TR-HNR-November-2019

MARKET & TRENDS

SOURCE: YARDI MATRIX HOUSTON RENT GROWTH BY ASSET CLASS (SEQUENTIAL 3 MONTH, YEAR-OVER-YEAR)

Houston: On Recovery Road

DIVERSIFYING ECONOMY FUELS DEMAND.

by Yardi Matrix

U nderpinned by favorable de- mographic trends and steady employment, Houston’s economy has improved significantly. During the past four years, the metro’s multifamily market has been through a lot. Houston gained 82,900 jobs in the 12 months ending in June, second only to Dallas for job creation in the state. Moreover, the 2.6 percent year- over-year increase is 90 basis points above the national average, making Houston one of the best-performing metros in the country. Growth was led by profession- al and business services (17,600 jobs), followed by mining, logging and construction (15,300 jobs) and manufacturing (11,000 jobs). The metro’s infrastructure is changing to accommodate growth, with George Bush Inter- continental Airport

million down payment to begin the reconstruction of a segment of Interstate 45. The Texas Medical Center is also undergoing massive expansion, with a 37-acre campus underway that will likely establish Houston as an international hub for biomedical innovations upon its expected 2022 completion. The metro added 95,000 resi- dents in 2017, a 1.4 percent uptick and twice the U.S. rate. Houston’s strong employment market remains a magnet for young professionals. Houston hit $216,970 in 2018, according to Yardi Matrix data, a new cycle high and up 39 per- cent from 2008, as a result of the broad-based employment growth and solid population gains. Homeownership remains the most cost-ef- fective RENTTRENDS The median home value in

0.8 percent year-over-year through July, severely lagging the 3.4 per- cent national rate. Houston joined Miami (2.4 percent) as the only major metros in the U.S. with rent growth below their long-term aver- ages. The Bayou City experienced an unexpected boost in the wake of Hurricane Harvey, but rent gains in the market are back to the level they were at the end of 2017. That’s still better than what they were at the beginning of the oil price drop in 2015-2016. The average rent was $1,117 as of July. With recent completions and multifamily projects underway catering mainly to high-income residents, demand for workforce housing has pushed rent growth in the Renter-by-Necessity seg- ment—up 1.3 percent year-over- year, to $888. Lifestyle rents inched up 0.3 percent to $1,396. Occu- pancy in stabilized properties was down 90 basis points year-over- year through July, to 92.7 percent. Eastern suburban submarkets such as Conroe–East, Porter, Baytown, and Galveston saw the strongest year-over-year rent increases due to high demand for their Renter-by-Ne- cessity stock. Despite contractions, core submarkets in West Houston remained the most expensive in the metro, with the Museum District at $1,951, the West End/ Downtown at $1,852, and River Oaks at $1,722. Giv- en Houston’s consistent pipeline and high levels of deliveries since 2015, Yardi Matrix expects rents to improve only 1.9 percent in 2019.

HOUSTON COMPLETIONS (AS OF JULY 2019)

SUPPLY As of July, 18,093 units were underway across the metro. Most of the upcoming supply is in West Houston and geared toward Life- style renters. Only 17 out of the total 76 projects underway cater to the Renter-by-Necessity seg- ment. The West End/Downtown—a dense, urban core submarket in the Inner Loop—accounts for almost a quarter of the apartments under construction (4,606 units), followed by Piney Point Village–North (1,282 units) and Katy (1,021 units). Houston added 2,712 units in the first seven months of the year, all in Lifestyle developments in the metro’s western end. The notable decrease in deliveries comes after five years of significant completions, when almost 80,000 units were add- ed to the stock. Yardi Matrix expects roughly 6,700 new apartments to come online by the end of this year. TRANSACTIONS More than $5.1 billion in multifam- ily assets traded last year, a record level. The metro’s rate of deliveries began its path to moderation in 2018, following two years of intense

SOURCE: YARDI MATRIX

20,000

15,000

10,000

completing the first building of

the facility’s $1.2 billion overhaul, Port Hous- ton plan- ning a $39.7 million

5,000

option, with the average mortgage

payment ac- counting for 16 percent of the area’s median in- come, compared

2011

2012

2013

2014

2015

2016

2017

2018

2019

expansion of its truck gates to handle great- er volumes, and The Hous- ton-Galveston Area Council’s Transportation Policy Council approving a $100

development activity. During the first seven months of 2019, $2.3 billion in multifamily assets traded in the metro. Although per-unit prices reached a cycle peak of $112,230 as of July, the figure was more than $45,000 below the U.S. average. Investors were drawn by both Class A

assets and value-add plays in the 12 months ending in July, with the total sales volume surpassing $4.9 billion. Acquisition yields for stabilized Class A properties in infill locations range between 4.8% and 5.3% and can go as high as 6.8% for value-add Class C properties in suburban locations. •