harris county appraisal district presentation

Houston Apartment Association Presentation

Commercial Property Division Bobby Larry RPA, CAE Division Director

Jim Robinson, Chief Appraiser

Within Harris County, there are a total of 6,179 apartment properties, consisting of 591,149 units, classified as State Class Code B1. HCAD has defined five (5) distinct apartment types that are categorized based on size, type, and use.

APARTMENT TYPES

Land Use Codes

Definitions Units Stories Properties Units

4209 Apartment Structure 4-20 3,308 36,556

4211 Apartment Garden Style 1-3 2,275 461,686

4212 Apartment High Rise 4 or more

108 18,809

4221 Apartment Subsidized Housing 279 30,209

4222 Apartment Tax Credit (LIHTC)

209 43,889


Apartment structures are categorized into five (5) building classes. The building classification system was implemented based on rent levels, age, amenities, physical condition, and functional design of the project. The building classes vary from Class “A “ to Class “E”. The Class “E” building classification is utilized exclusively for apartments valued based on the cost approach, which are typically new apartments; older properties in which the current use is no longer the highest and best use, and properties with unique features that do not correspond with the other classifications. Properties with twenty (20) units or less, also referred to as Land Use Code 4209, are also valued using the cost approach method. HCAD’S cost model is based on information received from Marshall & Swift and AIA documentation ascertained during the appeals process.


GENERAL GUIDELINES FOR APARTMENT BUILDINGS CLASS “A”

Structure Code/Land Use Code 4211 4212 4221

Typical Market Rent Range $0.84/sf to $1.89/sf and higher

Building Features Typically built to or near investment grade standards and at the most desirable location

Complex Amenities

Typically top of the line: • Pools• Tennis Courts• Exercise Rooms• Cable TV W/D Connections• Fireplaces• Pets accepted • Playground• Entrance Gates or Guard• Officers living on-site• Panic Alarms

• Jacuzzis• Club House• Covered Parking• Patio/Balcony • Ceiling Fans• Outside Storage• Perimeter Fence• Patrol Service• TV Monitored

Grounds• Valet Services• Maid Service

Age Range No limit on high-rise Typically 1983 to present on low to mid-rise styles


GENERAL GUIDELINES FOR APARTMENT BUILDINGS CLASS “B”

Structure Code/Land Use Code

4211 4212 4221 4222


Building Features Typically • Fireplaces W/D

Connections• Private Entrances• Private Balcony/Patio

• Outside Storage• Energy Efficient• Alarm Systems• Wet Bars

Complex Amenities

Typically • Security Fences• Swimming Pools• Exercise Facilities• Clubhouse

• Tennis Courts• Jacuzzi• Covered Parking• Leasing Office

Age Range Typically 1970 to present


GENERAL GUIDELINES FOR APARTMENT BUILDINGS CLASS “C”


4211 4221 4222


Building Features Typically

• Courtyard Style• Common walkway for several

units• Some decorative enhancements• Many have been renovated

Complex Amenities

Typically • Laundry Facilities• Security Patrols• Clubhouse/Leasing in one bldg or apartment unit• Playground or Picnic Area

Age Range Typically 1970 to present


GENERAL GUIDELINES FOR APARTMENT BUILDINGS CLASS “D”


4211 4221 4222


Building Features Typically minimal special features generally

• Window Air Conditioning• Master Cooling System

Complex Amenities

Typically minimum if any amenities

• Complex sizes range from 50-500 units

Age Range Typically 1945 to 1980


HCAD delineates Harris County into twenty-eight (28) geographical economic areas. These areas allow us to view market trends and income information based on its location within the county. Apartment Data Services (ADS) uses similar economic boundaries.


In apartment valuation, HCAD takes into consideration the average unit size and the total number of bedrooms. This chart below is published by ADS. HCAD also follows these guidelines.

TYPE SIZE

Efficiency Less than 550 sq. ft.

1 Bedroom 550 – 820 sq. ft.

2 Bedrooms 821 – 1100 sq. ft.

3 Bedrooms 1101 – 1500 sq. ft.and over

Several vendors are utilized to assist in accurate property valuation. To develop income models, information is gathered from various sources which include Apartment Data Services (ADS), REIS Services, Korpacz Investor’s Survey, actual income and expense statements ascertained during the appeals process, as well as other vendors that provide economic information.


