Call it the post-Katrina effect. When Camden Property Trust recently decided to adjust its Houston portfolio by selling a few of its older properties, it encountered a level of interest it hadn't seen in years. "Instead of seven or eight offers, you're getting 14 or 15 offers," says Ric Campo, chairman and CEO of the Houston-based apartment REIT, who says the company moved quicker than planned on the dispositions in response to the market. "It's definitely a good time to sell, so we sped it up as a result of that."
Campo isn't alone. Brokers report that a number of multifamily owners with properties in Houston have recently decided to sell. The main reason: the occupancy jolt they received from Katrina evacuees, which is boosting demand and prices for Houston apartment properties. "A lot of the sellers are coming off the fence," says Russell Jones, a broker covering Houston and eastern Texas for Marcus & Millichap. "A lot of people are deciding the time is right to sell."
The 344-unit Villas at Coronado is among the new Houston projects enjoying great interest.
Photo Credit: Apartment Realty Advisors
But Katrina isn't the only factor driving sales. Earlier last year, prior to Katrina, buyers scared of high price tags in Southern California and elsewhere moved into Houston in search of deals on Class A properties. For the most part, brokers and apartment owners think such high-end properties should hold their value if there's an exodus of evacuees, but many–including owners, operators, and brokers–wonder what will happen to their rents, values, and the Houston apartment market if the newcomers run out of money.
Burgeoning Market
Matthew P. Rotan, principal and co-founder of Apartment Realty Advisors in Houston, scoffs when he sees "the East Coast press" criticize Houston. Even before Katrina hit, the city was undergoing resurgence, Rotan says. "We've added about 30,000 jobs on a 12-month basis," he says. "We have a small [amount] of [apartment] supply relative to the past. With no concessions and 93 percent occupancy, Houston is in better shape than I've seen in my 20 years."
Why? The city's economy has become more diversified, and its key industry–oil and gas–has evolved. "Houston has changed its risk profile relative to oil and gas," Rotan says. "[In the 1980s] it was 80 percent energy-dependent. Right now, it's 48 percent energy-dependent. The oil and gas business is much more technical. It's a completely different industry."
But those aren't the only reasons behind Houston's rebound, particularly regarding Class A properties. "The California guys are looking for places to put their money," says A. David Lynd, COO of The Lynd Co. in San Antonio. "You can't find anything on the coast that makes any sense. That forces them to go to markets where they normally wouldn't go."
Houston's bargain prices have attracted tenant-in-common partnerships (also known as TICs), condo converters, and 1031 exchange buyers, according to Bob Meek, a senior advisor for broker Sperry Van Ness in Houston.
Scores of New Residents
With a growing job market and renewed investor interest, Houston was already on the upswing before Katrina hit. But the hurricane still made a tremendous impact on the city. In 2005, the Houston apartment market absorbed about 28,000 units; Rotan says as many as 24,000 of those units were taken by Katrina evacuees. "Houston was already positioned for recovery," he says. "Then, all of a sudden, you have 250,000 people register for assistance from the Texas emergency relief centers."
While Katrina evacuees moved into all classes of apartments in Houston, many appeared to migrate to lower B and C level properties, which saw the most significant jumps in occupancy. "We didn't get any big bump from Katrina," says Campo, whose Houston Class A properties' occupancies only increased 3 percentage points, to 98 percent. "But some properties that were 80 percent occupied and not well-located definitely got a big boost."
Consequently, many buyers sought out those apartments. "We've seen a lot of investors looking at C and B products," Rotan says. "I think there's a lot more interest in that."
It represents a big, if temporary, change in the Houston apartment market. Before hurricane survivors arrived in the Texas city, higher-end properties seemed to be the hot buy. "In the beginning of the year, Class A and urban infill were selling at a record pace," Rotan says. "We had a lot of condo conversions. Class B and C were growing slower."
What's Next?
