Houston’s apartment boom won’t last forever

June 16, 2015 Leave a comment

Houston apartment rental rates rose to an all-time high in 2014, but experts predict a slowdown in the multifamily market this year.

The Bayou City saw strong rent growth since 2009, when apartment construction and rental rates fell amid the Great Recession. Average monthly rents grew from $721 in 2009 to $923 in 2014, according to data from Apartment Data Services and CBRE Research released this week.

Last year, apartment rental rate growth hit 8.1 percent, a record high for Houston, according to CBRE. The international commercial real estate firm attributed the rental growth to Houston’s rapid population and job growth, which has boosted occupancy rates well above 90 percent, and a flood of new luxury apartments, which can charge a higher premium for upscale amenities.

Although apartment rents showed no signs of slowing down earlier this year, this multifamily boom isn’t expected to last, according to industry experts. Apartment analysts, brokers and developers predict Houston’s apartment boom will cool down this year, amid low oil prices and concerns about overbuilding.

“We’re at a time when certainly there will be no rental growth,” said Marvy Finger, president and CEO of The Finger Cos., a longtime Houston developer. “It’s about how much contraction will there be?”

In recent months, several Houston-area apartments have ramped up their marketing efforts, offering rent concessions, referral bonuses and other incentives to drum up leasing and occupancy rates. Class A rents are expected to flatten or dip slightly while Class B and C rents may still have room to grow, said Bruce McClenny, president of Houston-based Apartment Data Services Inc.

On the construction side, some developers have stalled their projects as financing for new projects dried up. The oil slump has claimed an estimated 40 to 70 proposed apartment projects, said Pat Duffy, president of Colliers International’s Houston office. As a result, new apartment construction is estimated to fall by about a quarter this year, according to CMD Group, an Atlanta-based construction industry research firm.

Developers differ on how the oil slump and influx of new apartments will ultimately affect Houston’s multifamily market this year. Some developers, like Finger, paint a dire picture, describing the market in a “spiral down.” Others, like Scot Davis of Trammell Crow Residential, feel that while developers are keeping a wary eye on oil prices, they’re not overly concerned about it and are pressing forward.

Most however agree that the slowdown in apartment construction and rent growth will give the frenzied Houston apartment industry a much needed “correction.”

“It’s creating a pause,” said Ryan Epstein, executive vice president of CBRE Houston’s multifamily capital markets group, in an interview last month. “We needed something to slow us down and give us a chance to catch our breath.”

Paul Takahashi covers residential and multifamily commercial real estate for the Houston Business Journal.


Multifamily Never Sleeps – Five Sleep Aids

June 5, 2015 Leave a comment

by John Wilhoit Jr. on

Man sleeping

Peaceable sleep is a wonderful thing…to doze off at the end of a productive day and start fresh the next.  Multifamily operations requires, in some form or fashion, twenty-four hour care.  As no one can stay awake 24/7 how do we assure that assets in our care are addressed 24/7/365? Here are some ideas on how to approach the issue.

Responsibility Centers. One mistake that some owner/operators make is believing they must do everything themselves. From mowing the lawn to showings, from plumbing repairs to painting. This is plausible with limited scale and a good skill set, however, it is probably not the highest and best use of your time.

With larger properties that are professionally managed this same issue sometimes occurs as a manager or lead maintenance person attempts to do all/be all as a stamp of their importance to the asset.  Further review will likely reveal that appropriate delegation is far more proficient. Emergency planning means lining out the team for emergencies. This will always include more than one person.

Emergency Maintenance Telephone Number always on.  An emergency maintenance telephone number usually rotates from person to person.  It is imperative that this number is always monitored, always on.  Invariably the biggest emergency will occur when the phone remains unanswered.

Appropriate staffing levels.  There is such a thing as running a skeleton crew, then there is the ghost crew…when people think they heard or saw someone, but not really.  See responsibility centers above.

Insurance.  No lapses allowed.

