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Houston Multifamily Development Faces ‘Hard Stop’ For The Next Year Or Two: Hanover CEO


Multifamily development in Houston could face a prolonged recovery compared with other major markets in the U.S., as the city struggles with the short-term effects of the coronavirus pandemic and the long-term consequences of an energy downturn.

"I think Houston, from a multifamily standpoint, at least to me, is the most illiquid market in America for the next year, maybe two, which is actually a good place to begin for recovery,” Hanover Co. CEO Brandt Bowden said during a Bisnow webinar this week.

Hanover, which operates in 16 markets across the U.S., already had limited new inventory planned for Houston, and that is likely to continue in the near future, as the company waits to see how the national coronavirus recovery plays out, Bowden said.

Crude oil prices have plummeted over the past two months, reflecting a price war between Saudi Arabia and Russia, as well as diminished energy demand in light of the coronavirus, particularly in regard to transportation. Increasing numbers of energy companies in Houston are furloughing or laying off workers, while others are filing for bankruptcy.

With so much economic uncertainty and a struggling job market, the outlook for Houston’s multifamily market is somewhat lackluster in the short term. But Bowden sees development opportunities in other U.S. markets like California, Massachusetts, Colorado and Arizona, especially where strong companies are thriving.

“Typically, we’re going to follow the jobs, wherever they may go,” Bowden said.

JLL Senior Managing Director Colby Mueck, Lionstone Investments Head of Capital Formation Dan Dubrowski, The Hanover Co. Chief Executive Officer Brandt Bowden, KKR Director Paul Wasserman

Opportunities for investment are also somewhat limited right now, despite market players looking for good deals in the midst of the pandemic. Real estate values have not yet fallen to levels where potential sellers are desperate to divest and buyers want to swoop in.

"I think there's a lot of capital out there that wants to be opportunistic, but to be opportunistic, they need to buy at a different price point than today,” Wilson Cribbs + Goren Chairman Reid Wilson said during the Bisnow webinar.

Certain well-performing asset types, like industrial and self-storage, are not going to present any opportunistic situations unless it’s for a typical reason, like an inability to refinance or a fund is ending, Wilson said.

Other assets related to hospitality, retail and possibly office could present a better opportunity, where bigger fundamental changes could occur in the market. And some of those asset types could even find themselves repositioned to become more profitable over time.

"I'm hearing about hotels becoming apartments,” Wilson said. "I've heard about office buildings becoming apartments, and of course, some of that has happened in Houston."

Bowden said that it takes time for market volatility to appear in real estate markets, as transactions can take months or even years to be finalized.

"We're not at a point right now where I think the opportunities that should present themselves in and around this situation have really fully presented themselves,” Bowden said.

On the other side of the equation, Wilson has started to see more national retailers acting like opportunists, trying to renegotiate lease agreements for lower rents. He pointed to Starbucks, which sent a letter to landlords around the country on May 5, informing them that the company would require concessions and adjustments to lease terms and rent for the next 12 months.

"I think that the retail economic model is broken, and I think retailers are going to say, no more fixed rent, it's going to be percentage rent,” Wilson said.