More Expansion in All Sectors
The Houston, Texas apartment market is the fourth largest in the country with nearly 600,000 units. Looking at the real estate drivers, it’s easy see why there’s so much demand. More than 90,000 jobs were added in 2012. New construction of offices in the energy corridor, a new Exxon campus in Harris County, and new apartment construction throughout the Houston area has created a large employment demand that’s expected to be strong for at least the next two years. The Houston Consolidated Metropolitan Statistical Area (CMSA) has gained about 90,000 jobs per year since 2011 which creates a demand for 18,000 new apartment units per year.
Average Class A cap rates have continued to decrease since mid-2010, from 7% to a low of 5.5% in 2012. During the same time average sales prices increased from $50,000 to $66,000/unit. Cap rates for 2013 are projected to stay about the same for Class A properties at about 5.4% to 5.6%. Values will tend to increase as much as 10% due to new demand from job growth and the lagging supply of new product which should cause rents to increase. Class B cap rates should range from 7.0% to 7.5% and Class Cs at 8% to 8.5%. Now is the time to sell before we go into “hypersupply” foreseen in about 18 months.
Vacancy Trend Shows 0.8% Improvement in 2012
Decreasing vacancy rates is one characteristic of the “expansion cycle.” Overall occupancy for all classes has improved 0.8% from year end 2011 to year end 2012. Based on the projected job growth for 2013, net occupancy should increase 1.0% in 2013. A projected 13,000+ units will come on the market in 2013.
High Absorption/Low Construction
While the characteristic of the expansion phase is high absorption, Houston saw an absorption in 2012 of about 12,250 units. The first half of 2012 was a positive 7,141 units with a positive 5,112 units absorbed in the second half. This year, we should see an increase in absorption to as much as 16,000 units. Construction remained moderate in 2012 with 5,457 units constructed. Construction for the past 3 years (2010-2012) has averaged 5,222 units. In 2009 construction peaked at 19,330 units. Construction projections for 2013 anticipate as many as 13,000 units to be completed. At year end 2012 there were 12,785 units under construction and an additional 7,792 units proposed.
Our fourth characteristic in defining the expansion cycle is a market that shows moderate to high employment growth. As you can see from the Employment Growth chart, Houston has seen a large increase in employment growth in the last three years with last year increasing to 90,000 net new jobs after a negative 102.8 thousand lost in 2009. Basically, we have recovered the 2009 losses in the last three years. Jobs are projected to increase in 2013 to about 91,000. Historically Houston absorbs 1 new unit for every 5 new jobs.
About 16,000 units are expected to be absorbed in 2013. In 2012 there were 198 garden apartment sales in the Houston CMSA – up 13% from 2011. Projections for 2013 are 250 properties based on Houston’s peak years.
Rental Rates and Rent Concessions…
As seen from the Rental Rate chart, in the last two years rental rates in the Houston area have increased about 9.4% or 4.7% per year.
Rental rates are expected to rise in 2013 for Class A & B apartments 4.7% above that of the 2012 levels. Rent concessions are almost non-existent except in the low end Class C & D properties.
Top 6 Lenders of Garden Apartments in 2011-2012
1. Holliday Fenoglio Fowler
$161,266,000 Total Volume
2. Wells Fargo Bank
$118,095,000 Total Volume
3. CBRE Multifamily Capital
$114,537,111 Total Volume
4. Jones Lang LaSalle
$105,663 Total Volume
5. Berkadia Commercial Mortgage
$84,100,000 Total Volume
6. Metropolitan Life Insurance
$72,090,000 Total Volume
Is it Time to Buy or Sell?
The best time to buy in Houston was the fourth quarter of 2010 to the 4th quarter of 2012 if you had money to rehab and could wait for the upside. Well the upside is here and expected to continue in the Houston CMSA through 2017 based on job growth and a 3-year lull in new construction. It is definitely a seller’s market and good properties are hard to find. If you are looking for an increasing income in a dynamic market, it is time to buy or build. As an owner it is time to think about selling in the next 12 months.
MAI, Managing Director