Having after hours service providers.  It’s one thing to have service providers lined up for everyday work, quite another for after hours calls. At least quarterly, check to make sure that everyone that is in charge of the emergency maintenance number also has the short list of after hours service providers.   Picking up the call is the first line of defense, addressing the matter in real-time sometimes requires waking up people in the middle of the night.  Who are these people and do you have their 24 hour service number?

Mr. Wilhoit is the author of two books: How To Read A Rent Roll: A Guide to Understanding Rental Income and Multifamily Insight Vol 1 – How to Acquire Wealth Through Buying the Right Multifamily Assets in the Right Markets.

For 50+ hours of property management audio training, 3 books and live weekly leadership academy–surf here, http://powerhour.com/propertymanagement/booksandcourses.

About This Blog:

Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily property management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. http://www.MultifamilyInsight.com

Dear New Tenant

May 27, 2015 Leave a comment

Dear New Tenant…


You could just hand your new tenants the keys, but it’s a good idea to put together a welcome kit to help them get settled in. Your locality may also require you to provide them with information about the landlord-tenant relationship and how housing disputes are addressed.
Getting Ready to Move In
Give your tenants the numbers they need to contact service providers to have utilities, telephone, and cable turned on. Let them know how to schedule their move in date and if there are any restrictions on how or when to reserve the elevator. If you require a certificate of insurance from their moving company, let them know the information needed: the amount of coverage, the names of the additional insured, and where the certificate should be sent.
You may have discussed your  policies with the tenants when they looked at the property before signing the lease, but chances are they won’t remember them. Putting the rules in writing means there won’t be any misunderstanding and will help protect you if there’s any dispute.
Garbage and Recycling
Let the new tenant know how you handles garbage and recycling. The rules vary from one location to the next, and every property manager has their own approach.
What happens if a tenant loses their key or is locked out? Whether you provide emergency access or the tenant needs to call a locksmith, let them know how to obtain access when they are locked out. Also let tenants know if they are required to provide keys to you when they change the locks or if there is a limit on the number of keys allowed.
Laundry Facilities
If you manage a building and it has shared laundry facilities, let your tenants know how the machines operate, who to call if there is a problem, and the hours the laundry room is open.
Let tenants know if packages will be held for them, how long they will be held, and how they should claim them.
Common Spaces
Specify the hours and any regulations for using the pool, gym, and similar facilities that may be available to the tenants, and whether these amenities are restricted to residents or can be shared with their guests. If you have facilities like a party room or barbecue grills, let the new tenants know how to reserve them.
While tenants have a right to privacy, you have a right to access the rental to make necessary repairs, show the property to prospective tenants when the lease is ending, or in case of emergency. Let tenants know the circumstances in which you’ll need access and how you’ll inform them you were in their home.
Repairs and maintenance
Let tenants know how to report problems with the home or on the property, and how to request repairs.
Will you provide a reminder each month, or are tenants expected to submit payment without prompting? Do you take credit cards, checks, or cash? Tell your tenants where, when, and how rent payments are to be made.
Add other topics to your welcome pack depending on your location, your property’s features, and your building’s policies. Help your new renters settle in easily and happily, and you’ll increase the chances of turning them into long-term tenants.

– See more at: http://www.landlordstation.com/news/dear-new-tenant/?utm_source=LandlordStation+Newsletter&utm_campaign=18ab9ea6d6-Wednesday_Email_95_21_2015&utm_medium=email&utm_term=0_48fc91a5cf-18ab9ea6d6-80858001#sthash.qvkIKQ31.dpuf

Multifamily Acquisitions: How to Measure a Winning Purchase

April 26, 2015 Leave a comment

Multifamily Acquisitions: How to Measure a Winning Purchase

by John Wilhoit Jr. on December 2, 2014

How do buyers measure their purchase? How do they know if they have a winner? Almost any measure requires the use of a timeline.  Buying a deal for a $1 and selling it for $2 requires knowing when the dollar was invested and the hold time to determine yield.  The dollar invested may have additional dollars added during the hold time. The timing of these additional dollars is also required to determine yield.

