Multifamily Research

Market Report First Quarter 2018

Houston Metro Area

Investors Target Houston for Upside

As Economic Outlook Turns Positive Multifamily 2018 Outlook

Hurricane Harvey lifts Houston hiring into high gear. Job 12,400 units Construction:
additions in the fourth quarter of 2017 reached a new peak as will be completed More than 20,000 apartments
37,400 positions were created during the three-month span, were added to inventory during
more than double the long-term average. In addition to strong each of the last two years, but
hiring in business and professional services, additions in leisure deliveries will fall by nearly half
and hospitality, construction and trade-related industries such during 2018.
as retail and wholesale trade led employment gains. Hotels and
eating establishments beefed up staff to accommodate increased 50 basis point Vacancy:
demand as displaced residents sought temporary housing Tenants moving back into per-
increase in vacancy
options, while construction workers descended upon the metro manent housing contribute to
to help repair and rebuild damaged homes and commercial an increase in vacancy this year,
buildings. Local residents in need of short-term housing, as well reaching 6.7 percent.
as individuals moving into the market to help with relief efforts,
filled nearly 14,000 apartments in the final quarter of last year, the
strongest quarterly absorption total since the end of 2005. 2.7% increase Rents:
in effective rents Strong tenant demand facilitat-
Favorable economic outlook keeps momentum moving ed a 7.2 percent advance in ef-
forward. Job growth will rise again this year as the metro fective rent last year. This year,
continues to rebound from the collapse in energy prices. After growth moderates as the aver-
adding more than 40,000 units to inventory during the last age reaches $1,109 per months.
two years, deliveries will fall drastically. Healthy job growth and
migration into the metro will help counter residents moving out of
apartments and back into homes, and though vacancy will rise
this year, it will stay 90 basis points below the 10-year average.
Investment Trends
• Developer interest is returning to Houston as positive momen-
Local Apartment Yield Trends tum returns to the local apartment market. While permitting
Apartment Cap Rate 10-Year Treasury Rate activity has not returned to prior peaks, the number of mul-
tifamily permits pulled during 2017 increased on a year-over-
12%
year basis. Apartment developers are searching for opportu-
nities in the suburbs around the city of Houston, particularly in
9%
Average Rate

The Woodlands, Kingwood, Baytown, Clear Lake, League City,

6% Pearland, Texas City, Katy and Cypress, with the intent to build
traditional garden-style units.
3%
• Private, local buyers dominate transaction activity, but positive
0% economic growth and the market’s recovery from the decline in
8* 00 02 04 06 08 10 12 14 16 17 energy prices continue to attract out-of-state investment. Val-
ue-add options priced below $10 million are in high demand.

Sales Trends • Southeast Houston has drawn a lot of investor interest over the
last year, and first-year returns typically average 50 to 75 basis
Sales Price Growth
points higher than the rest of the market.
Price per Unit (000s)

$100Group, Inc.; Real Capital Analytics

Sources: CoStar 32%
Year-over-Year Gr

$75 22%

$50 12%
Houston
4Q17 – 12-MONTH PERIOD
Employment Trends EMPLOYMENT:
Local Apartment Yield Trends

6%
Metro United States
1.8%
Apartment Cap Rate 10-Year Treasury Rate
increase in total employment Y-O-Y
Year-over-Year Change

12%
• Houston employers created approximately 53,000 posi-
4%
9%
tions last year, the strongest pace of hiring since 2014.

Average Rate
2%
Hiring in professional and business services accounted
6%for more than 20,000 jobs.
0% • A 100-basis-point drop pushed down the unemployment
3%
rate to 4.5 percent in December, the lowest rate since
-2%
0%mid-2015.
14 15 16 17 18* 00 02 04 06 08 10 12 14 16 17

Completions and Absorption CONSTRUCTION:

Sales Trends
Completions Absorption
20,800
Sales Price Growth
units completed Y-O-Y

Average Price per Unit (000s)

$100 32%

Year-over-Year Growth
32
• Completions topped 20,000 units for a second consec-
$75 22%
utive year during 2017. The Downtown, Spring/Tomball,
Units (000s)

24
$50 Katy, The Woodlands and Memorial12% submarkets have
16 received robust additions over the last eight quarters.
$25 2%
8 • More than 1,000 units come online in Spring/Tomball
$0
and Greenway/Upper Kirby, while Downtown
-8%
is slated
0 to receive
13 an additional
14 15 2,500
16 apartments
17 in 2018.
14 15 16 17 18*

Vacancy Rate Trends VACANCY:

8%
Metro United States
150 basis point decrease in vacancy Y-O-Y

7% • Strong demand from families and individuals seek-

Vacancy Rate

ing temporary housing options after Hurricane Harvey

6% flooded residences facilitated the first decline in vacancy
since 2014. The rate reached 6.2 percent in December.
5%
• The Bear Creek, Far West Houston, Katy, Memorial,
4% Spring/Tomball and The Woodlands submarkets pro-
duced vacancy declines of 300 basis points or more.
14 15 16 17 18*

Rent Trends RENTS:

