Houston Apartment Outlook 2017

Recap of State of the Industry Breakfast Hosted by
The Houston Apartment Association

By: Terri Clifton and Michael Knight, Better World Properties

Insights from Government and Industry Leaders

Bruce McClenny – Principal at Apartment Data Services

  • There are 626,000 apartments in Houston. Of the 16K new units that have been absorbed, 12K can be attributed to moves from stabilized properties.
  • Approximately 9,000 new units remain to be absorbed while another 12K will come on line in 2017.
  • Class A market peaked in June of 2015 and has gone down 4% since
  • Rents are now at 2013 levels
  • Class B peaked in June 2016 and product in hot areas is struggling. 85% of B construction has been in Inner-loop, Katy, Spring, Woodlands, etc. B’s in other areas are holding up.
  • C properties maxed out in June 2016 and are now beginning to be affected by the glut.
  • Value-add properties continue to be in demand
  • In 2016, 24 submarkets were up and 18 were down. Overall net growth was zero.
  • Occupancy will remain at 88% through 2017, while rents will grow just 2 to 2.5%

Jesse Thompson – Dallas Federal Reserve-Houston Branch Economist

  • Area employment flat in 2016
  • Expect very modest area growth for a while – 0.5 to 1%
  • Petrochem construction will remain strong for a while, but will peak in 2017
  • Tailwinds: Oil over $50 creates 20-30% growth in industry capital spending; and, US economy will grow 2 to 2.5%
  • Headwinds: Jobs gains in low-end sectors like retail, leisure and hospitality result in decrease in overall disposable income. It takes over 4 service jobs to equal 1 O&G job; construction generally down; healthcare payment shift downward with policy uncertainty will slow healthcare employment growth (still positive): and global GNP growth slowing
  • The energy industry will be key, which looks strong for 2018 and 2019
  • Long-term Houston is great with double the national growth rate: “Just have to overcome the hangover from $100 a barrel oil.”

Stacy Hunt – Executive Director of Real Estate Services for Greystar

  • Banks are currently loaning only 55% on new apartment development.
  • There is still great interest on the part of foreign investors in the US market, but Europeans are increasingly anxious about sustainability issues.

Cyrus Bahrami – Managing Director of Alliance Residential Houston

  • What is happening in student housing today foreshadows what will be expected in tomorrow’s apartments.

Ian Douglas – COO of Allied Orion Property Management Division

  • Houston is great compared to Philadelphia
  • In fish hook bottom
  • 2018 will take off bullishly
  • Believes in $60 (even maybe $70) oil
  • Class A “tough” –84% of development was in Class A
  • Overall, long-term the safest sector to be in.

Swapnil Agarwal – Houston Value-add Owner/Operator

  • Real estate continues to be the best investment class.
  • The worst is behind us.
  • Population changes are their key concern. Currently, Texas is adding 130K per year. Healthcare employment is 300K in Houston; Energy is only 150K. Houston is more diversified now (Petrochem is 35K for comparison).
  • Research into the Class-C demographic indicates 80% of leads are coming from social media, and customer service is the number one issue residents give for leaving a property (emphasis on unresolved maintenance issues).
  • Operational efficiency is key

Steve Lamberti – President of Milestone Management (Dallas)

  • Starwood is set to acquire them
  • Growth will come through renewals. Raise the rent and cut the costs.
  • Property buyers are increasingly diverse
  • Vacancy was 36% in 2005
  • Late 80’s B’s have a compounded 27% growth in rents from $620 to $950.
  • ROI is only 5.5% to 6.5% today. Still a positive Industry to invest in.

Better World Properties Takeaways & Predictions

With the Houston economy stagnating after an apartment building frenzy, slowdowns in immigration, and lack of a clear economic driver to create new high-paying jobs, there will be tremendous pressure on developers to fill thousands of vacant units before construction loans come due. After an arms race to install all the best amenities, and firing every bullet in the marketing gun, the only remaining weapon is concessions. Already, qualified renters can move every six to twelve months into a newer and better apartment, and enjoy three months free rent. Since the population of potential renters at the Class-A level is not expected to increase in the near future, renters to fill the new product will come mostly from established complexes.

As always happens, there will be a domino effect as renters are incentivized to move up. To compete, property owners at all levels will be forced to upgrade properties to retain existing residents, or offer concessions that allow renters in the level below to move up. We expect this trend to continue into 2018.

Either way, all owners will take a hit. We believe the smart move is to upgrade. Concessions add no value to the asset and are simply a cash flush. Accepting lower occupancy for a time may be the least expensive strategy, but will often result in violations of loan covenants and bigger problems down the road. Simply lowering rents is never an option.

Great customer service should, of course, be a given. Without it, in a buyer’s market, renters will definitely leave. Compared to capital reinvestment, improving customer service is by far the least expensive way to increase retention. It’s not just about events and better cookies in the office; it means touching every resident every month, completing work orders timely, and responding immediately through each resident’s preferred channel.

Expect lower level Houston multifamily properties to begin adding upgrades and amenities not previously seen within their class. With increasing emphasis on home technology, and costs of such going down, a number of relatively low-cost upgrades can be envisioned.

As the most diverse city in America, and with recent immigrants increasingly anxious about their future, Houston apartment communities that offer social comfort, better safety, and a sense of place will continue find the most success. A Muslim may feel best in a community that provides gender separated facilities. Orthodox Jews often appreciate being within walking distance of their synagogue and Kosher considerations. Hispanics may love spaces for families to mingle and relax on weekends. Asians often appreciate amenities that improve the living experience for their elders. The list goes on.


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