Everyone has a different measuring stick when it comes to defining a winning acquisition.  Depending on what side of the coin you represent, just the fact that a deal closed means many people were paid for their good efforts; appraisers, mortgage bankers, legal professionals.  That’s fine as they all represent pieces on the chess board of an acquisition.

Then there is the buyer.  This person or entity has just signed on for an extended relationship with the asset. For many, their relationship with the asset ends on closing day; for the buyer their relationship is just beginning.

And you cannot just “figure” like the old farmer that “figured” if he sold a crop for double the costs then he must be making money. Costs include more than labor, material and overhead. There is cost of capital and opportunity cost to take into consideration.

A tried and true formula for measuring yield is to predetermine your risk premium.  For some investors this baseline is cash the yield.  This seldom plays out well as this is a comparison of apples to oranges (attempting to compare yield on a liquid asset versus an hard asset). The risk premium curve requires a comparison of like assets.

Here are some methods, some numerical, to measure a winning purchase.  All require knowing the invested dollars and timeline to determine outcomes.

Land value.  Too many people, when looking at income producing assets, fail to consider the land value as a stand-alone asset. Granted, the valuation of income property is predicated on income.  However, land value can sometimes outstrip income production based on the highest and best use for the underlying land.  Just a point to ponder. Consider the strawberry farms across the street from Disneyland.  This from the Los Angeles Times, August 16, 1998:

The Walt Disney Company announces it has acquired an option to buy the last large development site in the resort district of Anaheim- a 52.5 acre strawberry farm that the  Fujishige family has refused to sell for decades. Several real estate experts speculate the land will costs Disney from $65-78 million dollars.

Long-term value.  We recognize real estate as a store of value. While prices do not always go up, they seldom go to zero. Real estate is also a hard asset, one that represents a physical plant that can produce income. This separates it from other stores of value like gold and diamonds…and we like income!

Occupancy and historic occupancy. A well occupied development is perceived to have good value.  Historic occupancy is a factor in the decision-making process. More importantly is current market dynamics that convey going-forward market strength and occupancy potential.

Relative NOI.  Relative here is just another word for guess.  It’s ok to perform that back-of-the-envelope analysis for a minute, but this should give way to empirical number crunching long before an offer is on the table.  When NOI is rising there is a presumption that value is rising. This form of thinking precludes performance of quality due diligence. Use  actual, projected and forecast numbers. Yes, these are estimates, but estimates built on quality research.

Yield – IRR and cash-on-cash. Ah- now we have some hard and fast numbers to capture. . These two measures, while separate and distinct from each other, provide a number from which to compare other investments alternatives. To determine each of these read Frank Gallinelli’s book “What Every Real Estate Investor Needs to Know About Cash Flow… And 36 Other Key Financial Measures“.

Upside potential. Penciling upside potential has as many outcomes as the people doing the penciling. And “value” is calculated in so many different ways based on the experience and expertise of the person completing this determination. Here is a basic rule of thumb for determining upside potential:

  1. Compare cost per square foot (acquisition price) to current market price per square foot.
  2. Add costs to redevelop to the acquisition price.
  3.  Compare total landing costs per square foot (acquisition price plus redevelopment expenses) to current market price.
  4. Determine percentage gain in value. If this number is less than 20%, depending redevelopment costs, the risk is out of line with the potential profit margin. A lower acquisition price is necessary to compensate for this risk.

The moral to this story is that there are several methods of determining value and gain on sale. As a buyer, your job is to select those methods that best represent an honest framework to capture the output yield for investors.  There is no glory in producing inaccurate information as if the yield is sub-par one would think your objective is to not repeat this behavior and when you find a winning formula- repeat often.  You have to study the details to be able to tell the difference.

This post is intended to spark your thinking on the topic.  Please add your comments and suggestions. I am always willing to update articles with thoughts, suggestions and new ideas from our loyal readers.

Mr. Wilhoit is the author of two books: How To Read A Rent Roll: A Guide to Understanding Rental Income and Multifamily Insight Vol 1 – How to Acquire Wealth Through Buying the Right Multifamily Assets in the Right Markets.

