MARKET REPORT

MULTIFAMILY
Houston Metro Area Q2/19
Vacancy Moves Back Down Amid Curtailing
Development and Positive Demographic Trends Multifamily 2019 Outlook

Sustained job growth underpins rising demand. Houston continues to CONSTRUCTION:

quickly expand as household and population growth rates are scheduled
Completions will decline for the third
to climb higher this year. While many of these new residents will be em-
year in a row as builders continue to cool
ployed within the energy sector, some are establishing themselves in the
metro’s prominent healthcare industry. In 2019, job creation is forecast 5,100 UNITS
will be completed
construction efforts. Roughly 74,000
apartments were built during a four-
to hit 101,000 — the second most of any metro in the nation. This, cou-
year span starting in 2014.
pled with soften development, will keep market vacancy in the lower-7
percent band. A more balanced supply-demand relationship will en-
courage owners to steadily boost rents in response to market conditions.
VACANCY:
Rent growth among Class C units should remain stable this year, while
gains for Class A and B spaces may continue to vary, potentially adding to A lull in development will allow demand
to catch up to supply, keeping market
the $500 gap between monthly rates of the two asset classes.
0 BASIS POINT
change in vacancy
vacancy to 7.1 percent, still 200 basis
points above the national reading.
Construction ebbs as builders face challenges. Completions will
slow this year as concerns of overbuilding and post-Hurricane Harvey
flood-control regulations are putting a damper on development. Higher
construction costs, fewer desirable sites and prolonged permitting
and building processes within the area’s flood plains are turning some
RENTS:
developers away from Houston. As a result, deliveries will shrink almost Stable apartment demand will support
a steady increase to monthly rates,
40 percent in 2019, marking the lowest completion volume since 2011.
Downtown Houston will again sit at the forefront of apartment develop- 3.0% INCREASE pushing Houston’s average effective rent
up to $1,132.
ment, accounting for 700 new units. Several additional projects will be in effective rents

finalized in inner-ring submarkets where live-work-play communities

are progressing.

Investment Trends
• Local buyers continued to dominate trading activity as value-add
Local Apartment Yield Trends
options were frequent across the metro. Southeast Houston as well
Apartment Cap Rate 10-Year Treasury Rate
as parts of Pasadena garnered extensive interest due to proximity to
12% numerous oil refineries and the thousands of workers seeking dwell-
ings near their place of employment. Relatively affordable price tags
9% attracted many entry-level investors.

• Northwest Houston remained a targeted area for investors with its

Rate

6%
plethora 1960s-built complexes. Though many of these assets require
considerable rehab, quick access to I-10 and Beltway 8 boosts their up-
3%
side. Here, the buyer pool was rather diverse, laced with institutional
and private capital as property sizes greatly varied.
0%
* 01 03 05 07 09 11 13 15 17 19*
• Class B complexes in northern suburbs like Spring and Westfield
attracted a number of investors. Exceptional household growth
continues to draw attention to the area, keeping bidding strong as cap
Sales Trends
rates generally fell in the low- to mid-6 percent band.
Sales Price Growth
* Cap rate trailing 12-month average through 1Q; Treasury rate as of March 29
er Unit (000s)

$120 Inc.; Real Capital Analytics

Sources: CoStar Group, 45%
Year-over-Y

$90 30%
 Employment Trends 1Q19 –
Local Apartment 12-Month
Yield Trends Period
Metro United States Apartment Cap Rate
EMPLOYMENT
10-Year Treasury Rate
6%
12%
2.5% increase in total employment Y-O-Y
Year-over-Year Change

3%
9%
• Houston organizations staffed 75,600 new workers during the past
year. The manufacturing and professional and business services

Rate
0%
6%
sectors each gained 17,000 jobs.
-3% •
3% Metro unemployment retreated 50 basis points to 4.1 percent,
supported by additional growth among education and health
-6% 0% companies
01 03
and government
05 07 09 11
agencies.
13 15 17 19*
09 10 11 12 13 14 15 16 17 18 19*

Completions and Absorption Sales Trends

Completions Absorption Sales
CONSTRUCTION
Price Growth

Average Price per Unit (000s)

$120 45%
30 6,600 units completed Y-O-Y

Year-over-Year Growth
Units (000s)

$90 30%
20 • Deliveries receded by approximately 60 percent from the previous
year. Completions were most concentrated in downtown as the
$60 15%
10
submarket received more than 1,500 units.

0 $30 • Outside of the core, construction was most0%prevalent in the far

northern suburbs and some eastern inn-ring submarkets. The
-10 $0 Woodlands and Katy each received about 500-15% new apartments.
09 10 11 12 13 14 15 16 17 18 19* 09 10 11 12 13 14 15 16 17 18 19*

Vacancy Rate Trends

Metro United States VACANCY
12%
140 basis point increase in vacancy Y-O-Y
10%
Vacancy Rate

• High delivery volumes in recent years have substantially affected

many parts of the metro, driving up vacancy rates in 33 of 35
8%
submarkets over the past 12 months. This supported a significant
increase at the market level, moving the rate to 7.4 percent.
6%
• Availability ticked up among all asset classes, with vacancy in each
4% tier rising by more than 100 basis points. Class B and C apartments
09 10 11 12 13 14 15 16 17 18 19*
witnessed the most substantial increases.

Rent Trends
Monthly Rent Y-O-Y Rent Change RENTS:
$1,200 12%
1.8% increase in the average effective rent Y-O-Y
Year-over-Year Change
Monthly Effective Rent

$900 8% • Climbing vacancy weighed on rent growth as the average effective

rent moved up moderately to $1,105 per month. Last year, gains
$600 4%
were much more pronounced at 7.2 percent.

$300 0% • Effective rents in several inner-ring suburbs witnessed strong rent

growth over the past 12 months as recent value-add investments
$0 -4% came to fruition. Most notably, the East Inner Loop logged a 15.7
09 10 11 12 13 14 15 16 17 18 19* percent bump, driving the area’s average to $1,195 per month.

* Forecast
Sources: Marcus & Millichap Research Services; CoStar Group, Inc.
 Demographic Highlights

Five-Year Population Growth* 1Q19 Population Age 20-34 1Q19 Median Household Income
(Percent of total population)
621,600 $68,420
Metro 22% Metro

U.S. Median $64,259

U.S. 21%

1Q19 Total Households

Five-Year Household Growth* Population of Age 25+ Rent 39%

Percent with Bachelor’s Degree+**
237,500
Metro 31% Own 61%
U.S. Average 30%
* Forecast ** 2018-2023

*2018-2023

SUBMARKET TRENDS SALES TRENDS

Strong Investment Activity Continues; Favorable
Lowest Vacancy Rates 1Q19
Employment Trends Cap Rates Bring Buyers
Local to Southeast
Apartment Yield TrendsTexas
Metro United States Apartment
• Solid fundamentals Cap Rate
boosted 10-Year
deal flow roughly 30Treasury
percent Rate
on a yearly
Y-O-Y Average
6% Vacancy Y-O-Y %
Submarket
Rate
Basis Point Effective
Change
basis. Asset12%
appreciation was also strong as the average price per unit
Change Rent
rose 7.2 percent to $105,200.
Year-over-Year Change

3%
Northwest Houston 5.8% 0 $848 1.7% • First-year yields
9% stayed on a downward trajectory, falling 30
basis points year over year to 6.4 percent. Returns among Class A
Rate

0%
Gulfton-Westbury 5.9% 170 $955 -1.6% 6%
properties, meanwhile, decreased slightly into the low-5 percent area.

East Inner Loop -3%

6.0% 210 $1,195 15.7% Outlook: Increasing
3% economic diversity will make investors more com-
fortable deploying capital in Houston assets moving forward. Relatively
Greater Heights-
-6% 6.3% -10 $1,529 2.6% strong first-year
0%yields will also drive investment.
Washington Avenue 09 10 11 12 13 14 15 16 17 18 19* 01 03 05 07 09 11 13 15 17 19*

Sugar Land-Stafford 6.3% 70 $1,216 3.3%

Galveston-Texas City Completions

6.4% and Absorption
120 $957 3.2% Sales Trends
Completions Absorption Sales Price Growth
Conroe-Montgomery County 6.7% 110 $1,022 7.2%
Average Price per Unit (000s)

$120 45%
Sharpstown- 30
Year-over-Year Growth

6.7% 50 $782 2.5%

Fondren Southwest
Units (000s)

$90 30%
20
Cypress-Waller 6.8% -20 $1,222 1.9%
$60 15%
10
Humble-Kingwood 6.8% 210 $1,061 0.1%
0 $30 0%

