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While the national economy remains sluggish, the energy-fueled Houston economy continues to power a resurgent local apartment market. The Houston multifamily market is the strongest it has been in years, with robust performance across classes and in virtually every submarket.
Construction has rebounded from the depressed levels of the past few years, but demand continues to exceed supply, forcing rents ever higher. The statistics say that vacancy is at its lowest level in nearly eight years, and rents are at their highest rate on record. I am seeing that borne out, as virtually every deal that crosses my desk shows that income is on an upward trend.
Houston was the first market nationally to recover all of the jobs lost during the recession, and since, the pace of job growth has accelerated. Projects that were shelved four or five years ago are now under construction throughout the region, including OliverMcMillan beginning work on its River Oaks District, Wulfe going vertical at BLVD Place and GID building on the site of the old Allen House.
In addition, new developments continue to be announced. This construction activity, both residential and commercial, has created lots of good jobs for skilled and semi-skilled laborers who are helping to fill up Class C properties. Meanwhile, the influx of engineers and tech workers are boosting Class A communities.
These trends show no signs of abating, as energy and trade are two of the primary drivers of Houston’s growth and the future looks bright on both fronts. With Exxon relocating 10,000 employees (both local and from out of state) to its new campus just south of The Woodlands, Houston’s claim as the world’s energy hub is even more justified. Also, the expansion of the Panama Canal is expected to boost production at Houston’s port, which is already the No. 2 port in the country by tonnage.
Houston can’t build roads fast enough to alleviate traffic congestion, and this has been a factor in the increasing desirability of Inner Loop areas, as nearby amenities and abundant employment allow city dwellers to mostly avoid a frustrating commute. Meanwhile, the new highways that are constructed can open up development corridors and make previously remote areas more desirable. Construction continues on the Grand Parkway, for example, linking far northwest Harris County with The Woodlands (and Exxon’s campus).
Houston’s prosperity has not gone unnoticed. Institutional buyers are paying record prices for trophy assets, Wall Street lenders are competing aggressively for multifamily loans and even Class B and C multifamily properties are attracting a long list of bidders. While interest rates are up from the record lows of earlier this year, they have settled down below their elevated levels this summer. The amount of liquidity in the lending market means that borrowers can find desirable loans if they know where to look.
The last cycle taught us to view every boom with a bit of trepidation, wondering if the good times are really sustainable. What is different now from a half-dozen years ago is that strong fundamentals are driving price appreciation, more than merely wishful thinking. With demand outpacing supply and no end in sight as even eager developers can’t keep up with the population growth in desirable submarkets, the Houston multifamily market should remain strong for quite some time.
— Brandon Brown, managing director, LMI Capital