Multifamily: Softened But Not Weak
There was a mix of opinions on the health of Houston’s multifamily market at Bisnow’s Multifamily summit last week: While investment sales gurus are seeing almost no slowdown, owner/developers are predicting a few soft years. But everyone agrees—there’s no black mark on Houston overall, and we’re still a hot market.
Brightside Properties president Dana Thorpe (far left, with Pape Dawson’s Celeste Berger, Sarah Allen and Nathan Billiot) is gearing up for two or three rough years, which he says would be an eye-opener to anyone who’s entered the multifamily space in the last six or seven years. He says demand has been so high over that period that anyone could lease anything to anyone. He says underwriting needs to change, and some assumptions (like rent growth or even the concept that everyone will pay rent) won’t be true anymore.
To hedge his risks, Dana (who buys Class-B and C infill) would like to bulk up in Spring Branch—it’s a family market, which he believes is a better target in down times. Families usually have multiple incomes (if one person gets laid off, they can probably still pay rent) and they want to stay in specific school districts, so they won’t move out unless they have to. (Unlike Millennials, who Dana says can “pick up their laptop and their Ikea sofa and be gone in an hour” if you raise rents or they lose their job.) Dana’s optimistic about Houston long-term because of our consistent population growth, which he says makes us unique; most markets boom and ebb. Here’s our owner/development panel: Allied Orion CIO Ricardo Rivas, BMS Management CEO Philip Schneidau, Morgan Group COO Stan Levy, Dana, WoodWorks South Central technical adviser Sherry Mundell and Steinberg Design Collaborative principal Sanford Steinberg.
Stan (pictured between fellow panelists ARA Newmark vice chairman Matt Rotan and NorthMarq managing director Kerry French) says two years where supply outpaces demand shouldn’t freak anyone out. We’ve been in an unprecedented run and can give some space back and still be in great shape. Houston is the only market in Morgan’s portfolio that hasn’t seen overall rent increases this year. Rents in some of its properties here are down 2%, he says, while others are slightly up.
We snapped some of Houston’s most famous data guys: CDS Market Research’s Steve Spillette and Apartment Data Services’ Bruce McClenny. They say Class-B and C properties are doing especially well. Class-B properties are occasionally topping $1/SF rent, which was a high-water mark in Houston even just a few years ago. Houston’s absorption has been mind-boggling. Berkadia managing director Greg Austin and HFF senior managing director Todd Marix broke it down: In the first seven months of this year, while headlines screamed that Houston was dropping off the map, we’ve soaked up 12,000 units. Since 2010, we’ve delivered 45,000 but absorbed 75,000 units.
Most predictions say supply will outstrip demand by 1,500 units this year, but Greg points out that would barely drop our occupancy into the mid to low 90% range. That’s a stat most markets (and even Houston five years ago) would kill for. Rather than answering what inning we’re in, Greg says Houston was in the middle of a great game when it got dark. Everyone went home for the night, but the game’ll pick right back up in the morning. Pictured: 400 attendees joined us at the Houstonian.
On the investment sales side, IPA director Nester Clark says there’s strong appetite for East and North Houston properties, where rents (especially Class-B and C) are still rising 9% or 10%. More sellers want to dispose of properties before they’re stabilized, he says, and buyers want more of a discount for those than they did a year ago. Matt says he’s getting fewer bids, and more of a premium for portfolio sales. But cap rates have held steady, Todd says, because there’s been no evidence things have changed. Private buyers are stepping up as institutions back off. Dana hasn’t been able to outbid a family office lately—he says they’ll just stretch their hold period until deals pencil out. Hedge funds are also being extra competitive by doing five- to seven-year holds. Here’s our transactions panel: Matt, Kerry, Greg, Nester and Todd.
Sanford (pictured with MFord & Associates’ Maurine Ford) says site plan work started picking up in February and hasn’t stopped, so he predicts development will accelerate again around the end of this year. However, building codes could become a real challenge to development. The City of Houston has discussed adopting the 2012 international energy conservation code, which would impact design and spur huge cost increases. The new standards require more space for internal infrastructure, which means you’d need bigger units or make the living spaces smaller. That hurts your density or your appeal to renters. An extra challenge is that you’d be competing with properties that are only a few years older that don’t have that restriction.
Sanford has worked with Allied Orion on some of its suburban product. Ricardo (center, between Sherry and Kimley-Horn’s Brandon Guillory) prefers to build in the suburbs, especially near master planned, deed restricted communities because they create barriers to entry. Ricardo calls its product out there “gardensities,” a blend of suburban garden communities with a denser/urban design that garner higher rents. Sherry gave a very compelling reason to use wood frame construction in all communities: WiFi and phone service strength have become one of the most important factors to residents, and those signals pass through wood better than other materials.