Bear Creek 6.9% 140 $1,050 -0.5%

-10 $0 -15%
09 10 11 12 13 14 15 16 17 18 19* 09 10 11 12 13 14 15 16 17 18 19*
Overall Metro 7.4% 140 $1,105 1.8%

* Trailing 12 months through 1Q19

Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Vacancy Rate Trends
Metro United States
12%
 1Q19* Apartment Acquisitions CAPITAL
CAPITAL MARKETS
MARKETS
By Buyer Type
Other, 0.9%
By DAVID G. SHILLINGTON, President,
Cross-Border, 8.6%
Marcus & Millichap Capital Corporation
Equity Fund • International pressures weigh on domestic outlook; Fed remains
& Institutions, 23.5% patient. Amid ongoing trade disputes between the U.S. and China
and slowing growth throughout the European economy, the global
economic outlook has become more cautious. Market volatility,
Private, 64.1%
Listed/REITs, 2.9% combined with muted sentiment, has sponsored a flight to the safety
of Treasurys, pushing the 10-year yield below 2.6 percent. While
domestic growth has moderated recently, the waning impact of the tax
cut stimulus will likely trim forward estimates further. As a result, the
Apartment Mortgage Originations Fed has decided to cease reducing its balance sheet reduction through
By Lender quantitative tightening by September and removed the potential for
100% rate increases through the remainder of the year. The bond market
has begun to price in a much more dovish Fed, with flattening interest
Percent of Dollar Volume

Gov't Agency rates reflecting more caution. Fed officials will likely focus on the
75%
Financial/Insurance
intersection of a global growth slowdown and continued labor market
Nat'l Bank/Int'l Bank
50% strength to refine their plans moving forward, keeping interest rates
Reg'l/Local Bank
CMBS stable for the foreseeable future.
25%
• Abundant liquidity sources balance conservative approach to
underwriting. The availability of debt for apartment assets remains
0%
elevated, spurred by the recent pivot by the Federal Reserve. Sourcing
14 15 16 17 18
will be led by Fannie Mae and Freddie Mac, in addition to a wide
* Trailing 12 months through 1Q19 array of local, regional and national banks, and insurance companies.
Includes sales $2.5 million and greater
Sources: CoStar Group, Inc.; Real Capital Analytics Loan-to-value (LTV) ratios are trending between 65 and 75 percent
on stabilized properties. The decline in interest rates has rewidened
the spread between cap rates and Treasurys, reducing lender concerns
about the risks related to repayment and valuation at maturity.
Development and value-add projects have seen more conservative
National Multi Housing Group lending due to concerns surrounding overdevelopment and the length
John Sebree of the business cycle, leading to a greater use of alternative financing
First Vice President, National Director | National Multi Housing Group structures such as mezzanine loans and preferred equity to cover the
Tel: (312) 327-5417 | john.sebree@marcusmillichap.com
additional capital requirements.
Prepared and edited by
Brandon Niesen
Research Associate | Research Services

For information on national apartment trends, contact:

John Chang
Senior Vice President, National Director | Research Services
Tel: (602) 707-9700 | john.chang@marcusmillichap.com
Houston Office: Memphis Office:

Price: $250
Ford Noe Regional Manager Jody McKibben Vice Pr
Three Riverway, Suite 800 5100 Poplar Avenue, Suite 25
Houston, TX 77056 Memphis, TN 38137
© Marcus & Millichap 2019 | www.MarcusMillichap.com (713) 452-4200 | ford.noe@marcusmillichap.com (615) 997-2860 | jody.mckibbe

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made toIndianapolis Office:
obtain accurate Miami Office:
and complete information; however, no representation, warranty or guarantee,
express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated based on the last month of the quarter/year. Sales data
Josh Caruana Vice President/Regional Manager Scott Lunine Vice Presid
includes transactions valued at $1,000,000 and greater unless otherwise noted. This is not intended to be a forecast600
of future events
E. 96th and
Street, this500
Suite is not a guaranty regarding a future event. This is not intended to provide
5201 Blue Lagoon Drive, Suite
specific investment advice and should not be considered as investment advice. Indianapolis, IN 46240 Miami, FL 33126
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Experian; National (317) 218-5300of| Realtors;
Association josh.caruana@marcusmillichap.com (786) 522-7000 | scott.lunine@
Moody’s Analytics; Real Capital Analytics; RealPage, Inc.; TWR/Dodge
Pipeline; U.S. Census Bureau