How Is The Houston Multifamily Market Doing?
The Houston multifamily market is looking good. Very good. That was the overall theme of HAA’s Market Outlook Breakfast. Stacy Hunt, Executive Director at Greystar, moderated a panel of Kirk Tate, CEO for Orion Real Estate Services, Brian Austin, Managing Director of Development at Alliance Communities, Brian Dinerstein, President of DMC Management Company, and Bruce McClenny, President of Apartment Data Services.
Photo by Mark Hiebert,www.hiebertphotography.com
As Houston enjoys a variety of positive multifamily factors, such as job growth, fewer apartment communities in development, and lower home purchases, Bruce McClenny reported that both effective rents and occupancy were up in 2011. He described 2010 as a recovery year from 2009, while 2011 was an improvement beyond that. He noted that Class A units led the pack with an average occupancy of 93.5% and average rents of $1,235 ($1.32/sq ft), and that Houston’s Class A market compared well with most every other major market in the U.S.
Houston’s Class B product also showed improvements in effective rents, but McClenny explained that future growth would be predicated on improvement in the Class A product. Class C rents grew minimally, and McClenny indicated that Class D simply needed a lot of tear down. For 2012, he expects rent levels to increase 6% for Class A properties in 2012, 4% for Class B, and 2% for Class C.
Brian Austin took up the reins at the meeting and discussed some of the multifamily development projects that Alliance had undertaken. Through this process, Austin analyzed high density and high rise developments in the Houston area, and noticed that the smaller units were consistently achieving stronger effective rents per square foot. He also noted that smaller communities appeared to be able to capitalize on increasing rent levels quicker than larger communities. Therefore, Alliance has used a strategy of smaller units to achieve these higher rents per square foot.
Kirk Tate next took the mic discussing tax credit issues at Orion, where they have 50,000 units in the Houston area. Many of these tax credit properties were Class B properties, which explained why rent growth was lower for Class B properties overall, due to restrictions on rent increases. Going forward, Tate indicated much of tax credit growth would come in the senior sector as tax credit developments favored smaller communities, which senior housing was more adept, as well as the easier path to development for a senior community relative to a “tax credit” community, as a tax credit community can tend to stir up neighborhood opposition.
Brian Dinerstein then shared some information on new upcoming developments, followed by an assessment of what lenders are looking for in regards to new development and permanent financing. He listed the 6 factors in what lenders are seeking, in order :
- Contingent Liabilities
- How did you treat everyone the past four-five years?
- Deposits at the Bank (Construction lenders only)
- Debt Service Coverage
- The Actual Project
He stressed that there were so many challenges to development that only those with the most conviction could make it through the process. He also shared how there is a large gap between multifamily deals, in that “the good deals are good” and “the bad deals are very bad”. This is why he felt that distressed deals were often still bad, despite a good price.
Overall, Dinerstein echoed the others’ sentiments that the Houston market is in a great position with job growth, shrinking home ownership, and no flooding of the market with new product.
Following the initial presentations, Stacy Hunt led the question and answer period with the panel:
What new amenities are you seeing?
- Kirk Tate: Splash pads instead of pools are becoming more popular. They still require maintenance, but they are safer and insurance companies like them better.
- Brian Austin: Real wood floors and accompanying sound proofing, silestone, and travertine
- Brian Dinerstein: A/C corridors and a modern look. Not interested in stainless steel, as they don’t seem to affect rents. Tanning beds and accent walls also popular.
With the improvement in the market, are concessions still common?
- Bruce McClenny: Many communities are raising market rent but including a concession, resulting in a net increase in rents.
- Kirk Tate: Not planning any. Not word for word, but Tate added, “The sin we committed was not giving a month free but prorating it.” He described how they had decreased rents by 8% by doing that, which was hard to recover.
- Brian Austin: They plan for one month concession.
- Brian Dinerstein: Not sure, as it depends on a lot of factors
What trends do you see in construction cost?
- Brian Austin: Labor costs are stagnant, and material costs are creeping up slightly, such as lumber and copper
- Brian Dinerstein: As single-family housing has dried up, that reduced demand has removed some of the increase in materials costs.