Multifamily in 2011: Moving Forward on All Cylinders

HOUSTON-Throughout much of 2011, multihousing has been an extraordinarily strong real estate sector nationwide. This has definitely been the case and then some in Houston as, during the past year, the multihousing sector has been active in all areas: Rent, occupancy and sales transaction.

Apartment Realty Advisors’ Fall, 2011 Multihousing Market Report introduced Q2 figures (the latest available) pertaining to the Houston market. Those figures pointed to a vacancy of just under 10%, with effective rents 1.9% higher than they were in the middle of 2010.  Experts tell Globest.com that, in the closing days of 2011, those effective rents are continuing to climb, while vacancies continue to drop. Rents are anticipated to increase a total of 10% from a year ago.

In other words, says ARA principal David Mitchell: “To sum up 2011, we’re lucky to be in Houston.” Furthermore, the combination of jobs growth, continued disdain for single family purchases from renters (especially younger renters) and the strong energy sector that continues to churn out many jobs means that “this is all a perfect storm for multifamily in Houston,” notes Ed Cummins, senior vice president with Transwestern.

One reason for this perfect storm is continued demand, combined with lack of supply.  Mitchell points out that, during the past two to three years, approximately 30,000 units were absorbed – and during that same period of time, around 5,500 units have been added to the inventory. The ARA report also puts it pretty succinctly, pointing out that employment in the construction and mining sector increased 2.2% year over year, with professional and business services expanding 4% year over year.

Craig LaFollette, senior managing director with Holiday Fenoglio Fowler LP notes that rent increases were the norm this past year, especially on A and B product, thanks to limited supply. “There is a lot of movement from renters going from B to A products; and we’re seeing absorption among B product pick up.” Class C apartments, however, are not seeing quite as much strength, he adds.

Increasing rents and constrained supply has, in turn, led to investors coming into town to see what they can buy. The three experts point out that buyers are across the board, ranging from private equity, to private equity backed by institutions, to the institutions themselves.  All three also pointed to record years on the transaction side.

And what’s being offered is as across the board as the buyers buying the assets. “When I look at 2011, I see a vibrant class A market with low cap rates and price-per-unit going up,” Cummins remarks. “At the same time, I saw 200 properties posted for foreclosure in Houston.” Out of those 200 postings, he goes on to suggest, 45 foreclosed. “There’s a lot of product that still needs to be moved and I don’t see that slowing down,” he adds.

Along those lines, the value-add play, which all but disappeared three years ago, is back, and with a vengeance. “Due to the lack of new development, value-add is back in play,” Mitchell says. “People are taking those 1980s and 1990s properties and are putting $5,000 to $10,000 a unit into the properties, and bringing those interiors up-to-date.”

LaFollette explains that the buyers are different depending on the product offered – the institutional investors have gone after the A-plus, core product, which is to be expected. Away from those core assets, private capital is more prevalent – again, not surprising. But those private buyers are a little nervous – and, as a result, buying slowed down during late summer, 2011.

“These are the folks that might be worth a million to $25 million; they don’t have deep pockets,” LaFollette remarks. Because of uncertainties due to what’s going on in Europe combined with continued nervousness about the U.S. economy, “all that uncertainty is making these buyers nervous,” LaFollette notes.

The experts agree that Houston’s current state of affairs as it pertains to multifamily will continue into 2012 and even into the following year – so longs as jobs keep getting added to the economy.  “I think we’ll see a lot of the same in 2012, what we saw in 2011,” Cummins comments.

“I think the fundamentals in Houston will be phenomenal through 2015,” Mitchell adds. “If we keep adding jobs, and supply stays down – which it will – we’ll continue having positive absorption, which will lead to continued rent increases.”

On the investment side, LaFollette agrees that the fundamentals will continue to attract buyers. The problem, however, is the unsettled economy in Europe. “There is no question there is a pent-up amount of capital that would like to invest,” he says. “If we could get this uncertainty behind us, or at least settled down, we could have a year that equals what we saw in 2011.”