For 50+ hours of property management audio training, 3 books and live weekly leadership academy–surf here, http://powerhour.com/propertymanagement/booksandcourses.

About This Blog:

Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily property management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. http://www.MultifamilyInsight.com

Categories: multifamily

The Metro Approved System Reimagining Map

April 22, 2015 Leave a comment

The Approved System Reimagining Map

The System Reimagining Plan was approved by the METRO Board of Directors on February 11, 2015. Implementation of the Reimagined Network is targeted for August 2015.

On the map below you can view the approved Reimagined Network Plan. The individual routes on the map are color coded by their base period frequency, or how often the bus comes at each stop on a route. The base network is the network that would be in place during the weekday midday and weekend time periods (many routes would run more often during the weekday peak periods). Click on a route for more detailed information.

Downloadable maps are available at the bottom of the page.

Click Here to open the Interactive Map in a full screen viewer.

The different service types shown on the map include:

  • Red: “The Frequent Network” Local buses run every 15 minutes or better, at least 15 hours a day, 7 days a week, on major streets, serving neighborhoods, jobs, education, medical care, and retail. Whatever you want to do, whenever you want to do it, frequent local will get you there.
  • Blue: Local buses run every 16 to 30 minutes with many of the characteristics of the Frequent Network.  These provide connections to many places in the METRO Service Area.
  • Green Routes: Local buses run every 31 to 60 minutes, at least 14 hours a day, 7 days a week, connecting more neighborhoods and other destinations to the network. Local buses connect to transit centers, frequent local buses, and rail.
  • Orange: Express services that run weekday peak hours only.  Large segments of the route use the freeway to speed up their trip connecting people to jobs and activity centers like Downtown or Uptown.
  • METRORail: Color coded by route name. Connect to major activity centers like Downtown, the Texas Medical Center, and major universities. Operates frequently, every 6 to 12 minutes, and fast, bypassing traffic by running in its own lane.

The METRO Service Area boundary is shown as a thin dashed purple line. You can click on individual routes to get a popup with more details. When you click on a route, there is a link at the bottom of the popup that allows you to open a detailed overview of the route. At the bottom of the page are links to additional files you can download to review the draft network in greater detail.

While the map shows the base network, many routes will have higher frequency (meaning the buses will come more often) during morning and afternoon peak periods when travel demands are typically at their highest levels. There will also be periods in the late evening when demand on the system is lower and buses may arrive less frequently than in the base period.

Categories: Uncategorized

Vacancies up, Rents Moderate, but 2015 still Looks Solid for Multifamily

April 2, 2015 Leave a comment

The multifamily market outperformed many predictions in 2014; vacancy levels, despite a flood of new properties, declined by 10 basis points from 2013 to a 13-year low of 4.2 percent. Revenue per unit rose, continuing the pattern that has led to a 20 percent increase over the last five years.

Freddie Mac’s economists are predicting that, while easing a bit from 2014, this year will be another strong one for the sector.  Its 2015 Multifamily Outlook projects that demand, driven by the millennial generation, will remain strong but construction of units in buildings with five or more will continue to trend upward so vacancies will rise.

Supply, they say, could actually outpace demand this year and the vacancy rate will probably rise by 60 basis points to 4.8 percent by year-end.  This however is still below the historic average of 5.4 percent.  This negative is tempered by an unknown; how much pend-up demand will be unleashed as households form that would have been formed earlier were it not for the recession.

Adding to the favorable outlook is the overall economy which is expected to grow 3 percent this year and an unemployment rate that is closing in on the Federal Reserve’s definition of full employment.  The later should translate into rising wages which in turn should encourage more household formation and increasing demand for rentals.

Other factors that could drive the multifamily market in one direction of the other is how the price of oil will impact employment in energy-dependent economies and the trajectory of interest rates.

Completions of multi-family units are expected to surpass their long-run average this year and remain above average for several more years while at the same time demand, due to favorable demographic trends and expansion of the labor market, will remain strong and result in continued rent growth this year driven by the coming of age of peak number of millennials which should continue through 2023.

