As the credit crunch continues to toss the real estate market around like a toy sailboat, ever-bullish Houston remains one of the most desirable ports in the storm. Not only does the market follow a compelling model for urban greatness—approaching its future from the mindset of providing a broad-based quality of life for the masses—it also has the job growths necessary to effectively support the local multifamily market.
According to the Texas Workforce Commission, Houston's job growth rate is double that of the national average. In both 2006 and 2007, the area welcomed more than 65,000 new jobs. This growth was bolstered by the approximately 125,000 people who moved to the area annually during that same time period. This equates, on average, to more than 340 individuals a day—for 730 days straight—moving to the Houston metro area.
New residents come for Houston's quality of life, low cost of living, and promising employment opportunities—the city's average household income is $80,000 per year. Home to 23 of the nation's Fortune 500 companies, Houston's largest firms come from the energy and aerospace industries, as well as interests surrounding the Port of Houston and the local medical industry. Furthermore, according to the Greater Houston Partnership—a local business advocacy group that aims to build regional economic prosperity—the local economy has diversified over the past 25 years. As a result, Houston is less vulnerable to downturns in upstream energy, an industry whose decline led to a recession here two decades ago but is no longer a threat.
LIGHTNING SPEEDThis combination of lifestyle and economics has served the local multifamily market well. Occupancy in Class A units sits at 88.8 percent, while Class B and C units sit only about 1 percent lower, according to the Apartment Occupancy and Rental Survey from Houston-based research company REVAC. Occupancy is down slightly from last year, due to credit crunch-related foreclosures and also to the departure of renters returning home following Hurricane Katrina. Still, the dip is a mere 2 percentage points or so from 2007, when it was in the lower-90 percent range.
Rents also remain healthy, according to REVAC, improving from an average $682 per month in 2006 to $706 per month in 2007. This breaks down to an average $1.04 per square foot for Class A apartments; 72 cents per square foot for Class B apartments; and 65 cents per square foot for Class C apartments. Despite burgeoning new construction and a slight fall in occupancy rates, rent continues to improve market-wide.
Rent growth for Class A units in the coveted submarkets “inside the Loop” (those neighborhoods located inside the Interstate 610 loop around downtown) experienced an impressive 11 percent increase last year, reports REVAC. In this submarket, construction is primarily infill and high-rise in order to offset high land costs. Outlying areas reported a much lower, though still positive, rent growth in the 3 percent to 5 percent range.
Yet the fundamentals of the market remain enticing enough to keep builders operating at relative lightning speed. According to REVAC, 2008 will bring 16,000 or more new, mostly Class A units to the Houston metro, even as the market typically absorbs just 8,000 units annually. Strong job growth is anticipated to help absorption in a multifamily market that's more than 500,000 units strong, as will the housing market slowdown. For example, in recent years, approximately 70 percent of new Houston residents purchased huses, while 30 percent rented apartments. Today, 60 percent of new residents seek homeownership; 40 percent look to rent.
IT'S RAINING HOSPITALS A key to multifamily success in this market seems to be building and buying near employment sources. As Houson grows, so does its traffic congestion—and the desire among residents to avoid gridlock.
The creation and expansion of Houston's hospitals is a living example of this trend. Texas Medical Center, which is the world's largest medical center, employing about 73,000 people, is fueling significant multifamily activity in its submarket just south of downtown. More than $7 billion in construction—the largest construction amount in its history—will continue through 2014. As a result, Texas Medical Center will increase the current work-force by more than 30,000.
In turn, numerous multifamily projects are underway to support an influx of employees. These properties include Braeswood Place, a 340-unit infill complex being developed by the newly formed Grayco Partners, a Houston real estate development firm; The Meritage, an amenity-heavy Chancellor property with 240 units just southeast of the medical center; and The Oasis, a 420-unit property by Archstone-Smith. The Grayco and Chancellor properties are both located on North Braeswood, while The Oasis will have a Hermann Museum Circle address. These projects are joined by The Equinox, a development by Simmons Vedder Partners and Trammell Crow that broke ground in early 2007. When completed, The Equinox will deliver 304 high-end units averaging 916 square feet and located just south of the medical center on Old Spanish Trail near Almeda Road.