houston’s energy angst - yardi matrix multifamily winter 2016 report

Rent Growth Decelerates; Future Uncertain

Houston’s Energy Angst Multifamily Winter Report 2016

New Development Nearly Halved

Investors Sour on Once Favored Locale

2

HOUSTON MULTIFAMILY

Market Analysis Winter 2016

Contacts Paul Fiorilla Associate Director of Research [email protected] (800) 866-1124 x5764

Dana Seeley Associate Director of Research [email protected] (800) 866-1124 x2035

Jack Kern Director of Research and Publications [email protected] (800) 866-1124 x2444

AuthorAdelina Osan Associate Editor

Energy Price Slump Weighs on Houston

Recent Houston Transactions

After years of outperforming its peers, Houston’s energy-driven economy is being shaken by low oil prices. Although the economy has diversified in recent years, the precipitous drop in the price of crude oil has dealt a reverberating blow that has flattened job growth and dampened the apartment market.

The news isn’t all bad: The metro has a first-rate healthcare system that is adding skilled workers and there is growth in the hospitality, education and government sectors. The metro remains a target for international investment, healthcare expansion, international trade and industrial investment. Projects such as the Texas 288 tollway, a $2.1 billion public-private partnership between the Texas Department of Transportation and Blueridge Transportation Group, will offer easy access to major employment centers such as the Texas Medical Center, covering a 10-mile stretch from U.S. 59 to the Harris County line. Still, the energy sector will continue to challenge Houston’s economy, as recovery is not expected to begin until 2017.

The outlook for multifamily fundamentals is uncertain, as the metro recorded negative growth on a trailing three-month basis, caused by a dip in Lifestyle rents. The large amount of construction will pressure rent growth, although YardiMatrix forecasts 4.7% growth. Meanwhile, the investment market is beginning to sour on Houston, with deal flow and pricing starting to slip.

City: Houston Buyer: Nitya Capital Purchase Price: $63 MMPrice per Unit: $57,861

Village at Piney Point

City: Houston Buyer: Olympus Property Purchase Price: $66 MMPrice per Unit: $105,289

The Ranch at Shadow Lake Town Center

Park at Research Forest

City: Kingwood, TexasBuyer: Cortland Partners Purchase Price: $64 MMPrice per Unit: $122,780

City: The Woodlands, Texas Buyer: South Star Properties Purchase Price: $59 MMPrice per Unit: $149,619

On the cover: Photo by Zview/iStockphoto.com

Houston Multifamily | Winter 2016 3

Houston vs. National Rent Growth (Sequential 3 Month, Year-Over-Year)

Rent Trends

� Rents grew 3.5% year-over-year to an average of $960 per month as of February 2016, well below the 6.2% increase nationally. Houston was one of the better-performing metros in the U.S. for several years due to healthy job and population growth. However, the drop in energy prices led to an immediate and sharp decline in rent growth beginning in May.

� Over the past three quarters, rent growth decelerated from 6% to 3.5%, and the future looks uncertain. On a trailing three-month basis, Houston was one of only two U.S. metros with negative growth.

� Growth has been higher in the working-class Renter by Necessity segment, which rose 5.6% year-over-year to an average of $812, whereas the higher-end Lifestyle segment rose by only 1.7% and has dropped by 0.4% over the past three months. The stark contrast is caused by stronger demand for mid-price properties, while supply is focused on the higher end of the quality scale. Lifestyle rents average $1,144 per month.

� We expect the growth rate to moderate and produce 4.7% gains in 2016, but market players should watch for further effects from energy prices as well as increased supply.