Monthly Rent Y-O-Y Rent Change 7.2% increase in effective rents Y-O-Y
$1,200 9% • Strong demand contributed to a burn off in concessions
Year-over-Year Change
Monthly Effective Rent

last year, resulting in a 7.2 percent increase in average

$1,100 6%
effective rent to $1,080 per month.
$1,000 3% • Rent growth was strongest in Class A properties last year,
rising 8.5 percent to $1,486 per month. The Bear Creek,
$900 0%
Spring Branch and Spring/Tomball submarkets generat-
ed advances of more than 20 percent.
$800 -3%
14 15 16 17 18*

* Forecast
 Multifamily Research | Market Report

DEMOGRAPHIC HIGHLIGHTS

FIVE-YEAR POPULATION GROWTH* 4Q17 POPULATION AGE 20-34 4Q17 MEDIAN HOUSEHOLD INCOME
(Percent of total population)
645,900 Metro 22% Metro $62,568
U.S. Median $58,714
U.S. 21%

4Q17 TOTAL HOUSEHOLDS

FIVE-YEAR HOUSEHOLD GROWTH* POPULATION OF AGE 25+

PERCENT WITH BACHELOR’S DEGREE+**
42% Rent

253,000
Metro 30% 58% Own
U.S. Average 29%
* 2017-2022 **2016

Lowest Vacancy Rates 4Q17 Anticipated Healthy Future Growth Attracts

Investors Back to Houston
Y-O-Y
Vacancy Effective Y-O-Y %
Submarket Basis PointTrends
Employment
Rate Rents Change • After falling in 2016,
Local the average
Apartment Yield price
Trends per unit grew
Change
more than 20 percent to $94,900, surpassing the
Metro United States Apartment Cap Rate 10-Year Treasury Rate
pre-recession peak by more than $10,000.
6%
Year-over-Year Change

Katy 3.8% -300 $1,239 8.9% • Strengthening

12% property operations and a favorable
SUBMARKET TRENDS

4% outlook have kept cap rates in the low-7 percent area

9%
Average Rate

East Inner Loop 4.1% -30 $1,015 4.4% for the past five years.
SALES TRENDS

2%
Greenway/Upper Kirby 4.5% -150 $1,646 15.2% Outlook:6%A growing buyer pool will intensify competition
0% for available apartment assets in Houston this year. Most
Galveston/Texas City 4.6% -120 $925 6.9% buyers 3%will target suburban assets, chasing apartment
-2% properties
0%
with upside potential, or assets built within
The Woodlands 14 4.9% 15 -370 16 $1,255 17 12.3% 18* the last five 00
years.
02 04 06 08 10 12 14 16 17

Humble/Kingwood 4.9% -240 $1,070 6.5%

Completions and Absorption Sales Trends

Clear Lake 5.0% -240 $1,071 7.7%
Completions Absorption Sales Price Growth
Average Price per Unit (000s)

West University/Med Center 5.1% -240 $1,733 6.8% $100 32%

Year-over-Year Growth

32
Memorial 5.2% -410 $1,491 16.6% $75 22%
Units (000s)

24
Pasadena/SE Houston 5.2% -90 $833 4.3% $50 12%
16
Gulfton/Westbury 5.2% -110 $952 4.7% $25 2%
8

Overall Metro 6.2% -150 $1,080 7.2% $0 -8%

0 13 14 15 16 17
14 15 16 17 18*

Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics

Vacancy Rate Trends

Metro United States
8%
Multifamily Research | Market Report

2017 Apartment Acquisitions By WILLIAM E. HUGHES, Senior Vice President, Marcus

By Buyer Type & Millichap Capital Corporation
Other, 1% Cross-Border, 9% • Fed raises benchmark interest rate, plots path for addi-
tional increases. The Federal Reserve increased the federal
Equity Fund funds rate by 25 basis points, lifting the overnight lending rate to
& Institutions, 24% 1.5 percent. While the Fed noted that the inflation outlook had
moderated in recent months, an upgraded economic forecast
Private, 62% factoring in recent tax cuts and a rollback in regulation strength-
Listed/REITs, 4% ened growth projections for the next two years. As a result, the
Fed has guided toward two additional rate hikes this year, while
setting the stage for as many as four increases in 2019.
Atlanta Office: Dallas Office:

CAPITAL MARKETS
• Lending costs rise alongside Fed rate increase. As the
Apartment Mortgage Originations
Michael Fasano
By Lender
First Vice President/Regional Manager Tim Speck
Federal Reserve lifts President/District
First Vice interest rates,Manager
lenders will face a rising cost
1100 Abernathy Road N.E., Bldg. 500, Suite 600 5001 Spring which
Valley Road,
Atlanta, GA 30328 of capital, maySuite
lead100W
to higher lending rates for investors.
100% Dallas, TX 75244
(678) 808-2700 | [email protected] However, in an
(972) 755-5200 effort to compete for loan demand, lenders may
| [email protected]
Percent of Dollar Volume

