Safe Harbor: Houston Multifamily Market

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.

Thanks to solid job and population growth, Houston has escaped the recent market slowdown and credit crunch unscathed.

LIGHTNING SPEED

This 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.

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.

Methodist Willowbrook hospital is also underway on a $250 million expansion that will make it the largest medical facility in the Cy-Fair/Tomball market of northwest Houston. In response, Trammell Crow is building Wynhaven at Grant, a 372-unit complex on Grant Road; Davis Development is constructing Villas at Huffmeister, a 250-unit complex located at Huffmeister and Cypress North Houston Road; and farther to the west, Alliance Residential is planning the 312-unit Broadstone Cypress, on Highway 290 at Mueschke Road.

In early 2007, Medistar Corp. joined the game, breaking ground on St. Luke's Sugar Land Hospital and Medical Plaza, located in the southwest portion of metro Houston. Nearby, Cranbrook Development, in conjunction with Greystone, is building a 312-unit property named Silverbrooke, which is located on Brand Lane in Stafford; and Houston-based Judwin Properties is developing Brazos Ranch, a 670-unit, two-phase complex. Situated within the mixed-use Brazos Town Center, the high-end Brazos Ranch apartments range in size from 574 square feet to 1,582 square feet with rents from about $700 to $1,400 per month.

In Texas' Energy Corridor west of down-town, two new hospital facilities are further bolstering multifamily development in the “Energy Capital of the World.” Here, Texas Children's Hospital is building a $220 million pediatric project, and the Methodist Hospital System is building a new $300 million hospital. In preparation for these facilities, Houston-based HFI is developing The Lancaster apartments, a 252-unit complex on Park Row with one-, two-, and three-bedroom plans and rents ranging from $600 to $800 per month.

Newport on the Lake also is being developed by Cambridge Development and will have approximately 234 units located on Barker Cypress and ranging from 727 square feet to 1,450 square feet.

While Houston continues to see a premium price being paid for future apartment developments, suburban markets do not garner the high rents common at properties inside the Loop. They do, however, have the competitive advantage of affordability, particularly as land and rent prices within the Loop continue to rise. Compared to downtown land prices, which average as much as $115 to $250 per square foot, suburban land can be secured for between $3.50 and $5.50 per square foot, depending on the submarket. Rents also reflect geography, with downtown apartments averaging $1.35 to $1.75 per square foot and downtown condos securing approximately $2.00 per square foot, as compared to midtown rents of an average $1.10 to $1.20 per square foot and approximate suburban rents of 90 cents to $1.25 per square foot.

Expansion of the Panama Canal and a reduction of services available at the Port of New Orleans have turned the Port of Houston into a golden child for the processing and distribution of waterborne goods. In turn, this has breathed new life into Houston's southeast multifamily markets. To offset port facilities working beyond maximum capacity, the Port of Houston Authority is progressing with a $1.4 billion expansion that will deliver the new Bayport mega-terminal, creating about 12,000 jobs in its first 10 years and 30,000 jobs upon the project's completion in 2030.

The growth of the Texas Medical Center is driving development in Houston. Examples include The Equinox (above), a 304-unit project developed by Simmonds Vedder Partners and Trammell Crow, as well as Braeswood Place (below), a 340-unit infill site being developed by Grayco Partners.

The port area—like much of Houston—houses mostly Class B and C properties, but the growing demand for nearby multifamily space among blue collar workers may go a long way toward inspiring local owners and investors to consider rehabilitation and repositioning. At present, however, buyers in this product type are struggling with deferred maintenance issues and, further shackled by credit constraints, are opting to walk away from such transactions.

Under this set of cycle fundamentals, buyers of Class C space across Houston must enter their deals with a vision to improve not only apartment communities but also neighborhoods. At the same time, they must evaluate a property on paper with a trained eye, particularly at a time when lenders are requiring 25 percent down payments (versus the 10 percent to 15 percent of past years) and sellers, in turn, are receiving 15 percent to 20 percent off of their listing price. On the seller side, expectations must become more realistic, as buyers are purchasing on actual and not pro forma numbers.

One thing that hasn't changed is that buyers still come to—and buy in—Houston for an upside. And the city rarely disappoints. In fact, many owners are swimming in profits from the upside. For the investor who can pick well geographically and amenity-wise, this is certainly a great place to wait out the weather.

• Population: 2 million
• Occupancy: 87.4%
• Median Age: 33
• Median Household Income: $80,000
• Average Rent: $706
• Unemployment: 4%

  NOTABLE: Houston is one of five cities in the United States with companies in all four disciplines of the performing arts—the Houston Ballet, Houston GrandOpera, Houston Symphony, and Alley Theatre. The Downtown Aquarium features 500,000 gallons of marine life, a live white tiger exhibit, several themed restaurants, a Ferris wheel, boardwalk, and dancing fountains. The Houston area also features 1.5 million acres of lakes and 80,000 miles of rivers and streams.