Houston Rent Growth by Asset Class (Sequential 3 Month, Year-Over-Year)

Source: YardiMatrix

Source: YardiMatrix

2008

2009

2010

2011

2012

2013

2014

2015

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Houston National

Employment Growth: YoY 6mo-avg (Houston)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2008 2009 2010 2011 2012 2013 2014 2015

National Houston

Supply: Percentage of Stock (Houston)

12,600 Units

15,259 Units35,540 Units

Planned Prospective Under Construction

Supply: Development Pipeline as of February 2016 (Houston)

$40,000

$60,000

$80,000

$100,000

$120,000

2008 2009 2010 2011 2012 2013 2014 2015

Houston National

Transactions: Price Per Unit (Houston)

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

0

50

100

150

200

250

300

350

2008 2009 2010 2011 2012 2013 2014 2015

Volume in Millions Number of Properties

Transactions: Total Volume (Houston)

0.0%

2.0%

4.0%

6.0%

8.0%

Houston National

Rent: YoY vs National (Houston)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Lifestyle Rent-by-Necessity

Rent: Lifestyle vs RBN (Houston)

2008

2009

2010

2011

2012

2013

2014

2015

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Houston National


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2008 2009 2010 2011 2012 2013 2014 2015

National Houston


12,600 Units




$40,000

$60,000

$80,000

$100,000

$120,000

2008 2009 2010 2011 2012 2013 2014 2015

Houston National


$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

0

50

100

150

200

250

300

350

2008 2009 2010 2011 2012 2013 2014 2015



0.0%

2.0%

4.0%

6.0%

8.0%

Houston National


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%




Houston vs. National Employment Growth (Year-Over-Year)

Economic Snapshot

� After outperforming the nation for several years, job growth in Houston remains rather flat: More than 23,000 jobs were added to the metro in 2015, but that was a quarter of what was added during the previous year. The 1.2% rate of growth is far behind the 2.3% national rate.

� Employment gains were led by the leisure and hospitality sector, which added 19,600 jobs, followed by education and health services (19,000) and government (10,000). Home to the largest medical center in the world, Houston benefits greatly from the Texas Medical Center, as the research facility employs more than 100,000 workers and has an annual budget of $15 billion.

� Houston’s continuous growth in industries such as medical research, education, tourism, life sciences, petrochemicals and international trade is counterbalancing the energy sector’s negative growth. Manufacturing lost 16,000 jobs last year, though the sector shows prospects of recovery. For example, Japan-based air conditioner maker Daikin Industries Ltd. plans a $417 million campus expected to employ more than 5,000.

� Mining, logging and construction contracted by 5,600 jobs, and the future prospects are dependent on the direction of crude oil prices, which briefly dropped below $30 a barrel. In late March, the price had recovered to close to $40 a barrel; if it remains stable, that would stop the bleeding in jobs.

Houston Employment Growth by Sector (Year-Over-Year)

Sources: YardiMatrix, Bureau of Labor Statistics (not seasonally adjusted)

Current Employment Year ChangeCode Employment Sector (000) % Share Employment %

70 Leisure and Hospitality 310 10.30% 19,600 6.80%65 Education and Health Services 378 12.50% 19,100 5.30%90 Government 394 13.10% 10,200 2.70%50 Information 34 1.10% 1,400 4.30%40 Trade, Transportation and Utilities 621 20.60% 800 0.10%60 Professional and Business Services 471 15.60% 400 0.10%80 Other Services 103 3.40% -1,500 -1.40%55 Financial Activities 144 4.80% -5,200 -3.50%15 Mining, Logging and Construction 319 10.60% -5,600 -1.70%30 Manufacturing 243 8% -16,000 -6.20%

Sources: YardiMatrix, Bureau of Labor Statistics

2008

2009

2010

2011

2012

2013

2014

2015

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Houston National


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2008 2009 2010 2011 2012 2013 2014 2015

National Houston


12,600 Units




$40,000

$60,000

$80,000

$100,000

$120,000

2008 2009 2010 2011 2012 2013 2014 2015

Houston National


$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

0

50

100

150

200

250

300

350

2008 2009 2010 2011 2012 2013 2014 2015



0.0%

2.0%

4.0%

6.0%

8.0%

Houston National


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%




Houston Rent vs. Own Affordability as a Percentage of Income

DemographicsAffordability

� Median home prices in the metro rose to $196,000 in 2015, reaching a peak for the current cycle. Houston remains relatively affordable compared to most major metros, but as housing prices rise and employment staggers, affordability issues may come up, as they have across the U.S. in recent years.

