Oil Prices Cause Dip in Multifamily Market, But Value-Add Opportunities Remain Strong
Although Houston’s local economy is not exclusively dependent on oil and gas, re-energizing this sector will be key to a multifamily rebound in the area. Since the downturn in oil prices over the last two years, Houston’s multifamily market has been one of the most impacted victims of the area’s economic slowdown.
Oil and gas is estimated to represent about one-fifth of Houston’s economy. This does not include construction and other new development that depends on the oil and gas industry.
The Houston market’s annual rent growth rate is well below the national average of 4.1 percent, according to Axiometrics’ Houston-area Market Performance Survey.
From the fourth quarter of 2015 to the first quarter of 2016, the annual growth rate in Houston’s multifamily sector was only 0.8 percent. The annual effective rent growth in the area is forecast to be 2.4 percent in 2017 and is expected to average 3.6 percent from 2018 to 2020.
According to the Bureau of Labor Statistics, job growth in the Houston metro area was 0.3 percent in April 2016, reflecting 10,000 jobs added during the preceding 12-month period. The metro job growth figure was below the national number of 1.9 percent.
On the supply side, permits for 16,462 multifamily units were issued in the 12 months ending in April 2016, down 3,422 units from the prior year’s total. This shows that the market is probably overbuilt as new multifamily construction outpaces the job growth in the area.
With millennials delaying buying homes and Baby Boomers downsizing into apartments, homeownership rates have continued to fall. Single family home permits in Houston saw a 4 percent decrease in 2015, and a 6 percent decrease over the 12-month period ending in April 2016.
Apartment renters in Houston are reporting lower incomes as job rates continue to decline amid the oil and gas slump. According to MPF Research, renters in 2015 reported a 4.2 percent lower income compared to renters in 2014.
To keep occupancy rates up, many apartment owners and managers in Houston have been offering more one and two-month rent concessions. The Houston market’s occupancy rate decreased from 93.8 percent in the fourth quarter of 2015 to 93.4 percent in first quarter of 2016, according to Axiometrics. While still strong enough for most multifamily assets to show positive cash flow, this occupancy rate is below the national average of 94.8 percent in the first quarter of 2016.
Reasons for Optimism
The news isn’t all bad though. While new apartments are overbuilt, older multifamily properties have the potential for significant price increases this year. The market for affordable Class B and Class C units is highly competitive.
Just last year, amidst the oil and gas downturn, Westmount acquired two “value-add” multifamily properties in Houston. In June 2015, the company acquired Braesridge Apartments, a garden-style apartment community that was rebranded as Westmount at Braesridge. In September 2015, the company acquired another strong Class B garden-style apartment complex that was rebranded Westmount at Summer Cove.
Westmount at Braesridge is a three-story, well-maintained asset constructed in 1982. It consists of 542 units totaling 413,276 square feet on 16.7 acres, for an average of 32 units per acre. Positioned in the Greater Fondren Southwest submarket of Houston, the location offers close access to the Houston medical center as well as several major transportation corridors. Since Westmount acquired the property, Braesridge has seen an occupancy rate of 98 percent.
Westmount at Summer Cove is a strong Class B garden-style apartment complex in Houston. The two-story project was constructed in 1983 and consists of 376 units on a 13.8-acre site, for an average of 27 units per acre. The community is well positioned in the Clearlake submarket of southeast Houston, providing easy access to major business centers from the Houston medical center and central business district to the petrochemical industrial complexes. Since Westmount acquired the property, Summer Cove has seen an occupancy rate of 93 percent.
Both properties are ideal value-add opportunities, which demonstrate that there is a market for older properties that can be upgraded and modernized even during the oil and gas decline. With great connections in the market and savvy due diligence, good value-add multifamily assets with significant upside potential can be found in the Houston area.
To increase occupancy in these older properties, Westmount completes high-quality interior, exterior and pool-area upgrades. Common interior renovations include lighting and plumbing fixture updates, cabinetry, countertops, appliances and faux wood flooring.
Exterior renovations typically include minor wood/stucco repair, updating the common areas and amenities, landscaping, upgrades to the leasing offices, parking lot repairs and upgraded exterior lighting. Pool upgrades often include new seating areas and patio furniture as well as the addition of an outdoor kitchen.
Where to Invest
When looking at value-add multifamily properties in Houston, investors should focus on the eastern and southern portions of the metro area, where tenant demand for lower-tier properties is rising as the area’s petrochemical industry stays strong.
Investors looking to add value to older assets in need of repositioning will find this area especially attractive.
Returns for these assets are strong and first-year returns range from 6 to 9 percent, depending on how much deferred maintenance there is, how much of the rent roll is under market, and other factors. Value-add projects are most successful in markets where there is a wide range between the average rental price of a new Class A apartment compared to Class B or Class C units.
Finally, “workforce housing” properties have not been affected too much, if at all, by the downturn in the energy sector. Layoffs in this sector in Houston have been mostly white collar jobs, as the blue collar workers in the oil business are at the source, and not in Houston.
Westmount believes that Houston is the energy capital of the world, and that fact is not likely to change anytime soon.
Additionally, Westmount acquired and is looking to acquire more apartments, based on pricing that makes sense today, without projecting any short-term recovery in energy prices, and can therefore withstand any further drop in the energy sector.
— By Clifford Booth, president and CEO, Westmount Realty Capital. This article originally appeared in the July 2016 issue of Texas Real Estate Business.