascocita16 Humble/Westfield17 Spring18 The Woodlands–East19 Porter20 Kingwood21 Baytown22 League City/Dickenson23 Texas City/San Leon25 League City–West26 Alvi27 Galveston28 Conroe–East29 Lake Jackson/Angleton

Area # Submarket1 West End/Downtown2 The Heights3 Museum District4 Reliant Park5 Bellaire6 River Oaks7 West Bellaire8 Piney Point Village–South9 Piney Point Village–North

10 Hunters Creek11 Bunker Hill Village12 Spring Valley13 Rosslyn14 Missouri City15 Suger Land–South16 Sugar Land–West17 Suger Land–North18 Royal Oaks Country Club19 Addicks20 George Bush Park21 Bear Creek Park22 Jersey Village/Salsuma23 Bammel24 Louetta25 Richmond26 Rosenberg27 Cinco Ranch–South28 Katy29 Cinco Ranch–North30 Tomball32 Magnolia33 The Woodlands34 Conroe–West


Definitions

Lifestyle households (renters by choice) have wealth sufficient to own but have chosen to rent. Discretionary households, most typically a retired couple or single professional, have chosen the flexibility associated with renting over the obligations of ownership.

Renter-by-Necessity households span a range. In descending order, household types can be:

� A young-professional, double-income-no-kids household with substantial income but without wealth needed to acquire a home or condominium;

� Students, who also may span a range of income capability, extending from affluent to barely getting by;

� Lower-middle-income (“gray-collar”) households, composed of office workers, policemen, firemen, technical workers, teachers, etc.;

� Blue-collar households, which may barely meet rent demands each month and likely pay a disproportionate share of their income toward rent;

� Subsidized households, which pay a percentage of household income in rent, with the balance of rent paid through a governmental agency subsidy. Subsidized households, while typically low income, may extend to middle-income households in some high-cost markets, such as New York City;

� Military households, subject to frequency of relocation.

These differences can weigh heavily in determining a property’s ability to attract specific renter market segments. The five-star resort serves a very different market than the down-and-outer motel. Apartments are distinguished similarly, but distinctions are often not clearly definitive without investigation. The Yardi® Matrix Context rating eliminates that requirement, designating property market positions as:

Market Position Improvements Ratings

Discretionary A+ / A

High Mid-Range A- / B+

Low Mid-Range B / B-

Workforce C+ / C / C- / D

The value in application of the Yardi® Matrix Context rating is that standardized data provides consistency; information is more meaningful because there is less uncertainty. The user can move faster and more efficiently, with more accurate end results.

The Yardi® Matrix Context rating is not intended as a final word concerning a property’s status—either improvements or location. Rather, the result provides reasonable consistency for comparing one property with another through reference to a consistently applied standard.

To learn more about Yardi® Matrix and subscribing, please visit www.yardimatrix.com or call Ron Brock, Jr., at 480-663-1149 x2404.

What’s the best choice for CRE news & views?

Visit our websites and sign up for our free emailed newsletters at cpexecutive.com/subscribe and multi-housingnews.com/subscribe.

With so much information out there, selecting the best source

can be daunting. Keep it simple. Commercial Property Executive

and Multi-Housing News will keep you up-to-date on real estate

news, data, trends and analysis—daily, weekly or monthly. Trust

the leading integrated industry information resource to help you

make informed decisions and achieve your business goals.

cpexecutive.com multi-housingnews.com

https://www.cpexecutive.com/

https://www.multihousingnews.com/

https://www.cpexecutive.com/subscriptions/

https://www.multihousingnews.com/subscriptions/


DISCLAIMER

ALTHOUGH EVERY EFFORT IS MADE TO ENSURE THE ACCURACY, TIMELINESS AND COMPLETENESS OF THE INFORMATION PROVIDED IN THIS

PUBLICATION, THE INFORMATION IS PROVIDED “AS IS” AND YARDI MATRIX DOES NOT GUARANTEE, WARRANT, REPRESENT OR UNDERTAKE

THAT THE INFORMATION PROVIDED IS CORRECT, ACCURATE, CURRENT OR COMPLETE. YARDI MATRIX IS NOT LIABLE FOR ANY LOSS, CLAIM,

OR DEMAND ARISING DIRECTLY OR INDIRECTLY FROM ANY USE OR RELIANCE UPON THE INFORMATION CONTAINED HEREIN.

COPYRIGHT NOTICE

This document, publication and/or presentation (collectively, “document”) is protected by copyright, trademark and other intellectual

property laws. Use of this document is subject to the terms and conditions of Yardi Systems, Inc. dba Yardi Matrix’s Terms of Use (http://

www.yardimatrix.com/Terms) or other agreement including, but not limited to, restrictions on its use, copying, disclosure, distribution and

decompilation. No part of this document may be disclosed or reproduced in any form by any means without the prior written authorization

of Yardi Systems, Inc. This document may contain proprietary information about software and service processes, algorithms, and data

models which is confidential and constitutes trade secrets. This document is intended for utilization solely in connection with Yardi Matrix

publications and for no other purpose.

Yardi®, Yardi Systems, Inc., the Yardi Logo, Yardi Matrix, and the names of Yardi products and services are trademarks or registered trademarks of

Yardi Systems, Inc. in the United States and may be protected as trademarks in other countries. All other product, service, or company names

mentioned in this document are claimed as trademarks and trade names by their respective companies.

© 2018 Yardi Systems, Inc. All Rights Reserved.

houston’s balancing act...houston multifamily | spring 2018 3 houston vs. national rent growth...

Documents