� Despite steady growth in home prices, owning remains more affordable than renting: The cost comprises 14% of the metro’s median income of $60,900, while rents, averaging $960, take up 19% of the median income. Rents are highest in River Oaks, far above the metro’s average at $1,784. Located just miles away from the Texas Medical Center, that area is one of the most expensive in Texas.

Houston Median Home Price

Sources: YardiMatrix, National Association of Realtors, U.S. Dept. of Housing & Urban Development, U.S. Dept. of the Treasury

Source: National Association of Realtors

2010 2011 2012 2013 2014

National 309,347,057 311,721,632 314,112,078 316,497,531 318,857,056

Houston 5,949,076 6,060,721 6,186,923 6,333,809 6,490,180

Source: U.S. Census

Population

� Houston is growing at a fast pace, as young workers are following jobs.

� The metro’s population added 156,000 residents in 2014, at 2.5% more than three times the 0.8% rate of the U.S., and has grown by 9.1% since 2010.

Houston vs. National Population


Houston vs. National Completions as a Percentage of Total Stock (as of February 2016)

Supply

� Despite Houston’s shaky economy, new development remains high. More than 15,000 apartment units were added in 2015, a 2.6% expansion. That’s slightly above the 2.3% national rate. Meanwhile, roughly another 20,000 units are scheduled to be completed in 2016.

� Development has been fueled by high population growth and the strengthening employment market. Demand mostly comes from the metro’s core, which is seeing the greatest job and population growth. Another area seeing heavy supply is Houston’s northwest.

� The pipeline consists of more than 63,000 units, including over 35,500 currently under construction. Most of the pipeline was conceived during the market’s bull run, and it remains to be seen whether developers will put projects on hold or whether banks will rein in construction financing. About 12,600 units are already in the planning and permitting phase, suggesting a continued pace of new supply for several years.

� The West End/Downtown submarket leads supply with 7,200 units. Other submarkets with a large pipeline include Piney Point Village North (2,200 units) and Katy (2,000 units).

Development Pipeline (as of February 2016)

Source: YardiMatrix

Source: YardiMatrix Source: YardiMatrix

Houston Completions (as of February 2016)

2008

2009

2010

2011

2012

2013

2014

2015

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Houston National


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2008 2009 2010 2011 2012 2013 2014 2015

National Houston


12,600 Units




$40,000

$60,000

$80,000

$100,000

$120,000

2008 2009 2010 2011 2012 2013 2014 2015

Houston National


$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

0

50

100

150

200

250

300

350

2008 2009 2010 2011 2012 2013 2014 2015



0.0%

2.0%

4.0%

6.0%

8.0%

Houston National


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%



2008

2009

2010

2011

2012

2013

2014

2015

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Houston National


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2008 2009 2010 2011 2012 2013 2014 2015

National Houston


12,600 Units




$40,000

$60,000

$80,000

$100,000

$120,000

2008 2009 2010 2011 2012 2013 2014 2015

Houston National


$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

0

50

100

150

200

250

300

350

2008 2009 2010 2011 2012 2013 2014 2015



0.0%

2.0%

4.0%

6.0%

8.0%

Houston National


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%



2008

2009

2010

2011

2012

2013

2014

2015

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Houston National


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2008 2009 2010 2011 2012 2013 2014 2015

National Houston


12,600 Units




$40,000

$60,000

$80,000

$100,000

$120,000

2008 2009 2010 2011 2012 2013 2014 2015

Houston National


$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

0

50

100

150

200

250

300

350

2008 2009 2010 2011 2012 2013 2014 2015



0.0%

2.0%

4.0%

6.0%

8.0%

Houston National


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%




Houston Sales Volume and Number of Properties Sold (as of February 2016)

Transactions

� Some $2.8 billion worth of properties changed hands in 2015, far below the $3.5 billion of both 2013 and 2014. It seems that investors are starting to sour a little bit on Houston, only recently one of the darlings of the value-add crowd.

� The average price per unit in Houston, just shy of $80,000, remains well below the national average.