The appropriate market rents are applied after determining the proper economic area and class. HCAD’s income model takes into consideration whether concessions are given, the stabilized occupancy, and ancillary income if applicable. When this calculation is completed, it generates an effective gross income. The next step is a deduction of market expenses. The income model separates market expenses into the categories of fixed expenses; which include property insurance, and variable expenses; which include but are not limited to payroll, utilities, repairs and maintenance, and marketing. The model then accounts for management fees, franchise taxes, and reserves for replacements. After all of these factors have been considered, the net operating income remains. HCAD’s model utilizes a loaded capitalization rate that uses a component for the effective tax rate. At the conclusion of the appeals process, the income and expense statements received are keyed into the database to be used for future analysis and valuation. This information is vital because of the constant changes in the local market. We are then able to generate reports to analyze market trends for each area, type and class. This allows us to easily determine rental rates and market expenses. HCAD receives the best and most current information available from various sources. This information allows us to accurately place a market value on each property as of January 1 of any given year, according to the State Property Tax Code and USPAP standards.


In preparation for the 2010 tax year and analyzing current market trends, HCAD has recognized a further decline in occupancies and rental rates in the fourth quarter of 2009. This is due to a combination of factors. First, financial markets have frozen across the country, making it difficult to obtain loans to purchase or refinance apartments. Secondly, lenders are requiring a substantially larger equity portion upfront from the investors. Also, the lack of financing and a decrease in demand for apartments have contributed to a decline in new apartment construction locally. Many projects have been put on hold or scaled back. Although Harris County has witnessed an economic downturn, it still remains relatively stable in comparison to the national level. Per the Real Estate Center at Texas A & M University, from December 2008 and December 2009 the statewide unemployment rate increased from 5.7% to 8.0%. Locally, the Houston area witnessed an increase of 3.5%, leaving Houston’s unemployment rate 8.3% during the same time frame. The construction sector witnessed the highest loss of jobs at a rate of 15.4%, or 99,500 total jobs. Although Houston is experiencing record unemployment rates, it still has not seen the vast amount of job losses the nation is witnessing. Per Texas A & M, the U. S. unemployment rate rose from 7.4% in December 2008 to 10% in December 2009. Many local economists anticipate seeing an improvement in employment rates beginning mid-2010, and reaching near normal levels in 2011.


Houston’s economy relies heavily on international trade. The Houston job market is dominated by oilfield service companies, and companies that provide support service for this industry. For Houston to replenish jobs, the international trade level must first be revived. With some foreign countries witnessing economic growth in late 2009, as well as gains in imports and exports, Houston is expected to regain a portion of the jobs lost in this field. As Houston’s employment rates begin to upswing around the middle of 2010, it is expected to see increases in population. This influx of population will increase demand for apartments. The apartment market may well be one of the first segments to rise from the economic downturn. As these influences work through the local economy, apartment demand is expected to rise.


Rental RatesDuring the third and fourth quarters of 2009 rental rates fell as apartment occupancies dropped. Most communities are now forced to offer free rent or other concessions to maximize occupancy. Per Apartment Data Services (ADS), 67% of apartment communities are now offering concessions. Consequently, Class “A” apartments are providing the largest concessions of 10.2%. Of the 41 sub-markets analyzed by ADS, only 4 have had a rental rate increase in the fourth quarter of 2009. The Northwestern region had the largest increase at 25.9%, having a current rental rate of 89.4 cents per square foot. The remaining submarkets saw declines, ranging from a very slight decrease to double digits. Throughout the metro area, ADS reports that vacancies rose from 11.9% to 15.1% between late 2008 and late 2009. This number includes properties newly opened that have not reached stabilized occupancies. During calendar year 2009, rents declined from an average of 83.8 to 81.6 cents per square foot for the overall market. Hurricane Ike damaged or destroyed many apartment units in late 2008. This temporarily increased the demand for undamaged apartments in some submarkets. Currently, the majority of damaged complexes have either already began or have finished all necessary repairs caused by the storm.


