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Houston Apartment Research Report

November 18, 2014 Leave a comment Go to comments

Houston Metro Area, Fourth Quarter 2014


Apartment Vacancy Recedes Despite Spike in Completions


Houston ranks atop most U.S. metros for job creation, household formation and net migration, which supports expectations for the local apartment market to finish the year strong. Vacancy in the metro declined considerably over the past 12 months in spite of a 63 percent increase in completions. For perspective, though, the 12,160 units delivered amounted to only a 2 percent uptick in metrowide inventory.

Furthermore, new supply was concentrated in the Downtown/West Inner Loop, Galleria/Uptown and Medical Center/University submarkets, where rents run 30 to 80 percent above the metro average. As such, recently completed apartments have introduced minimal competitive pressure elsewhere in the metro.

Next year, luxury urban projects will again dominate the pipeline, though deliveries will also rise in The Woodlands/Spring area, home to ExxonMobil’s sprawling new campus. While a recent slide in oil prices introduces some uncertainty into the local energy sector outlook, Houston apartment operators should continue to benefit from outsized job creation in other segments of the economy, including the education and health services sector. The trade, transportation and utilities sector is also poised for growth in coming quarters as efforts intensify to increase capacity at the Port of Houston ahead of the 2016 completion of the Panama Canal expansion.

Transaction velocity increased significantly over the past 12 months and likely would have accelerated further if not for a shortage of for-sale inventory. An influx of out-of-state capital, particularly from California, has created intense competition for available properties, driving prices higher.

Over the past year, per-unit prices in the metro climbed by more than 10 percent, while cap rates compressed modestly, to 7.1 percent.

On average, Class A properties traded in recent quarters closed at cap rates in the mid-to high-5 percent range. Class B cap rates, on the other hand, averaged in the mid-7 percent range, though a handful of assets in close-in submarkets traded significantly lower.

2014 Annual Apartment Forecast


Employment: Houston employment will rise 3.9 percent this year with the addition of 116,500 jobs. In 2013, the metro recorded a 2.8 percent increase in payrolls.

Construction: Metrowide, developers will complete approximately 13,100 apartments in 2014, which reflects a sizable increase from 2013, when 9,600 units were brought online.

Vacancy: Apartment vacancy in Houston will close 2014 at 5.4 percent, down 70 basis points for the year. In 2013, the vacancy rate declined 140 basis points.

Rents: On average effective rents in the metro will rise 5.2 percent in 2014 to $955 per month. In 2013, effective rents advanced 4.6 percent.

Reprint from Marcus Millichap.com

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