� During the past 12 months, investor appetite was highest in West Bellaire, Nassau Bay/Seabrook, The Woodlands and Jersey Village/Salsuma. Louetta rounded out the top five. The 624-unit Ranch at Shadow Lake was the most expensive property to change hands in Houston over the past year. Olympus Property acquired the luxury complex in May for $65.7 million.

Houston vs. National Sales Price per Unit Top Submarkets for Transaction Volume1

Submarket Volume ($MM)

West Bellaire 184

Nassau Bay/Seabrook 158

The Woodlands 144

Jersey Village/Salsuma 142

Louetta 116

Sugar Land - South 99

Source: YardiMatrix 1 From 3/1/2015 to 2/29/2016.

Source: YardiMatrix

Source: YardiMatrix

2008

2009

2010

2011

2012

2013

2014

2015

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Houston National


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2008 2009 2010 2011 2012 2013 2014 2015

National Houston


12,600 Units




$40,000

$60,000

$80,000

$100,000

$120,000

2008 2009 2010 2011 2012 2013 2014 2015

Houston National


$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

0

50

100

150

200

250

300

350

2008 2009 2010 2011 2012 2013 2014 2015



0.0%

2.0%

4.0%

6.0%

8.0%

Houston National


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%



2008

2009

2010

2011

2012

2013

2014

2015

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Houston National


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2008 2009 2010 2011 2012 2013 2014 2015

National Houston


12,600 Units




$40,000

$60,000

$80,000

$100,000

$120,000

2008 2009 2010 2011 2012 2013 2014 2015

Houston National


$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

0

50

100

150

200

250

300

350

2008 2009 2010 2011 2012 2013 2014 2015



0.0%

2.0%

4.0%

6.0%

8.0%

Houston National


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%




Area # Submarket1 Greater Third Ward2 East End3 Mount Houston4 Cloverleaf5 Pasadena6 South Houston - Crenshaw Park7 South Houston8 William P Hobby Airport9 Pirce Junction

10 Clear Creek11 Pearland/Friendswood12 Nassau Bay/Seabrook13 Deer Park14 La Porte15 Atascocita16 Humble/Westfield17 Spring18 The Woodlands - East19 Porter20 Kingwood21 Baytown22 League City/Dickenson23 Texas City/San Leon25 League City - West26 Alvi27 Galveston28 Conroe - East29 Lake Jackson/Angleton

Area # Submarket1 West End/Downtown2 The Heights3 Museum District4 Reliant Park5 Bellaire6 River Oaks7 West Bellaire8 Piney Point Village - South9 Piney Point Village - North

10 Hunters Creek11 Bunker Hill Village12 Spring Valley13 Rosslyn14 Missouri City15 Suger Land - South16 Sugar Land - West17 Suger Land - North

Houston Submarkets

Area # Submarket18 Royal Oaks Country Club19 Addicks20 George Bush Park21 Bear Creek Park22 Jersey Village/Salsuma23 Bammel24 Louetta25 Richmond26 Rosenberg27 Cinco Ranch - South28 Katy29 Cinco Ranch - North30 Tomball32 Magnolia33 The Woodlands34 Conroe - West

Read All About It! Greystar Starts Pre-Leasing

Luxury Community in Houston

Historic Neighborhood

Get the latest Dallas real estate news at

HFF Closes Sale of 270-Unit

Ranch at City Park

Regency Centers in JV for The

Market at Springwoods Village

Kimco’s Grand Parkway

Marketplace Lands Target

Photo by cheng8/iStockphoto.com

https://www.cpexecutive.com/houston/

https://www.multihousingnews.com/houston/


Definitions

Lifestyle households (renters by choice) have wealth sufficient to own but have chosen to rent. Discretionary households, most typically a retired couple or single professional, have chosen the flexibility associated with renting over the obligations of ownership.

Renter by Necessity households span a range. In descending order, household types can be:

� A young-professional, double-income-no-kids household with substantial income but without wealth needed to acquire a home or condominium;

� Students, who also may span a range of income capability, extending from affluent to barely getting by;

� Lower-middle-income (“gray collar”) households, composed of office workers, policemen, firemen, technical workers, teachers, etc.;

� Blue-collar households, which may barely meet rent demands each month and likely pay a disproportionate share of their income toward rent;

� Subsidized households, which pay a percentage of household income in rent, with the balance of rent paid through a governmental agency subsidy. Subsidized households, while typically low income, may extend to middle-income households in some high-cost markets, such as New York City;

� Military households, subject to frequency of relocation.