also choose to absorb a portion of the cost increases. While

75% Gov't Agency
higher borrowing
Fort Worth Office: costs may prompt buyers to seek higher cap
Austin Office: Financial/Insurance rates, the positive economic outlook should provide rent growth
Reg'l/Local Bank
50% Kyleoutpaces
Palmer inflation
Vice President/Regional Manageryear. As a result, sellers
Craig Swanson Nat'l Bank/Int'l
Regional Bank
Manager that over the coming
300 Throckmorton Street, Suite 1500
9600 North MopacCMBS
Expressway, Suite 300 remain committed to higher asking prices, which has begun to
(817) 932-6100 | [email protected]
25% Austin, TX 78759 Pvt/Other
(512) 338-7800 | [email protected]
widen an
Denver Office:expectation gap as property performance and de-
0% mand trends remain positive.
12 13 14 15 Baltimore
16 17 Office: Robert Kaplan Vice President/Regional Manager
• The
1225 capital markets
17th Street, Suite 1800environment continues to be high-
Matthew Drane Regional Manager ly competitive.
Denver, CO 80202 Government agencies continue to consume
100 E. Pratt St., Suite 2114 (303) 328-2000 | [email protected]
the largest share, just slightly over 50 percent, of the apartment
Baltimore, MD 21202
Include sales $2.5 million and greater
Tel: (443) 703-5000 | [email protected] lending market. National and regional banks control approxi-
Sources: CoStar Group, Inc.; Real Capital Analytics Detroit aOffice:
mately quarter of the market. Global markets and foreign
Boston Office:
central banks
Steven Chaben areSenior
keeping pressure down
Vice President/Regional on long-term inter-
Manager
Tim Thompson Regional Manager est
Two rates. PricingSuite
Towne Square, resides
450 in the 4 percent realm with maximum
National Multi Housing
100Group
High Street, Suite 1025 Southfield, MI
Boston, MA 02110 leverage of 48076
75 percent. Portfolio lenders will typically require
(248) 415-2600 | [email protected]
Visit www.NationalMultiHousingGroup.com
(617) 896-7200 | [email protected] loan-to-value ratios closer to 70 percent with interest rates in
Charleston Office: the high-3 to mid-4 percent range. The passage of tax reform
John Sebree and rising fiscal stimulus will keep the U.S. economy growing
First Vice President, National Director Fort Lauderdale Office:
National Multi Housing Group
Benjamin Yelm Regional Manager strongly and rental demand will remain high with the national
151 Meeting Street, Suite 450
Tel: (312) 327-5417
Charleston, SC 29401 apartment vacancy rate
Ryan Nee Vice President/Regionalat 5 percent
Manager
at the end of 2017.
[email protected]
(843) 952-2222 | [email protected] 5900 N. Andrews Avenue, Suite 100
Prepared and edited by Ft. Lauderdale, FL 33309
Charlotte Office: (954) 245-3400 | [email protected]
Jessica Hill
Benjamin Yelm Regional Manager
Market Analyst | Research Services
201 South Tryon Street, Suite 1220
For information on national apartment trends,
Charlotte, NC contact:
28202 Houston Office:
John Chang (704) 831-4600 | [email protected]
David H. Luther First Vice President/District Manager
First Vice President, National Director | Research Services Three Riverway, Suite 800
Tel: (602) 707-9700 Houston, TX 77056
[email protected] (713) 452-4200 | [email protected]
Chicago Area Offices:
Richard Matricaria Senior Vice President/Division Manager
Price: $250 333 West Wacker Drive, Suite 200, Chicago, IL 60606
(312) 327-5400 | [email protected] Indianapolis Office:
© Marcus & Millichap 2018 | www.MarcusMillichap.com
David Bradley Regional Manager | Chicago Downtown Josh Caruana Vice President/Regional Manager
(312)) 327-5479 | [email protected] 600 E. 96th Street, Suite 500
Steven Weinstock First Vice President/Regional Manager
Indianapolis, IN 46240
The information contained in this
One report was obtained
Mid America from200
Plaza Suite sources deemed to be reliable. Every(317)effort was made
218-5300 to obtain accurate and complete information; however, no
| [email protected]
representation, warranty or guarantee,
Oakbrook express or60181
Terrace, IL 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 includes transactions valued at $1,000,000 and greater unless otherwise noted. This is not intend-
(630) 570-2250 | [email protected]
ed to be a forecast of future events and this is not a guaranty regarding a future event. This is not intendedCity
Kansas to provide
Office:specific investment advice and should not be considered
as investment advice.
Sources: Marcus & Millichap Cincinnati Office:
Research Services; Bureau of Labor Statistics; CoStar Group, Richard
Inc.; Matricaria
Experian; National Association of Realtors; Moody’s
Sr. Vice President/Division Manager Analytics; Real Capital
Analytics; Real Page, Inc.; TWR/Dodge Pipeline; U.S. Census Bureau 7400 College Boulevard, Suite 105
Colby Haugness Regional Manager Overland Park, KS 66210
600 Vine Street, 10th Floor (816) 410-1010 | [email protected]
Cincinnati, OH 45202
(513) 878-7700 | [email protected]
Las Vegas Office: