While the national economy and commercial real estate in general look to have a tough year ahead of them, Houston and multifamily real estate have a little more room for comfort, although not enough for complacency. Houston is projected by some to have the strongest job growth in the United States for 2009, and multifamily is the only commercial property class to maintain some semblance of normalcy.
Houston benefits from the diversity of its economy. Houston has also greatly benefited by one sector in particular, oil and gas, which saw its greatest rally in history just as the financial sector saw its darkest days. Houston continues to maintain an unemployment rate almost 3 percent below the national average and is ranked 18 of 392 U.S. MSAs by Moody’s Economy.com for employment growth between now and 2013.
Unlike other commercial real estate (CRE) asset classes, multifamily has been more successful fighting off the financial crisis that shut down the CMBS market and essentially froze CRE transactions across the country. Steve Duplantis, senior managing director of CBRE in Houston, is only aware of one investment grade retail transaction and one investment grade office transaction in the past year. So far this year there has been zero CMBS issued and there was only $12 billion issued in 2008 in comparison to $230 billion in ‘07. The saviors of the multifamily industry are, without question, Fannie Mae and Freddie Mac, which have diligently followed their mission of supporting liquidity in the housing finance markets. In the words of Jack Dinerstein, CEO of The Dinerstein Companies, “The health of Fannie, Freddie and HUD multifamily businesses are absolutely critical to the health of our industry, especially over the next 5 years, and the fact that their multifamily businesses have remained viable during these turbulent times speaks volumes about the quality of their loans, underwriting and borrowers.”
Houston multifamily owners are concerned with the city’s ability to absorb new construction, but the fourth quarter of 2008 saw a total of 2,727 units absorbed, and first quarter 2009 was equally robust at 2,521 units. Houston moved up six places this year in Marcus & Millichap’s National Apartment Rankings, and some of the city’s most iconic new developments such as the Millennium Greenway (Dinerstein Companies), Gables Residential and One Park Place (both Finger Companies) are reporting strong lease ups. The success of these developments illustrates two unfolding trends within the market: urban infill locations such as the Inner Loop and Galleria are strong; and Class A properties are being delivered and leased in these difficult economic times. Gables Residential’s West Ave and Memorial Hills developments are two examples of recent delivery of urban infill locations that are experiencing strong lease ups.
Multifamily owners were able to push rents across Houston through the end of 2008, despite the delivery of nearly 13,000 units during the year. There are currently another 20,000 in lease up and another 10,000 under construction. With this volume of completions, it is no surprise that overall market occupancy has steadily declined since a high of 90.3 percent in the fourth quarter of 2005 to 85.9 percent in the first quarter of 2009. Although Houston’s multifamily industry is in better shape than most U.S. cities, property owners are reporting declining operating fundamentals across Houston’s submarkets. While it is too early to tell if this is a trend or blip, the conclusion here is that Houston will need even stronger job growth to sustain absorption and keep rent growth positive.
All things considered, Houston multifamily owners should feel blessed in comparison to other CRE owners in other markets. But the financing markets are changing daily with multifamily fundamentals on the decline across the nation. Making sure you have a clear path to refinancing any owned assets and lining up any acquisition financing well ahead of going hard is mandatory in today’s market.
— Andrew Stone is assistant vice president with Walker & Dunlop.