Houston Multifamily Market is On Fire

I attended CBRE’s Second Quarter 2012 Press Luncheon last Thursday. These events are always informative, but this one offered some exceptional insights into the Houston multifamily market. Ryan Epstein is CBRE’s multifamily guru, and his comments about this red-hot market are worth repeating:

  • Houston is seeing a stable, healthy volume of apartment sales transactions.
  • Multifamily debt financing for new construction in Houston is readily available at rates under 4 percent for a ten-year term.
  • Annual rent increases of 7 to 8 percent are not unusual for Class-A units, with some submarkets seeing more than 10 percent increases.
  • Citywide multifamily occupancy increased 100 basis points to 89.4 percent and should reach 90 percent by year-end, a rare event in Houston’s multifamily sector.

The most active segment of the market is in mid-rise and high-rise units located inside the 610 Loop. The average rental rate in this market segment increased 8.7 percent on an annual basis this past quarter to $1.38 per sf per month. Ryan also noted that:

  • These mid-rise and high-rise units look a lot like resort properties and are largely being occupied by “discretionary” renters who could buy a home at any time if they wished to.
  • Units inside the loop are popular because of their proximity to downtown and a wide array of urban amenities, including restaurants, parks and the museum district.
  • Lease signings for these high-end units have been steady at about 40 units per month so far this year, even though most of the units being rented are not yet completed.
  • Demand is high from folks employed in the Galleria and Medical Center area as well as some reverse commuters working in the city outskirts.
  • The typical demographic is 25- to 40-year-old professionals and some empty-nesters.

Ryan noted that developers who were able to start construction a year ago and are now beginning to deliver units are being handsomely rewarded in the current environment. Only 9,478 units are under construction in a 570,000-unit market. About 51 percent of these units are located in the Montrose/Museum District, Inner Loop West/Greenway Plaza and the Galleria submarkets.

The current thought is that it takes about five new jobs to create demand for one apartment unit in Houston today. With annual job growth in Houston at 82,300 between March 2011 and March 2012, Houston apartments look significantly underbuilt. More than 6,500 units were absorbed in second quarter 2012 alone.

Ryan noted that developers are keeping the average unit size smaller today to keep the absolute dollar amount fairly flat. One way this can be done efficiently is through an open concept that eliminates a traditional dining room in favor of eating around a kitchen island.

A large number of people are relocating to Houston, many of them with good incomes related to the oil and gas industry. However, the education and health services sector reported the largest employment gain of any job sector, adding 23,200 jobs. Most of those jobs were in the high-paying healthcare segment. The 7.4 percent rate of growth was more than three times the nationwide gain of 2.3 percent.

With numbers like these, the Houston multifamily market looks to be headed for solid returns over the next several years. Life is pretty good in Houston.

Keep up with the latest Texas real estate news. The Center has several RSS feeds designed to help you make better real estate decisions.