MARKET REPORT

MULTIFAMILY
Houston Metro Area Q4/19
Vacancy on Track for Substantial Drop; Value-Add
Opportunities Still Prevalent Around the Core Multifamily 2019 Outlook

Wave of new households puts demand back ahead of supply. With net CONSTRUCTION:
absorption clocking in at 13,500 units through the first three quarters of
Development will continue to trend
2019, the Houston apartment market is on pace to significantly tighten
down from the cyclical high of 23,000
by year end. Strong household formation remains a primary catalyst for
absorption, particularly in western and northern suburbs and through- 6,500 UNITS
will be completed
units completed in 2016. The urban core
is set to receive a sizable portion of the
out the urban core, where vacancy rates have generally been pushed well
new supply.
below the market reading. Metrowide, Houston will add more than 47,000
new households in 2019 — the second highest total in the nation. This
continues to compress apartment availability across the board as vacancy
VACANCY:
rates for all asset classes registered decreases of at least 40 basis points
during the past year. Net absorption of more than 16,000
apartments will push market vacancy
Developer interest well dispersed despite overall construction soften- 150 BASIS POINT
decrease in vacancy
to 5.6 percent. In 2018, market vacancy
ing. Following the completion of 80,000 units during the past five years, increased 90 basis points.
builders will begin to slow their pace in 2019 as 6,500 apartments are on
tap. Several mid- and high-rise complexes within the urban core headline
development, including the 27-story Drewery Place in Midtown and the
32-story Hanover BLVD Place in Uptown. Other notable projects include
RENT:
a pair of nearly 400 unit complexes in Katy and Stafford. Strong house- Sound rent growth will push the metro’s
average effective rent to $1,143 per
hold growth and relatively tight vacancy in many of Houston’s western
suburbs will keep builders active in these areas for the foreseeable future. 4.1% INCREASE month, outpacing last year’s advance of
Northern suburbs like Humble and Spring will also post large additions to in effective rents 2.5 percent.
inventory as the two cities collectively add 1,000 units in 2019.

Investment Trends
• Private investors remained active during the past year, zeroing in on
Local Apartment Yield Trends many value-add assets in and around the urban core, where some cap
Apartment Cap Rate 10-Year Treasury Rate rates reached the upper-8 to lower-9 percent range. Areas just north
12%
of Hobby Airport offered similar properties, with units selling for an
around $70,000 each, more than 40 percent below the metro average.
9% • Investors nationwide continue to take note of Houston’s healthy demo-
graphics, generating substantial out-of-state investment across all asset
Rate

6% classes. Bellaire, several northern suburbs and Uptown Houston were

highly targeted among these buyers, with many of them coming from
3%
California, Florida and New York in search of higher yields than those
found in their local markets.
0%
01 03 05 07 09 11 13 15 17 19*
• With the market’s Class A vacancy dropping 160 basis points in the past
three years, institutional groups remained interested in Houston. Re-
cently built luxury complexes in the urban core and in western suburbs
Sales Trends like Katy and Sugar Land offered cap rates as low as 4 percent.
Sales Price Growth
* Cap rate trailing 12-month average through 3Q; Treasury rate as of Sept. 30
Sources: CoStar Group, Inc.; Real Capital Analytics
r Unit (000s)

$120 45%
Year-over-

$90 30%
 Employment Trends 3Q19 Yield
Local Apartment – 12-Month
Trends Period
Metro United States Apartment Cap Rate
EMPLOYMENT
10-Year Treasury Rate
6%
12%
2.6% increase in total employment Y-O-Y
Year-over-Year Change

3%
•
9% The strongest hiring activity in more than four years helped push
Houston’s unemployment rate down to a record-low 3.6 percent.

Rate
0%
6% Nearly 82,000 jobs were created over the past 12 months.

-3% • Propelled by the 26,100 new employees in professional and

3%
business services, office-using job growth increased 4.0 percent
-6% over the past year — the largest jump since midyear 2013.
0%
09 10 11 12 13 14 15 16 17 18 19* 01 03 05 07 09 11 13 15 17 19*

Completions and Absorption Sales Trends

Completions Absorption Sales
CONSTRUCTION
Price Growth

Average Price per Unit (000s) 6,900

$120 45%
30 units completed Y-O-Y

Year-over-Year Growth
Units (000s)

$90 30%
20 • After adding roughly 8,600 units to inventory in the previous annual
period, Houston witnessed the completion of 6,900 apartments
$60 15%
10
since last October. Katy and neighborhoods in and around the core
logged some of the strongest construction activity.
0 $30 0%

• There are 30,000 units underway, with delivery dates extending

-10 $0 into mid-2022. More than one third of these
-15%completions will be in
09 10 11 12 13 14 15 16 17 18 19* 09 10 11 12 13 14 15 16 17 18 19*
urban submarkets.

Vacancy Rate Trends

Metro United States VACANCY
12%
50 basis point decrease in vacancy Y-O-Y
10%
Vacancy Rate

• Net absorption of approximately 8,700 apartments over the past

year pushed market vacancy down to 5.7 percent — the lowest
8%
level in four years.

6% • Houston’s luxury units witnessed strong leasing activity as

the metro’s Class A vacancy rate dipped 70 basis points to 5.5
4% percent. At the same time, the Class B and C readings decreased
09 10 11 12 13 14 15 16 17 18 19*
40 and 60 basis points, respectively.

Rent Trends
Monthly Rent Y-O-Y Rent Change RENT
$1,200 12%
2.1% increase in the average effective rent Y-O-Y
Year-over-Year Change
Monthly Effective Rent

$900 8% • The metro’s rent growth remained steady during the past 12 months,
moving the average effective rent up to $1,128 per month. One year
$600 4%
earlier, the monthly rate increased 7 percent.

$300 0% • With vacancy rates hovering around 4 percent, the East Inner Loop
and Conroe/Montgomery County submarkets continued to experi-
$0 -4% ence strong demand as each area posted rent growth above 5 percent
09 10 11 12 13 14 15 16 17 18 19* since last October.

* Forecast
Source: CoStar Group, Inc.
Demographic Highlights

3Q19 Median Household Income 3Q19 Affordability Gap Multifamily (5+ Units) Permits

Metro $69,723 Renting is $604 Per Month Lower 20,622 1H 2019

U.S. Median $65,205 Average Effective Rent vs. Mortgage Payment*

100% Compared with 1H

h
2016-2018

3Q19 Median Home Price Five-Year Household Growth** Single-Family Permits

Metro $242,914 230,900 or 1.8% Annual Growth 37,504 1H 2019

Compared with 1H
U.S. Median $272,227 U.S. 1.0% Annual Growth
0% 2016-2018

*Mortgage payments based on quarterly median home price with a 30-year fixed-rate conventional mortgage, 90% LTV, taxes, insurance and PMI. **2019-2024 
Annualized Rate

SUBMARKET TRENDS SALES TRENDS

Valuations Maintain Modest Incline; Job Creation
Lowest Vacancy Rates 3Q19 Continues to Provide Buyers With Opportunities
Employment Trends Local Apartment Yield Trends
Metro Y-O-Y United States • During the past 12 months,
Apartment Cap Houston’s
Rate average first-year
10-Year Treasury return
Rate
Vacancy Average Y-O-Y %
Submarket 6% Rate
Basis Point
Effective Rent Change
maintained its 6.6 percent reading — still 150 basis points above the
Change 12%
national average — as the metro’s strong demand drivers kept investor
Year-over-Year Change

3% interest strong.
East Inner Loop 4.0% 10 $1,227 5.6% 9%
• Pricing rose steadily over the past year as the average price per unit
Rate

0%
Cypress/Waller 4.1% -190 $1,277 1.5% inched up 2.86%percent to $102,400. Since 2016, values have increased
by 28 percent.
-3%
Conroe/Montgomery County 4.4% -100 $1,046 5.3% 3%
Outlook: Houston’s thriving labor market will continue to attract waves
of renters, particularly millennials seeking live-work-play environments
The Woodlands -6% 4.5% -90 $1,266 -1.0% 0%
09 10 11 12 13 14 15 16 17 18 19* in walkable urban and01 suburban
03 05 areas.
07 09 11 13 15 17 19*

Rosenberg/Richmond 4.6% -70 $1,139 2.3%

Completions and Absorption Sales Trends

Galveston/Texas City 4.7% -10 $997 3.3%
Completions Absorption Sales Price Growth

Sugar Land/Stafford 4.7% -70 $1,221 1.2%

Average Price per Unit (000s)

$120 45%
30
Year-over-Year Growth

Gulfton/Westbury 4.8% -40 $969 2.1%

Units (000s)

$90 30%
20

Hobby Airport 10 4.8% -500 $920 11.9% $60 15%

Champions West 0 5.0% -60 $1,078 0.1% $30 0%

-10 $0 -15%
Overall Metro 5.7% -50 $1,128 2.1%
09 10 11 12 13 14 15 16 17 18 19* 09 10 11 12 13 14 15 16 17 18 19*

* Trailing 12 months through 3Q19

Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Vacancy Rate Trends
Metro United States
12%
 CAPITAL MARKETS
1H19 Apartment Acquisitions By DAVID G. SHILLINGTON, President,
By Buyer Type Marcus & Millichap Capital Corporation
Other, 1.6% Cross-Border, 7.5% • Fed cuts rate again, while balancing assortment of factors. The Federal
Reserve cut the overnight rate by 25 basis points at the end of October, the third
Equity Fund
& Institutions, 18.9% reduction in less than 100 days in an attempt to lengthen the economic runway.
Muted inflationary pressure and continued trade negotiations have boosted the
probability for an additional rate cut in December as it is anticipated by some
Listed/REITs, 5.0% domestic and foreign markets. However, at the end of October, the U.S. and China
Private, 67.0%
were in talks for finalizing the first phase of a trade deal, potentially erasing the
need for another rate reduction if the preliminary agreement quickly comes to
fruition. This, along with positive economic indicators like strong wage growth,
sustained job creation and a rising 10-year Treasury, will continue to make future
Apartment Mortgage Originations
decisions difficult for Fed members as they balance the array of forces tugging at
By Lender
both ends of possible outcomes. Global developments including slowing Euro-
100% pean economies as well as the progression of Brexit and its potential aftermath
will also help determine future Fed decisions. Though recession risks remain, the
Percent of Dollar Volume

Gov't Agency
75%
Financial/Insurance
economy’s solid foundation has softened it in recent months, signaling continued
Nat'l Bank/Int'l Bank domestic growth in the near future.
50%
Reg'l/Local Bank
• Abundant liquidity balances conservative underwriting. Debt financing for
CMBS
25% apartment assets remains strong, supported by a variety of lenders. Fannie Mae
and Freddie Mac, two mainstay apartment capital sources, were recently given
0% increased lending caps, allowing the two Government Sponsored Enterprises
15 16 17 18 1H19 to purchase $100 billion in loans during a yearlong period that started at the
beginning of the fourth quarter 2019. A wide range of local, regional and national
Includes sales $2.5 million and greater
Sources: CoStar Group, Inc.; Real Capital Analytics banks; pension funds; insurance companies and CMBS sources will also remain
active. All have responded to the falling interest rate climate by reducing mort-
gage rates, but lender spreads have widened as the 10-year Treasury rate remains
near cycle lows. Given the downward pressure on interest rates, lender caution
National Multi Housing Group has risen, particularly for construction loans. Though lending is still available for
John Sebree these types of projects, investors may need to blend mezzanine debt with other
First Vice President, National Director | National Multi Housing Group capital sources until they prove out their concepts and substantially fill units. For
Tel: (312) 327-5417 | john.sebree@marcusmillichap.com
stabilized existing assets in most major markets, financing remains plentiful.
Prepared and edited by
Brandon Niesen
Research Analyst | Research Services

For information on national apartment trends, contact:

John Chang
Senior Vice President, National Director | Research Services Houston Office: Memphis Office:

Tel: (602) 707-9700 | john.chang@marcusmillichap.com

Ford Noe Regional Manager Jody McKibben Vice President/Re
Three Riverway, Suite 800 5100 Poplar Avenue, Suite 2505
Houston, TX 77056 Memphis, TN 38137
Price: $250 (713) 452-4200 | ford.noe@marcusmillichap.com (615) 997-2860 | jody.mckibben@marcus

© Marcus & Millichap 2019 | www.MarcusMillichap.com

Indianapolis Office: Miami Office:

Josh Caruana Vice President/Regional Manager Scott Lunine Vice President/Region

600 E. 96th Street, Suite 500 5201 Blue Lagoon Drive, Suite 100
Indianapolis, IN 46240 Miami, FL 33126
(317)
The information contained in this report was obtained from sources deemed to be reliable. Every effort was 218-5300
made | josh.caruana@marcusmillichap.com
to obtain (786) 522-7000
accurate and complete information; however, no representation, warranty | scott.lunine@marcusm
or guarantee,
express or 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 intended to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide
specific investment advice and should not be considered as investment advice.
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Experian; National Association of Realtors; Moody’s Analytics; Real Capital Analytics; RealPage, Inc.; TWR/Dodge
Pipeline; U.S. Census Bureau

Milwaukee Office:
Kansas City Office:
Todd Lindblom Regional Manage