CLS

NUMBEROF

PROPERTIES

AVERAGERATE

CENTS/SF/MO

OCCUPANCY

CONCESSIONS

A

358

117.2

82.6%

10.2%

B

1,003

84.2

86.8%

7.1%

C

1,017

66.9

82.7%

5.7%

D

474

45.5

82.1%

4.0%

OVERALL

2852

81.6

84.3%

7.4%


2009 2010

Rent Per ADS Per ADS

Concessions 4% of potential rent 8% of potential rent

Occupancy 93% 91%

Variable Expenses 25% of effective gross 26% of effective gross

Cap Rate 7.50% base 7.75% base

CLASS B

2009 2010



Occupancy 90% 88%



2010 INCOME MODEL ADJUSTMENTS

CLASS A


2009 2010



Occupancy 88% 86%



CLASS D

2009 2010



Occupancy 86% 84%



CLASS C


SUBSIDIZED CAP RATES

2009 2010

Class A 8.50% base 9.00% base

Class B 9.00% base 9.50% base

Class C 9.50% base 10.00% base

Class D 10.50% base 11.00% base

TAX CREDIT (LIHTC) CAP RATES

2009 2010

Class A 9.50% base 10.00% base

Class B 9.50% base 10.00% base

Class C 9.50% base 10.00% base

Class D 9.50% base 10.50% base


Market TrendsFor many years, there was a consistent increase in market values across the board in all property types. This trend has changed during the recent economic downturn. Because of the uncertainty in the economy and apartment market, most investors are choosing a longer holding period as opposed to selling now for a loss. Per Real Capital Analytic’s (RCA) data, the average apartment cap rate is 7.1% for the third quarter of 2009. Per Korpacz, cap rates increased to 7.84% in the third quarter of 2009 nationally. REIS indicates a 12-month rolling cap rate of 8.5% for the local Houston market. Real Capital Analytics has identified forty-three (43) investor grade transactions in Houston. The estimated sales volume totaled $400 million in the first 3 quarters of 2009.

2008 and 2009 Certified Value Comparisons

2008Certified

2009Certified

Less New Construction

PercentChange

4209 $734,802,867 $749,980,791 $747,528,305 1.7%

4211 $14,604,999,510 $15,101,166,780 $14,423,647,144 -1.3%

4212 $420,313,849 $616,371,694 $419,360,254 -0.03%

4221 $497,426,925 $512,427,698 $489,336,064 -1.6%

4222 $672,515,262 $791,909,068 $753,003,048 11%

TOTAL $16,482,374,180 $17,771,856,032 $16,832,874,815 2.0%


New Construction:The new construction activity for apartments is declining as expected due to equilibrium, the difficulty to find financing for new projects, and the consumer’s ability to spend money. During calendar year 2009, forty-five new complexes totaling 13,426 units were added to the Houston market. Per ADS, there are 12 complexes under construction at this time, consisting of 2,523 proposed units, which is a downward trend from 2008’s proposed rate of 17,613. Of the new apartment complexes entering the market, four are tax credits and four are senior housing. Due to population growth, the northwest portion of the county, as well as Katy and the far western edge of the county leads in the number of new apartments being constructed.


Apartments currently under construction as of December “09:

* Tax Credit** Senior Housing

AKA ADDRESS UNITS KMAP

Sheldon Ranch 930 Dell Dale St - Residential 40 498A

Cypress Creek at Reed 2910 Reed Rd 132 573B

Villas at Shaver 3271 S Shaver 240 576D

Preserve at Baywood Red Bluff/Genoa Red Bluff 336 578M

Sierra Meadows **

90 375T

Fountains at Memorial City (Condo) 9870 Gaylord 114 490B

La Maison on River Oaks 2727 Revere St 423 492U

Gables West Ave 2800 Kirby 389 492U

Golden Bamboo Village Ph1 12010 Dashwood 57 529E

City Place 306 McGowen 185 493P

Space Center Plaza Space Center Blvd/Crenshaw 313 618V

The Lynn at Country Club Apartments Baker Rd/Emmett Hutto 204 501K

TOTAL

2523


SummaryThe economy in Houston is expected to remain slow during first 2 quarters of 2010 due to the lack of funding and investor uncertainty. Houston’s apartment rental rates have declined and increasing amounts of concessions are being offered, thus lowering market rents. With unemployment rates steadily increasing, occupancy rates are decreasing. This trend is expected to continue through mid-2010. Many investors have delayed their purchases of apartment properties. New apartment construction has seen a drastic decrease due to the current over-supply of units and lack of funding. This will help the Houston apartment market reach equilibrium when the units begin experiencing positive absorption. As a result of current economic trends, HCAD has addressed changes in the four critical variables in the income model used to value properties. The first component addressed is the market rents, which are carefully researched. As indicated by the market, we have populated the base model for each property segment with a minimum 2% concessions. HCAD has adjusted stabilized occupancies downward by 200 basis points for all property segments. The variable expense category under market expenses has also been indexed upwards. For all income producing properties appraised by HCAD, the capitalization rate has been adjusted upward between 25 and 100 basis points.
