Houston 4Q10Apt

8/8/2019 Houston 4Q10Apt

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Houston Metro Area Fourth Quarter 2010

CORE AREAS LEADING METROWIDE APARTMENT RECOVERYA recovery is well under way in Houston, but the slow pace of economic growth has bifurcated improvement in the

apartment market between high- and low-cost areas. The most desirable submarkets already post noteworthy increasesin occupancy due to owners offering wide concessions to attract renters from secondary areas. Over the next severalmonths, though, owners in these primary locations near major employment centers such as the CBD, Energy Corridorand Texas Medical Center will withdraw leasing incentives. Moreover, job gains in the high-paying professional andbusiness services and education and health services sectors will outpace other segments, fueling renter demand in thesewhite-collar sections of the metro. Less-attractive first-ring suburbs, however, will not register improvements in occu-pancies and rents until early 2011, when broad-based job growth accelerates. On the supply side, the pace of buildingwill reach a four-year low in 2010 and fall further in 2011 unless the availability of construction financing rebounds.

Although the supply/demand balance currently favors core, expensive areas of the metro, local buyers are mov-ing back into the market to take advantage of lower prices in the suburbs. Several poorly managed complexes ownedby out-of-state investors came to market recently, presenting value-add opportunities at cap rates in the low-9 percentrange. Well-capitalized out-of-state buyers and institutions also remain active, targeting stabilized assets in premierlocations. The presence of large buyers has driven cap rates for these properties to below 6 percent in some cases, andfurther compression is on the horizon. While distressed-asset shoppers have found few such offerings thus far, morethan 130 apartment communities are in some level of distress in Houston and should begin clearing the market withinthe next two quarters. Several funds have been established to take advantage of the $1.5 billion in properties that couldchange hands, though competition will likely minimize the discount that can be achieved.

2010 ANNUAL APARTMENT FORECASTEmployment: Payroll expansion will hasten through the end of 2010 and into next year.Employers will add 27,500 positions in Houston this year, a 1.1 percent annual increase.From 2006 to 2008, the metro led the country in job creation.

Construction: After averaging 9,900 new units per year over the past five years, develop-ers will bring online 7,600 apartments in 2010, a 1.6 percent inventory expansion. A sharpdecline in permitting activity will further reduce completions in 2011.

Vacancy: The marketwide vacancy rate will continue to march lower this year, averaging11.1 percent in the fourth quarter, an annual decline of 120 basis points. While improving,vacancy is at levels last recorded in the late 1980s.

Rents: As conditions tighten, asking rents will climb 2.5 percent to $765 per month in 2010while effective rents push up to $698 per month, a gain of 3.6 percent. Last year, askingrents declined 3 percent, and effective rents fell 5.7 percent. Concessions will tick down to32 days of free rent this year.

1.1%increase in

totalemployment

7,600units

will becompleted

120 basispoint

decrease invacancy

2.5%increase in

askingrents


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Year-over-YearChange

Metro Area

United States

Employment Trends

* ForecastSources: Marcus & Millichap Research Services, BLS, Economy.com

07 08 0906 10*-6%

-3%

0%

3%

6%

Metro Area

United States

MedianExistingHomePrice(Y-O-YChg.)

Home Price Trends

* Trailing 12-Month PeriodSources: Marcus & Millichap Research Services, Economy.com, NAR

07 08 0906 10*-15%

-10%

-5%

0%

5%

NumberofUnits(thousands)

Construction Trends

0

6

12

18

24

07 08 09 10*06* ForecastSources: Marcus & Millichap Research Services, U.S. Census Bureau

Apartment Completions

Multifamily Permits

ECONOMY Since total employment bottomed in the fourth quarter of last year, employ

ers in Houston have added 500 positions, amid a choppy recovery. Duringthe recession, 104,000 jobs were lost in the area.

Two of the hardest-hit sectors are leading the metro into the recovery. Man

ufacturing, which cut 26,300 positions through the recession, has created4,600 jobs since the beginning of 2010. Professional and business servicesproviders generated 700 jobs in the same period, after eliminating 37,200workers in the downturn.

Walmart is hiring 450 workers for a new store at Crosstimbers Street and Interstate 45, which should help boost apartment demand in the North LoopEast/Sheldon submarket. The company also recently received approval foa store near the Heights neighborhood that could come online next year.

Outlook: Payroll expansion will hasten through the end of 2010 and intonext year. Employers will add 27,500 positions in Houston this year, a 1.1percent annual increase.

HOUSINGAND DEMOGRAPHICS Over the past year, 20,500 single-family permits have been pulled, a 13 per

cent increase from the prior 12-month stretch. Multifamily builders, however, continue to show some hesitation, as 3,900 permits were issued in thelast year, down 44 percent from the previous period.

The median home price in Houston has stabilized, gaining 0.9 percent yeaover year to $156,000. Similarly, the median household income has risen 0.3percent from the third quarter of 2009 to $51,900 annually, $12,000 abovethe minimum qualifying income for a median-priced home.

Due to historically low interest rates, the mortgage obligation on a medianpriced residence, using traditional financing, is $40 per month lower than

the average Class A asking rent.

Outlook: Homes in Houston have always been affordable as a result of theareas above-average household income. Few renters will likely make thetransition into ownership, however, due to tighterfinancing standards andthe withdrawal of the government tax credit.

CONSTRUCTION Builders completed 1,050 apartment units in the third quarter, bringing

year-to-date additions to 7,200 units, or a 1.4 percent inventory expansion.

Currently, 1,300 units are under construction, including 900 apartmentsscheduled to come online after the end of the year. The planning pipelinecontains 12,900 units, 3,000 of which are in the Hardy Yards redevelopmenof the Union Pacific rail yard northeast of the Central Business District.

Millennium Waterway in the Woodlands is the only project scheduled to becompleted in the fourth quarter. The 393-unit complex will expand stock inthe Montgomery County submarket by 1.9 percent.

Outlook: After averaging 9,900 new units annually over the past five yearsdevelopers will complete 7,600 units in 2010, a 1.6 percent increase in stock

page 2 Marcus & MillichapApartment Research Repor


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VacancyRate

Metro Area

United States

3%

6%

9%

12%

15%

Vacancy Rate Trends

* ForecastSources: Marcus & Millichap Research Services, Reis

07 08 0906 10*

Asking Rent

Effective Rent

Year-over-YearChange

Rent Trends

* ForecastSources: Marcus & Millichap Research Services, Reis

07 08 0906 10*-6%

-3%

0%

3%

6%

MedianPriceper

Unit(thousands)

Sales Trends

$20

$30

$40

$50

$60

07 08 09 10*06* Trailing 12-Month PeriodSources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

VACANCY In the third quarter, vacancy retreated to 11.5 percent, down 140 basis

points from six months ago, when the metrowide rate peaked. Despite thereduction, vacancy remains near 22-year highs.

Class A vacancy is driving overall improvement. Top-tier owners reported

an average rate of 10 percent in the third quarter, a year-over-year improve-ment of 160 basis points. In the Class B/C segment, vacancy is up 50 basispoints from last year, as some renters made the transition into higher-qual-ity accommodations to take advantage of leasing incentives.

High-end submarkets are outperforming their less-expensive counterparts,indicating the recovery is well under way in Houston. In the six most ex-pensive submarkets, the average vacancy decline in the past year was 120basis points, while the six least expensive submarkets posted an averagerise in vacancy of 160 basis points.

Outlook: The marketwide vacancy rate will continue to march lower thisyear, averaging 11.1 percent in the fourth quarter, an annual decline of 120basis points.

RENTS Asking rents reached $760 per month in the third quarter, a year-over-year

gain of 0.8 percent, while effective rents were $688 per month, a drop of1.1 percent from last year. Since the beginning of 2010, asking and effectiverents have climbed 1.9 percent and 2.1 percent, respectively.

Buoyed, in part, by new-unit premiums, Class A asking rents rose 2.5 per-cent to $936 per month year to date. Rent growth in the Class B/C sectorwas slower at just 0.3 percent, with the average lower-tier rent reaching$609 per month in the third quarter.

Leasing incentives peaked at 35 days of free rent in the second quarter of

this year and have since retreated to 34 days of free rent.

Outlook: As conditions tighten, asking rents will climb 2.5 percent to $765per month in 2010 while effective rents push up to $698 per month, an an-nual gain of 3.6 percent. Last year, asking rents declined 3 percent, and ef-fective rents fell 5.7 percent.

SALES TRENDS** During the most recent 12-month period, deal flow eased a modest 2 per-

cent. Investors remain hesitant, however, as only 40 percent of the proper-ties that changed hands in that time did so within the last six months.

The median price of $27,200 per unit over the past year was down 14 per-cent from the previous period, as buyers bought larger properties at lowerper-unit prices.

Despite the decline in prices, average cap rates ticked down 20 basis pointsduring the last year to the high-7 percent to low-8 percent range.

Outlook: Sensing a market bottom, local buyers are moving back into theinvestor pool to target value-add deals. Property operations remain a chal-lenge in many of out-of-state owned properties, providing opportunitiesfor owner-operators.

Marcus & MillichapApartment Research Report page 3** Data reflect a full 12-month period, calculated on

a trailing 12-month basis by quarter


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CAPITAL MARKETSBY WILLIAM E. HUGHES, SENIOR VICE PRESIDENT, MARCUS & MILLICHAP CAPITAL CORPORATION

The yield on the 10-year U.S. Treasury held in the mid-2 percent rangethrough October due to concerns regarding the durability of economic recovery. The yield last peaked at 4 percent in early April of this year.

Despite significant losses and ongoing troubles associated with Fannie Maeand Freddie Macs residential mortgage portfolios, their multifamily holdings continue to outperform, with delinquency rates holding well below 1percent. The GSEs and commercial banks remain the dominant sources offinancing for apartments, but life insurance companies have begun to compete more intensely for attractive deals that meet their criteria.

Loan-to-values (LTVs) among portfolio lenders range from 55 percent to75 percent depending on asset quality and location, as well the strength othe borrower. For best-of-class deals financed by agency lenders, LTVs canpush closer to 80 percent. Lenders generally require debt-service coverageratios of 1.25x to 1.30x, well above pre-crisis levels but relatively close tohistorical norms.

All-in mortgage rates offered by portfolio lenders on smaller seven-yearloans range from 4.80 percent to 5.75 percent, while agency loans typicallyprice 55 basis points to 100 basis points lower, depending on the deal. Largeseven-year loans of $5 million or more price between 4.5 percent and 5.5 per-cent among portfolio lenders and 4.0 percent to 4.5 percent for the agencies

SUBMARKET VACANCY RANKINGVacancy Y-O-Y Basis Effective Y-O-Y

Rank Submarket Rate Point Change Rents % Change

1 Sugar Land/Fort Bend County 7.1% -270 $851 0.5%

2 North Loop East/Sheldon 8.5% -260 $610 -3.6%

3 Katy/Bear Creek 8.7% -60 $744 -0.4%

4 Bellaire/West University 8.8% -240 $937 -2.5%

5 Westchase/Woodlake 9.2% 30 $779 0.8%

6 Cypress/Fairbanks 9.3% -390 $741 -4.0%

7 Montrose/River Oaks 10.1% 190 $1,061 0.6%

8 Energy Corridor 10.4% -90 $713 -2.7%

9 Clear Lake 10.5% 110 $713 -2.3%

10 Kingwood/Lake Houston 10.6% -480 $735 0.4%

11 Pasadena/Deer Park 10.7% -60 $566 -1.0%

12 Montgomery County 10.9% -300 $726 -1.0%

13 Medical Center/Museum District 11.4% -100 $614 -1.1%

14 Spring Branch 11.7% 110 $621 -2.2%

15 Sharpstown 12.0% 180 $538 -2.4%

16 Alief 12.1% -40 $549 -3.2%

17 Braeswood/Meyerland 13.4% 20 $535 -0.6%

18 Inwood/Northwest Houston 13.9% 40 $557 -2.8%

19 San Jacinto/Galena Park 15.6% 220 $549 -1.6%

20 Spring/Champions 16.4% -180 $642 0.2%

21 North Houston 16.7% 80 $488 -4.5%

22 Baytown 18.8% 350 $517 -2.1%

23 Heights 19.5% 110 $531 -3.5%

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or r eliabilitof the information contained herein. Note: Metro-level employment growth is calculated using seasonally adjusted quarterly averages. Sales data includes t ransactions valued at $500,000 and greater unless otherwise noted. Sources: Marcus & Millichap Research ServicesBureau of Labor Statistics, CoStar Group, Inc., Economy.com, National Association of Realtors, Real Capital Analytics, Reis, TWR/Dodge Pipeline, U.S. Census Bureau.

Visit www.NationalMultiHousingGroup.com or call:

Linwood C. ThompsonSenior Vice President, Managing DirectorNational Multi Housing GroupTel: (678) [email protected]

Prepared and edited byStephen Hovland

Division Research ManagerResearch Services

For information on nationalapartment trends, contact

John ChangVice President, Research Services

Tel: (602) 687-6700 ext. [email protected]

Houston Office:Brent Smith

Regional [email protected]

777 Post Oak BoulevardSuite 900Houston, Texas 77056

Tel: (713) 452-4200Fax: (713) 452-4210

Price: $150

Marcus & Millichap 2010www.MarcusMillichap.com

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