These differences can weigh heavily in determining a property’s ability to attract specific renter market segments. The five-star resort serves a very different market than the down-and-outer motel. Apartments are distinguished similarly, but distinctions are often not clearly definitive without investigation. The Yardi® Matrix Context rating eliminates that requirement, designating property market positions as:

Market Position Improvements Ratings

Discretionary A+ / A

High Mid-Range A- / B+

Low Mid-Range B / B-

Workforce C+ / C / C- / D

The value in application of the Yardi® Matrix Context rating is that standardized data provides consistency; information is more meaningful because there is less uncertainty. The user can move faster and more efficiently, with more accurate end results.

The Yardi® Matrix Context rating is not intended as a final word concerning a property’s status—either improvements or location. Rather, the result provides reasonable consistency for comparing one property with another through reference to a consistently applied standard.

To learn more about Yardi® Matrix and subscribing, please visit www.yardimatrix.com or call Ron Brock, Jr., at 480-663-1149 x2404.

© Yardi Systems, Inc., 2016. All rights reserved. All other trademarks are the property of their respective owners.

Visit our websites, and sign up for our free emailed newsletters at cpexecutive.com/subscribe and multi-housingnews.com/subscribe.

With so much information out there, selecting the best source

can be daunting. Keep it simple. Commercial Property Executive

and Multi-Housing News will keep you up-to-date on real estate

news, data, trends and analysis—daily, weekly or monthly. Trust

the leading integrated industry information resource to help you

make informed decisions and achieve your business goals.

cpexecutive.com multi-housingnews.com

What’s the best choice for CRE news & views?

https://www.cpexecutive.com/subscriptions/

https://www.multihousingnews.com/subscriptions/

https://www.cpexecutive.com/

https://www.multihousingnews.com/


DISCLAIMER

ALTHOUGH EVERY EFFORT IS MADE TO ENSURE THE ACCURACY, TIMELINESS AND COMPLETENESS OF THE INFORMATION PROVIDED IN THIS

PUBLICATION, THE INFORMATION IS PROVIDED “AS IS” AND YARDI MATRIX DOES NOT GUARANTEE, WARRANT, REPRESENT OR UNDERTAKE

THAT THE INFORMATION PROVIDED IS CORRECT, ACCURATE, CURRENT OR COMPLETE. YARDI MATRIX IS NOT LIABLE FOR ANY LOSS, CLAIM,

OR DEMAND ARISING DIRECTLY OR INDIRECTLY FROM ANY USE OR RELIANCE UPON THE INFORMATION CONTAINED HEREIN.

COPYRIGHT NOTICE

This document, publication and/or presentation (collectively, “document”) is protected by copyright, trademark and other intellectual

property laws. Use of this document is subject to the terms and conditions of Yardi Systems, Inc. dba Yardi Matrix’s Terms of Use (http://

www.yardimatrix.com/Terms) or other agreement including, but not limited to, restrictions on its use, copying, disclosure, distribution and

decompilation. No part of this document may be disclosed or reproduced in any form by any means without the prior written authorization

of Yardi Systems, Inc. This document may contain proprietary information about software and service processes, algorithms, and data

models which is confidential and constitutes trade secrets. This document is intended for utilization solely in connection with Yardi Matrix

publications and for no other purpose.

Yardi®, Yardi Systems, Inc., the Yardi Logo, Yardi Matrix, and the names of Yardi products and services are trademarks or registered trademarks of

Yardi Systems, Inc. in the United States and may be protected as trademarks in other countries. All other product, service, or company names

mentioned in this document are claimed as trademarks and trade names by their respective companies.

© 2016 Yardi Systems, Inc. All Rights Reserved.

houston’s energy angst - yardi matrix multifamily winter 2016 report

Documents