Multifamily has pushed into uncharted territory, which is why we're excited to host Bisnow's fifth annual Multifamily Summit next week. (Register here.) ARA gave us a sneak peek into the changes and what they mean for deals.
1. Preemptive sales
ARA VPs Zach Springer, Russell Jones, and Matt Saunders are seeing fewer listings make it through the full marketing process. Typically, ARA lists a property for four or five weeks before calling for offers, but Matt tells us his team has closed nine deals in the last 12 months that locked in buyers before finalizing the marketing package. He says investors are willing to pay premium pricing to lock in a deal early because they believe strongly in Houston’s job growth and next few years of rent growth.
The trio tells us many private developers are considering a pre-sale option as opposed to stabilizing and selling. Core infill locations and Katy—thanks to their absorption levels, lease-up velocity, and projected rent growth—are seeing the majority of these deals. The team has closed seven this year. Zach tells us developers like the concept because they can hit proforma IRRs with current market pricing while minimizing lease-up risk. Some investors like purchasing projects in lease-up because it's so difficult to win fully stabilized deals; this way buyers are able to get well-located new developments at a slight discount.
2. Quick resales
Typically, multifamily owners have projected hold periods of at least three years, but Russell tells us his team (which has done 560 property tours this year) has 33 assets it’s sold twice in the last two years. (You know things are hot when it's necessary to keep the deed in your back pocket for quick access.) Most were distressed or value-add deals that were fixed up and able to hit projected exit pricing more quickly than owners thought. (Cap rates have dropped 25 to 50 points in the last nine months—not on interest rates, Russell says, but purely on Houston’s fundamentals.) Look for the number of transactions this year to surpass 2013.
3. High density takes over
ARA principal David Marshall, Tom Dosch, principal Tim Dosch, and Clark Dalton say the future of Houston multifamily is high-rise. Tom tells us there are 20 such projects under construction or in the pipeline (ARA's handled 10 high-rises so far this cycle), spread throughout the city—not just the Inner Loop. He says the barrier to entry to multifamily development now is finding a site big enough. One year ago, very few developers would look at sites smaller than one and a half acres, and most wouldn’t consider high-rise. Now developers will consider tracts as small as 30k SF, and almost everyone is talking high-density. Pictured below, TDI's planned development on 1.47 acres near Memorial and Houston Avenue. The ARA gents handled the site acquisition.
Clark says single-family is going higher-density, too. The ARA team has closed 60 single-family deals this cycle totaling 5,000 acres. The passing of Chapter 42 last year increased permitted single-family units per acre from roughly 16 to 27, and now multifamily and single-family buyers are competing for the same tracts. Tom tells us he handled a four-acre site in the Heights recently that had a number of multifamily offers but ended up being bid up by three (and closing to one) townhome developers. It’s happening all over town: Clark also just closed a five-acre site in Kingsland that’ll become high-density townhomes, something that hasn’t happened so far west before.
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