Apartment Market

[TheNiche]

I guess we're making predictions, but I don't think we should discuss the possibilities until we see a raw vacancy rate in Houston and if it means lower rents well I think that's a good thing.

Sure, for you...unless you're an architectural connoseiur. Then it sucks.

It also sucks for people who work in development, construction, brokerage, architecture, land planning, legal services, accounting, and all the other professions that are tapped to make projects happen.

[KinkaidAlum]

One thing few (if any) have mentioned is how many apartments have been taken "off" the market over the last few years.

First, you have numerous conversions of class A apartments like The Royalton at River Oaks, the Rise (tower part of post midtown), 7575 Kirby, the McCue, The Oxford, the Lofts on Post Oak, the upper floors of the Four Seasons Hotel downtown and I am sure there are many others (these were just off the top of my head).

Secondly, you have the ones being torn down and replaced like Allen Parkway, the ones on Lower Westheimer just inside of Shepherd and Westcreek. Oftentimes, the replacement is bringing fewer units to the market than the development it is replacing (Allen Parkway).

Finally, you have others that were torn down for other purposes like the older units on Voss to make way for a strip center, the ones lining Richmond near the Menil (still just a field?) and I am sure many more.

[TheNiche]

One thing few (if any) have mentioned is how many apartments have been taken "off" the market over the last few years.

First, you have numerous conversions of class A apartments like The Royalton at River Oaks, the Rise (tower part of post midtown), 7575 Kirby, the McCue, The Oxford, the Lofts on Post Oak, the upper floors of the Four Seasons Hotel downtown and I am sure there are many others (these were just off the top of my head).

Secondly, you have the ones being torn down and replaced like Allen Parkway, the ones on Lower Westheimer just inside of Shepherd and Westcreek. Oftentimes, the replacement is bringing fewer units to the market than the development it is replacing (Allen Parkway).

Finally, you have others that were torn down for other purposes like the older units on Voss to make way for a strip center, the ones lining Richmond near the Menil (still just a field?) and I am sure many more.

Trading Class B and C units for Class A+ probably isn't a fair comparison, for the most part. There is some rebound within the same submarket or into Class A complexes, but it is a mere fraction of those tenants that were displaced. Also, the way that O'Connor runs their statistics, the histories of complexes that have been demolished or removed from their database for condo conversion are completely removed from the historical construction and absorption numbers.

[Double L]

Well a slow down of new housing starts has been the national trend for a few years and I think we should be glad that Houston has been able to buck that trend for so long.

[dbigtex56]

Note:

A large number of the above posts originated in the Allen House: it was nice knowing you - thread, and were moved to this thread by request.

Please overlook any incongruities.

[Houston19514]

Surprised nobody has posted this highly relevant Nancy Sarnoff article about the Houston apartment market:

http://www.chron.com/disp/story.mpl/busine...ff/4658086.html

In short, she says that "vacancy rates are expected to decline in 2007."

She further says that "This year, about 5,300 units will be built, down from 6,300 in 2006."

[TheNiche]

Surprised nobody has posted this highly relevant Nancy Sarnoff article about the Houston apartment market:

http://www.chron.com/disp/story.mpl/busine...ff/4658086.html

In short, she says that "vacancy rates are expected to decline in 2007."

She further says that "This year, about 5,300 units will be built, down from 6,300 in 2006."

Actually, it is not Nancy saying that "vacancy rates are expected to decline in 2007," but Marcus & Millichap. They're brokers. Can you say "conflict of interest?" It seems that they got their rounded 2006 construction data from O'Connor, which shows 6,285 units as being delivered in 2006. ...but, to my concern, they claim that 5,300 units will deliver in 2007, except that 2,213 units (42% of their projection) already delivered in the first three months of 2007. O'Connor shows another 12,273 as being under construction (and O'Connor still seems to be undercounting).

Even if all of those units presently under construction were in complexes that would take two years to be completed (which is an unreasonabe assumption in your favor not only because most projects don't take that long but because O'Connor is undercounting construction), you could expect an average of 511 to deliver per month for the remainder of the year, so that we'd finish out at about 6,815 units. So I call BS on Marcus & Millichap.

--------------------

Nobody ever likes to be the bearer of bad news in an industry because it kills deals. When deals die, messengers get shot. Even when data is sufficiently transparent and the company issuing them is an independent 3rd party, press releases with any degree of analysis are often subtlely (and sometimes not-so-subtlely) biased with a positive slant...and Nancy might spin them even further to avoid burning bridges. Having said this, I started this thread back in January, and job growth has been revised upward in a signficant way, so I'm somewhat less concerned than I had been. My only worry is that the same level of growth may not be sustainable and that all the hype will only fuel the apartment boom.

[Houston19514]

Actually, it is not Nancy saying that "vacancy rates are expected to decline in 2007," but Marcus & Millichap. They're brokers. Can you say "conflict of interest?" It seems that they got their rounded 2006 construction data from O'Connor, which shows 6,285 units as being delivered in 2006. ...but, to my concern, they claim that 5,300 units will deliver in 2007, except that 2,213 units (42% of their projection) already delivered in the first three months of 2007. O'Connor shows another 12,273 as being under construction (and O'Connor still seems to be undercounting).

