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As Houston As Houston continues to create jobs and power the economic engine of Texas, every segment of the multifamily sector continues to push higher. With more than 100,000 jobs added in the past year alone, the newly hired and the job-hungry are leasing up available space in Houston faster than units are being delivered to the market.
Demographics demonstrate a growing shift toward rentals for the city in general. For the first time since 2005, Houston apartment occupancy is averaging more than 90 percent. As the energy, medical, service and construction industries continue to expand in Houston, demand will remain strong across the board for Class A, B and C product.
New multifamily construction is heavily concentrated within the Inner Loop, Energy Corridor and the vicinity of The Woodlands. The development pipeline trends toward these job-ready markets as Houstonians dream of shorter work commutes and “live, work and play” scenarios. Multifamily options inch toward this dream, providing retail, dining and entertainment options on property or nearby.
But living the dream does not come cheap. While convenience is desirable, these benefits can be packaged at a steep price. Houstonians, however, are more than willing to pay premium prices for premium options. Residents are paying rates for new construction that two years ago would have been considered lofty expectations. Hanover Rice Village is leasing at a rapid pace with steep rents, approaching $2.50 per-square-foot on average, while apartments in The Woodlands Town Center are leasing for approximately $1.80 per-square-foot. The Domain at City Centre is securing highly competitive rent levels ($2.35 per-square-foot). These options not only provide superior resident amenity packages, but they also allow Houstonians to live close to where they work and access to an urban lifestyle.
Hanover Post Oak in the Galleria will likely set the bar for new pricing levels in the Galleria market, while the PM Realty 40-story development on Weslayan will set new high-level watermarks for rents across Houston. As new apartment development continues to satisfy the tremendous demand created by the mass of people moving to Houston, units will be delivered to market at the next echelon of rent levels, positioning the market for even higher gains as the rest of the market tries to catch up.
One might wonder whether the city is overbuilding. Projected statistics indicate otherwise. While construction activity for 2013 is slated to increase, estimates suggest that the delivered apartment product within the next three years will still fail to meet demand. According to absorption rates and job growth released by the Bureau of Labor Statistics and the Apartment Data Services, Houston requires one apartment unit for every six jobs created. If the numbers prove accurate, the city will be more than 15,000 apartment units short in supply during the next three years, even at today’s high average occupancy rate. Challenges faced by developers in raising equity could contribute to the lack of continued development. Institutional development capital is still hesitant to go outside of the Inner Loop, the Energy Corridor, The Woodlands and Katy. Since development outside these areas occurs at a slower pace and with construction costs rising, it is difficult to get new development out of the ground.
Sales activity in the multifamily sector has escalated to a steady pace. Today, it seems that on average more Class B product is being sold than Class A product, likely due to debt maturities or fund expirations. Development slowed to a snail’s pace in 2010 and 2011; thus, we have seen less Class A product delivered from merchant builders. We expect that once the current wave of new construction stabilizes, the Class A market will experience more velocity from these builders/sellers. Even though the new development pipeline has been robust, deliveries are just starting to lease. With limited Class A product available for sale, rare opportunities continue to be highly competitive.
— Ryan Epstein, senior vice president, CBRE Capital Markets Multi-Housing Group