While the Class B and C owners and operators have gained the most from Katrina, they also have the most to lose. "Those folks may be concerned about what happens to their occupancy levels over the next six to eight months," says Campo, who isn't worried about the impact on Camden's Houston holdings. "Generally the top of the market has done very well and I don't think [it] has a huge amount of risk because of the Katrina folks leaving."
But things are different at less luxurious properties. First, no one knows how long the Katrina evacuees will stay. It may be only for a few more months, or it could be for good, depending on a resident's options and finances. "The people that came from New Orleans who are used to government subsidies and housing won't move," predicts Meek.
But will these residents be able to pay their rent in the future? "These guys don't have any money," Lynd says. "What are they going to do when the government funds run out? That's a real issue. It's a big concern, and it should be a big concern for everybody, including the government. Landlords will not ride with these folks. They're going to punt them."
That could leave the city of Houston in a tough spot. "When they [the landlords] kick them out [because] they're not paying their rent, you're going to have a lot of guys who don't know where to go," Lynd says. "The cities aren't prepared to handle those guys on a voucher basis. Where do they go?"
Davlyn Investments in San Diego bought Watermark, a 128-unit apartment community in Lake Elsinore, Calif., for $11.4 million, or $88,672 per unit. ALS Lakeside in Greenwood Village, Colo., sold the property, and Marcus & Millichap Ontario represented both buyer and seller in this transaction. Davlyn will change the property's name to Northlake.
AAA Properties in Weatherford, Texas, bought Azle Creek Apartments, a 43-unit apartment community, for an undisclosed amount from SKM Tarrant in Fort Worth, Texas. Sperry Van Ness brokered the sale of the six-building property, built in 1968. It consists of 43 units that include 17 two-bedroom/one-bathroom units and 25 two-bedroom/two-bathroom units.
CarmelKen in Coconut Grove purchased The Kensington at Royal Palm Beach, a new 166-unit rental development in Royal Palm Beach, for $32.5 million from The Enclave in Miami. CarmelKen plans to turn the property into condos. Kensington, a gated community, features a mix of 166 two- and three-bedroom floor plans, ranging in size from 1,272 square feet to 1,606 square feet.
Archstone-Smith in Denver has acquired The Gershwin, a 40-story, 550-unit high-rise apartment community in Manhattan, for $342 million. The property, Archstone's ninth in New York, offers studio and one- and two-bedroom apartments. The property has 41,200 square feet of retail space. Its amenities include 24-hour concierge, a state-of-the-art, full-service health club, an indoor swimming pool, a sunbathing terrace, open kitchen floor plans, tile floors, and a 120-space on-site garage.
GMAC Institutional Advisors, headquartered in Philadelphia, and Security Properties in Seattle formed a joint venture to purchase the Serravella Apartments, a 216,904-square-foot multifamily property in Hollywood, Calif. Serravella Apartments is a 298-unit, mid-rise multifamily property comprising three- and four-story residential buildings. The property, situated on nearly two acres, is currently 97 percent occupied.
Northland Investment Group in Massachusetts bought Germantown Falls, a 240-unit apartment community in Memphis from ChrisKen in Chicago. The property, built as a resort in 1988, has a fitness center, racquetball and tennis courts, swimming pool, dry sauna, and Jacuzzi. The interiors include sunrooms, vaulted ceilings, walk-in closets, fireplaces, and washers and dryers in each unit.
Gray Development Group in Phoenix bought the Biltmore Club Apartments in Phoenix from Wilshire Enterprises in Newark, N.J., for $21 million, representing a land cost of $60.14 per square foot. Gray will tear down the 378-unit property, built in 1973, to pave the way for new apartments and condos.
Passco Cos. in Irvine, Calif., acquired the 350-unit Four Winds Apartments complex located in Overland Park, Kan., for approximately $21 million from AIMCO in Denver. Passco wants to spend roughly $1 million to upgrade and improve the property, including a major renovation of the clubhouse and fitness center, a complete repainting of the exterior, and significant unit interior improvements.
–Listings compiled by Les Shaver