Houston Multifamily Defies Oil Fears
'Tis a strange time in Houston. It feels like we’re firing on all cylinders, while the rest of the country thinks our engine is out, according to NorthMarq managing director Kerry French. In fact, he says the only negative is that he spends more time talking about the price of oil than cap rates or interest rates. We’ll discuss this and more at Bisnow’s sixth annual multifamily event Aug. 2 , starting at 7:30am at the Houstonian. Register here!
Kerry, who’s moderating our discussion on the 26th, says he’s having a record year. Office has been impacted by oil prices, but every other segment is strong. (He can’t even find enough warehouse product to meet investor demand.) The Wall Street Journal keeps talking about how Houston should be feeling pain, so investor perception has been damaged. But he’s just not seeing issues at the street level. Luckily, not every capital source is backing off; Kerry tells us banks have gotten more aggressive, and are starting to compete with life companies. In multifamily, Kerry's team (right, with NorthMarq VP Warren Hitchcock) is doing more business with Freddie Mac this year than ever.
If there’s a major resistance in the multifamily market, says HFF senior managing director Todd Marix (a speaker at our event), it’s supply, not oil prices. Analysts had predicted capital would exit Houston and we’d redline, but he’s still seeing attention from investors. It’s less robust than a year ago, but pricing and cap rates have held. (Suburban Class-A deals are in mid to upper 5s, and core urban is in the 4s.) Underwriting has changed, Todd says, especially in high delivery areas, and concessions have entered the market in some places for the first time since 2010, but it’s unusual that we haven’t had them for so many years.
Any uncertainty is driving up the value of properties in master planned communities. Todd is in the best and final round on a 190-unit community in Sienna Plantation, which is completing its initial lease-up. One other apartment complex is under construction nearby, but there’s no other multifamily in Sienna Plantation. That lack of product attracted 12 offers, and Todd says pricing is already above what he forecast. It’s mostly gotten attention from private capital, but that’s always been true in the ‘burbs. Across the metro, he is still seeing new investors enter Houston, especially foreign capital from places that understand the oil industry.
ARA Newmark vice chairman Matt Rotan (another panelist, bottom right, with Brett Benton, David Schwarz, Zach Springer and Russell Jones) agrees most investors are sticking with Houston. He says about one-third are business as usual, one-third are out either because they’re full on Houston or they’re worried about oil/fundamentals, and one-third are underwriting a little more conservatively or are requiring higher yield to do deals. He feels like the slowdown can be viewed as a slightly positive turn of events—the pause will keep Houston from seriously overheating and give us a longer run.
Meanwhile, transaction volume has been better than Matt predicted. ARA Newmark’s investment sales team has closed 70 YTD and has 26 under contract, 11 in marketing including two portfolios, and seven preparing to hit the market. Matt says the ARA Newmark team is doing about 95% of the number of tours they did last year—not bad since 2014 was its best year ever. Matt recently took out his first core deal since the energy market slowdown: Domain at Kirby, a 293-unit property in the Med Center that ARA Newmark’s listing for Principal Financial. Matt expects institutional players to take notice: There haven’t been many core opportunities this year, its Med Center location mitigates oil concerns, it’s 95% occupied with $1.67/SF rents, includes 17k SF of retail, and is fairly new construction. (Simmons Vedder built it in ’09.)
Value-add is also still doing extremely well, pushing rent growth over the past 24 months in markets that had been flat. ARA Newmark has two large Class-B portfolios on the market, including a $300M portfolio spanning three states. A year ago, it probably would have gotten 15 offers. Now, it got seven, but Matt says they’re legit investors and are hitting the seller’s investment expectations. Zach is also about to bring out Presidio Clear Lake, a 313-unit property that’ll be one of the last repositioning opportunities in Clear Lake. (The market’s been hot for value-add lately, and most assets have already traded and been improved.)
Things are different over at ARA since it was bought by Newmark in December. Matt (here with Adam Allen and David Mitchell) tells us it’s now handling the full spectrum of deals (its bulked up capital markets team has had about a 40% capture rate from its investment sales so far) and has dramatically increased its international activity. The team has grown from 31 people to 44 (with more hires coming), and ARA Newmark is merging with the NGKF Houston office in October, when they take occupancy together in three floors of BLVD Place. Hear more from Kerry, Todd, Matt and others at our multifamily summit Aug. 26 at the Houstonian. Sign up here.