There is considerable lag between starts and completions of multi-family housing.  In 2014 completions increased by about 67,000 units or 36 percent year-over-year to a total of 251,000 units.  This was 18,000 below the long-run average from 1995-2007.  The pace of construction is expected to slow but permits are still increasing so starts and completions will continue to increase for several more years.

Vacancy rates will not only rise nationally but in most Metropolitan Statistical Areas (MSAs) as well as new construction comes on line and rents are expected to respond accordingly.  While growth will moderate from 2014, rents will still rise by 3.1 percent.  They will, however grow more slowly in many areas and become flat or even decline in some markets.

The report says Freddie Mac estimated last year that the supply of new multi-family units needs to be around 440,000 annual to meet demand including that from households that delayed formation during the recession.  While completions will rise above the historic average of 270,000 this will not meet long-term demand.  “While the timing of the realization of pent-up demand is hard to predict, they expect that the wave of current supply will not disrupt the market and will be absorbed within the mid-term.”

Consistent with the revenue growth noted above, property prices also advanced robustly in 2015, rising about 15 percent and this appreciation is expected to continue.   Cap rates decreased by 16 basis points during the year, ending at 6 percent and Freddie Mac anticipates that cap rates will stay below that rate for the year.

Multi-family origination volume ended the year about $185 billion, $13 billion more than in 2014 due to a strong second half of the year.  That finish can be attributed to declining interest rates, increasing construction completions, and increasing property prices.  Freddie Mac expects that investors will take advantage of low rates by refinancing debt or funding new completions and expects another substantial year for multifamily originations.  It also expects that the sharp increase in commercial mortgage-backed security conduits, while still only a small share, will continue.

Another unknown is energy prices.  A continued decline could affect the economy in contradictory ways; lower prices are likely to lead to more economic growth but energy dependent areas could be hurt by layoffs and cuts in capital spending.  The biggest concern is in Texas, especially Houston but the area is more diversified than during the last energy crisis so it is unlikely it will fall into a recession.

The report contained a special section analyzing manufactured housing which has seen growing popularity in response to the growing unaffordability of traditional housing.  Average rent for manufactured housing in was $450, which was 42 percent lower than the median for a traditional multifamily unit.

Nationwide 6.7 million households reside in this housing or 5.8 percent of total households.  About one-third of these are renters.  More than half of manufactured units are located in six states in the Southeast Region and California and Texas and is more prevalent in smaller cities and municipalities.  After falling during the recession, occupancy in this housing is trending up while rent growth remains below pre-recession levels.

Freddie Mac says it expects the supply of manufactured housing that will be delivered this year to surpass pre-recession levels; market dispersion will become more pronounced, and the housing is expected to be a vehicle to help bridge the housing affordability gap.

Reprint from MortgageNewsDaily.com     by Jann Swanson

Houston a top commercial real estate market, report says

April 2, 2015 Leave a comment

Houston ranks among the top U.S. commercial real estate markets in another report.

Coldwell Banker Commercial’s “Top CRE Markets 2014” report, released Feb. 4, ranked Houston No. 3, behind Denver and San Francisco.

Houston ranked No. 2 for multifamily, No. 13 for retail and No. 26 for office. The report considered percent change in vacancy and percent change in rental rates between the third quarter of 2013 and the third quarter of 2014.

Percent change in population and percent change in unemployment for the same time period were also considered. Houston ranked No. 8 and No. 30, respectively, in those categories.

Dallas came in at No. 4 on the overall rankings, San Antonio is No. 7, Austin is No. 9, and Fort Worth rounds out the Texas cities at No. 16. The report ranked 40 markets in total.

The high ranking is not surprising for Houston.

In October, the Urban Land Institute and PwC named Houston the No. 1 real estate market to watch in 2015. Houston ranked No. 1 in both investment and development prospects, and it came in second to Austin for homebuilding prospects in that report.

The Bayou City also took the top spot on Forbes’ recent fastest-growing cities list, though Houston is not expected to grow as fast this year, due to the oil price slump.

Olivia Pulsinelli is the web producer for the Houston Business Journal’s award-winning website

%d bloggers like this: