HOUSTON—Strong demographic trends will persist through 2016, and though supply additions will cause some softening in the Houston apartment market this year, the long-term effect will be short, according to Marcus & Millichap 's second quarter multifamily market report. Nearly 140,000 residents were added to the metro's population in the last 12 months, supporting the creation of approximately 64,000 households. Individuals remain optimistic about the local economy, though growth is moving east, where advancement in the area's petrochemical industry is spurring job creation and additional commercial real estate development. Western submarkets are feeling the pangs of supply-side pressure as thousands of units have been added to inventory at a time of slowed hiring in the Energy Corridor. Concessions on this side of the metro have risen substantially as builders attempt to stabilize complexes upon coming to market. The addition of nearly 25,000 apartments this year will place additional upward pressure on vacancy, though the rate will remain below the 10-year average, says Marcus & Millichap. John Chang , first vice president, research services, Marcus & Millichap, tells GlobeSt.com: "Approximately half of the units underway in the metro are in western submarkets, where upstream oil and gas operations are primarily located. Reduced hiring by these firms will contribute to softened operations over the next several quarters as these units are brought online. Energy-related cuts have been concentrated in the manufacturing sector, along with the natural resources and mining industry; however, losses are spilling over into other segments of the local economy. In the last four quarters, the professional and business services sector has shed 11,000 positions, and high-wage earners such as attorneys, accountants and engineers made up a significant portion of these losses.” Despite those losses, investors remain optimistic about Houston's long-term economic outlook, chasing multifamily deals in budding submarkets, according to the report. The buyer pool is shifting, as institutional buyers and REITs begin limiting trades, leaving room for private buyers to capitalize on class-A and B-plus assets they were priced out of a year ago. Out-of-state, private office, international and local buyers are chasing deals, and growth in the petrochemical industry has spurred investors to pursue value-add assets in Clear Lake, TX, Baytown, TX and Pasadena, TX, while Sugarland, TX and Kingwood, TX also remain popular targets to the west and north. Properties in need of repositioning through renovations or management improvements are especially sought after as the opportunity to create value through stabilizing the complex and increasing rents is attractive. These assets typically trade at initial yields in the high-5 to low-6% range, says Marcus & Millichap. Financing remains competitive, with loan-to-values at 75% and buyers seeking many routes, including Fannie and Freddie, bridge financing and other creative options. Job growth will remain modest this year, as employers hire 17,000 workers, a 0.6% year-over-year increase. Additions are shifting to the medical and hospitality sectors, boosting headcounts this year. Employers added 20,700 positions in 2015, expanding the employment base 0.7% annually. Developers will complete 24,500 units this year, expanding apartment stock 3.9% from 2015. This includes affordable and seniors housing, in addition to 23,000 market rate rentals. Last year, builders brought 15,300 apartments online. Apartment development initiated during booming employment will create headwinds to vacancy compressing this year. The rate will inch up 30 basis points to 6.5%, for a second consecutive year of gains. Last year, vacancy rose 40 basis points. Houston's average rent will rise 4.5% from the end of 2015 to $1,060 per month by year end, slowing from last year's gain of 5.5%. Operators in western submarkets will continue to provide additional concessions to improve occupancy in new apartment buildings. Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What's driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.

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Positive Outlook is Attractive to Investors, Residents

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