Report: Multifamily Market Softens in Q3

HOUSTON-A softening multifamily market in the third quarter is a direct contrast to the surge in activity last year at this time as Hurricane Katrina evacuees began to pour into the city. Local experts say the softening was to be expected due to increasing construction and departing Katrina households.

According to the Carrollton-based M/PF YieldStar's Q3 report, average occupancy is 93.5% versus its 2005 peak of 94%. The class A assets are reporting the highest occupancies, 95%, in the market. Older product, though, is softer, with the average occupancy standing at 92%. As a result, rent increases have been impacted too, with the annual change from last year up just 0.1%.

Greg Willett, M/PF's vice president, says the "Katrina factor" has been in play since the beginning of this year. "Class A did see some vacancy increases earlier in the year," he explains. "They got the immediate bump right after the hurricane as these were comparatively affluent people. They either returned to New Orleans because their homes weren't as damaged or bought in Houston."

On the B and C level, occupancy drops have been higher. CB Richard Ellis' executive vice president Craig LaFollette hesitates to put evacuee move-outs in the crosshairs, however. "There's been some move-out in that class, but I think we're only talking about 16,000 units in an apartment market approaching 500,000 units," he says.

Colliers International Inc.'s principal Teresa Lowery, siding with LaFollette, says concerns that non-Katrina residents are moving to areas where evacuees aren't living is a little misleading. "It's been reported that crime has increased because of Katrina evacuees," Lowery says, "but that has not placed downward pressure on occupancy rates. Tenants are not leaving their apartment homes because of any perceptions of crime."

What Lowery does observe, however, is an uptick in multifamily construction has pointed to softening occupancy. "We have quite a few new units being added. Ten new projects have already been completed with 28 more under way," she says, adding the occupancy drop is far less than what others initially predicted.

M/PF's research shows 5,640 units were added to the inventory in the past year. The prediction for the next September-to-September watch, ending in 2007, is 6,321 units will come on line.

Katrina evacuees, though, certainly have had an impact on the market. The local pros say the ones who remain are those who have no where to go. Lowery and LaFollette predict nothing will change in the near future.

Lowery points out that Louisiana's "Road Home" program is just starting to ramp up. The program provides repair funds for single- and multifamily dwellings in the New Orleans area. "It'll be a long time before those units are made ready for evacuees so opportunities for renters to return home aren't yet there," she says.

Not only is there limited housing in New Orleans, but "what's available is through the ceiling," LaFollette says. "Many of those evacuees don't have anywhere to go and don't even have jobs. They'll be around for awhile as long as the government assistance continues."