Even if all of those units presently under construction were in complexes that would take two years to be completed (which is an unreasonabe assumption in your favor not only because most projects don't take that long but because O'Connor is undercounting construction), you could expect an average of 511 to deliver per month for the remainder of the year, so that we'd finish out at about 6,815 units. So I call BS on Marcus & Millichap.

--------------------

Nobody ever likes to be the bearer of bad news in an industry because it kills deals. When deals die, messengers get shot. Even when data is sufficiently transparent and the company issuing them is an independent 3rd party, press releases with any degree of analysis are often subtlely (and sometimes not-so-subtlely) biased with a positive slant...and Nancy might spin them even further to avoid burning bridges. Having said this, I started this thread back in January, and job growth has been revised upward in a signficant way, so I'm somewhat less concerned than I had been. My only worry is that the same level of growth may not be sustainable and that all the hype will only fuel the apartment boom.

... and speaking of spin . . .

[RedScare]

This looks like a good thread for H-Town's 'Cool Hand Luke' analogy.

[mumbles]

With the cut in subprime lending many people will no longer be able to buy homes, many people will be losing their homes to foreclosure. Apt rentals are expected to go way up. Where are all the laid off construction workers going to go? This housing boom is on the way out.

[jim1126]

With the cut in subprime lending many people will no longer be able to buy homes, many people will be losing their homes to foreclosure. Apt rentals are expected to go way up. Where are all the laid off construction workers going to go? This housing boom is on the way out.

You've got that right. I'm looking for an apartment now (Inner Loop, not necessarily the latest or greatest property) and rents have gone from high to outrageous, even for B class properties. Here I was hoping rents would be coming down this year with all the construction, but that is obviously not the case.

[Kittycattex]

I know that we've got a few folks on the forum that are in the know. Is anyone other than me a bit concerned about where the in-town apartment market is going to end up in 2008? I'm looking at construction stats, then looking at absorption and occupancy stats, and they don't exactly match.

Granted that the Katrina mess completely clouded the true workings of the market, and granted that energy and medical are going gangbusters, but... ...am I just paranoid or is this really happening? How many units can we fill?

I'm an apartment locator and I'm finding that the college students are competing for availability of the inner loop apartments. Parents are willing to shell out the bucks to put them there versus living at home and paying the gas prices to commute. My concern will be the broken leases from not being able to maintain their lifestyle that the parents started. Many that are new to town are intrigued with the rail system versus buses and want to be in apartments along the rail line.

The suburb housing market is noticing a change, in some areas, due to the influctuation of evacuees that have taken over the older, lower renting apartment units. I've seen a rise of older couples selling their home and requesting a loft in the city. Some don't want to drive on the highways anymore.

There are over 900 units in three complexes being built in the Woodlands area. The demand has already exceeded the supply. To address your concern; it will be further into the future before the in-town market is in trouble. Someday they may be the "older buildings" with the lowest rents and empty spaces.

[Jax]

Outrageous compared to what Houston used to be like I guess. My sister lives in a small class B apartment in NYC with 3 other girls (maybe 1000 sq ft MAX) and they pay over $1000 each. Now that is outrageous!

You've got that right. I'm looking for an apartment now (Inner Loop, not necessarily the latest or greatest property) and rents have gone from high to outrageous, even for B class properties. Here I was hoping rents would be coming down this year with all the construction, but that is obviously not the case.

[Houston19514]

The results are in. According to O'Connor & Associates the Houston apartment market in 2007 had the following results:

"absorbed a strong 7,516 units over the year"

"Despite positive absorption for the year, overall Houston occupancy dipped 0.44 points to 88.17% to close out 2007. Class A occupancy suffered the largest drop in occupancy in 2007, decreasing from 90.77% to 88.61%"

"In contrast to 2007

[TheNiche]

Additional evidence that my concerns were valid.

http://www.globest.com/news/1093_1093/houston/168231-1.html

[Houston19514]

Additional evidence that my concerns were valid.

http://www.globest.com/news/1093_1093/houston/168231-1.html

One thing that is troubling in that article: the statement that "Absorption is at its lowest that it's been in 10 years.". That's just not true, at least according to O'Connor. 2007 positive absorption of 7516. 2006 had negative absorption.

The one thing we know with absolute certainty is that those (or I should say "the person", and I'm not talking about you Niche) who told us that 17,000 new apartments would be delivered to market in 2007 was wrong. The actual number delivered, according to O'Connor: 10,070.

[TheNiche]

One thing that is troubling in that article: the statement that "Absorption is at its lowest that it's been in 10 years.". That's just not true, at least according to O'Connor. 2007 positive absorption of 7516. 2006 had negative absorption.

The one thing we know with absolute certainty is that those (or I should say "the person", and I'm not talking about you Niche) who told us that 17,000 new apartments would be delivered to market in 2007 was wrong. The actual number delivered, according to O'Connor: 10,070.

Yeah, I noticed that. GlobeSt.com is notorious for poor writing, errors, and at times outright fabrications.

O'Connor has its own issues with tracking construction.

[spiderman]

The results are in. According to O'Connor & Associates the Houston apartment market in 2007 had the following results:

"absorbed a strong 7,516 units over the year"

"Despite positive absorption for the year, overall Houston occupancy dipped 0.44 points to 88.17% to close out 2007. Class A occupancy suffered the largest drop in occupancy in 2007, decreasing from 90.77% to 88.61%"

"In contrast to 2007's decrease in occupancy levels, Houston rental rates posted an increase for the year. Overall rents increased $0.017 per square foot (psf) to $0.848 psf, their highest level on record. All Classes reported yearly increases in rental rates, with the Class A and C markets enjoying the largest increases. Average rents in the Class A market closed out the year at $1.122 psf, Class B rents are at $0.821, Class C rents are at $0.698 psf, while Class D rents are at $0.607 psf."

"In 2007, 40 projects totaling 10,070 units consisting of Class A and tax-credit units were delivered to the market"

O'Connor

I went to a presentation that Pat O'Connor gave a couple of weeks ago, and he presented the data cited in the article above.

O'Connor said that with the large number of Class A apartments currently under construction and hitting the market in 2008, he believes that there will be a lot of foreclosures, and that sales prices for apartment complexes will drop by 10-15% per door. He also foresees that these new complexes will have to offer a lot of concessions to fill their their complexes (3 months free rent with a 13 month lease, etc.), and that there will be a move up effect that will ripple through the market - people in class B apartments will move up to Class A, C+ to B, C- to C+, etc., and this will hurt rents and sales prices across all classes.

[Houston19514]

I went to a presentation that Pat O'Connor gave a couple of weeks ago, and he presented the data cited in the article above.

O'Connor said that with the large number of Class A apartments currently under construction and hitting the market in 2008, he believes that there will be a lot of foreclosures, and that sales prices for apartment complexes will drop by 10-15% per door. He also foresees that these new complexes will have to offer a lot of concessions to fill their their complexes (3 months free rent with a 13 month lease, etc.), and that there will be a move up effect that will ripple through the market - people in class B apartments will move up to Class A, C+ to B, C- to C+, etc., and this will hurt rents and sales prices across all classes.

Did he say anything about gains in apartment occupancy anticipated by some as a result of the housing credit crunch and home foreclosures?b (It was discussed in the article Niche posted and is the reason some investors are still confident in the apartment market)

[TheNiche]

Did he say anything about gains in apartment occupancy anticipated by some as a result of the housing credit crunch and home foreclosures?b (It was discussed in the article Niche posted and is the reason some investors are still confident in the apartment market)

Tighter mortgage underwriting on single-family housing (especially entry-level homes) and real or percieved fears of dropping home values is significantly depressing tenant turnover according to my sources. This is a national trend, and Texas is no exception where this is concerned. It positively affects net absorption, but occupancy is a function not only of demand, but of net new supply, which is where we are presently challenged.

Out-of-state investors have been turned on to Texas because our cities are actually generating jobs, with long-term prospects being extremely favorable; the same can't be said at the moment for most places. Houston has been a favorite, although it has gotten overbuilt in most submarkets. Dallas has had some issues with single-family vacancy being too high and attracting renters away from apartments, but their new construction has been offset almost 1-for-1 by demolition, so it is still a fairly balanced market. Austin is becoming overbuilt, especially in and near downtown; they're also likely to run into condo oversupply before too long. San Antonio is probably the healthiest market in the state and could easily be the best in the country by next year.

[spiderman]

Did he say anything about gains in apartment occupancy anticipated by some as a result of the housing credit crunch and home foreclosures?b (It was discussed in the article Niche posted and is the reason some investors are still confident in the apartment market)

Some favorable impact short term as single family homes are taken out of the market via the foreclosure process, however these will end up being sold to either new owner occupants or to investors as rentals. One of the factors that has hurt apartment absorption in the past 5 years is the easy availability of subprime loans, homes were built that otherwise would not have been built, so apartment absorption stalled as people who would otherwise be apartment dwellers were able to purchase homes that they are now losing. Now that the subprime market has shriveled, we should return to the historical equilibrium ratio of 2:1 single family houses versus apartments.

Longer term, O'Connor was very upbeat, repricing of risk will result in 10-15% apartment per door sale price declines in 2008, competent operators should be able to add to their portfolios at better pricing, the apartment construction mania should subside. O'Connor said he believes that Houston is at the beginning of a golden age due to oil, there will be a narrow gap between supply and demand for a long time (10-15 years) due to China, India, etc., 1/2 of the Houston economy is tied to energy, so job growth and population growth should be strong long term, and housing construction and apartment construction should be more realistic, etc.

[missmsry]

I'm not so much concerned about apartment overbuilding as I'm concerned about the rats nest of an apartment across the street from me. Burn in hell slum lords.