B and C Multifamily in Path of Gentrification and Growth Gets Noticed

HOUSTON—With average effective rents at $300 less than the typical mortgage payment, and gentrification and growth setting the stage for investors, Houston multifamily properties are grabbing the spotlight. This is especially true of the value-add mid-size class-B and -C multifamily properties in urban and close-in suburban markets.

With that in mind, Excelsa Properties, in a joint venture with Goldcor Capital Partners, recently acquired Bayou Parc at Oak Forest, a 392-unit multifamily community located at 4000 Watonga Blvd. for an undisclosed price. The acquisition comes approximately six months after Excelsa Properties raised $85.6 million through Excelsa US Real Estate I LP to acquire value-add multifamily properties in the Southeast and Mid-Atlantic regions of the United States.

Excelsa Properties brought 95% of the equity of the transaction and Goldcor Capital partners sourced the opportunity and brought the balance of the equity. The joint venture intends to invest more than $4 million in property upgrades including improvements to home interiors and all common areas including addition of a second clubhouse.

“Bayou Parc at Oak Forest is a perfect investment for Excelsa as it is located in one of Houston’s rapidly gentrifying and close-in neighborhoods, and enjoys great access to the city’s major employment drivers,” said Jon Woods, a partner at Excelsa.

Woods says Bayou Parc fits with Excelsa’s strategy of acquiring value-added mid-size class-B and -C multifamily properties in urban and close-in suburban markets in the path of gentrification and growth. Excelsa seeks to make carefully planned common area and in-unit upgrades to these properties in order to provide the type of housing people want and can afford.

“Excelsa was drawn to the Houston market given its value relative to other major gateway markets and a stronger and more diversified economy than one commonly perceived to be only about the energy industry,” Woods tells GlobeSt.com. “The city also has a very deep class-B and -C multifamily market, allowing Excelsa to build a portfolio of over 1,500 units in the next several years, something it aspires to do in every market it enters to create economies of scale. While risk of another severe weather event such as Hurricane Harvey remains, Houston has made huge infrastructure investments to mitigate this risk, and flood and business interruption insurance, while hopefully not required, is in any event factored into long-term business planning.”

Bayou Parc at Oak Forest consists of 36 two-story buildings completed in 1974. The unit mix features studio- to three-bedroom apartments, with floorplans ranging from 480 to 1,210 square feet. Common-area amenities include a fitness center, business center, clubhouse, picnic area, playground, pool and two dog parks. The property was 94% occupied as of May.

Multifamily builders will continue to scale back deliveries this year to move supply and demand closer to equilibrium, according to a report by Berkadia. Construction is scheduled to complete on 5,560 units by year-end, down a third from deliveries in 2018. Deliveries may remain subdued in the near term as multifamily permits were filed for 12,300 units in 2018, down more than 20% from the preceding five-year average issuance. Multifamily additions will remain concentrated in the Inner Loop with nearly half of all deliveries this year, where single-family housing starts and apartment deliveries continue to lag new household formation.

Employment growth will be driving demand. Total nonfarm employment is forecast to expand 2.6% or by 81,100 jobs this year. Leasing activity is expected to remain positive in the area and across the metro as single-family home prices are forecast to rise 1.5% while existing single-family home sales dip 0.6%.

Even with sustained rental demand, supply-side pressure is forecast to cause a 60-basis-point reduction in average apartment occupancy to 93.2% by year-end. Even with the decline in occupancy, effective rent is expected to rise 4.2% year over year. At $1,177 per month in December, average effective rent is forecast to be at least $300 less than the typical mortgage payment, says the Berkadia report.