ApartmentResearch

M A R K E T R E P O RT
Houston Metro Area Fourth Quarter 2011

Apartment Operations Moving in the Right Direction

Houston will lead the nation in job growth this year, supporting stronger apartment operations and enabling owners to begin making healthy rent increases. The market last led the country in employment gains in 2007, when a comparable number of positions were created. Although job growth is similar, the economic climate in 2011 is significantly different from four years ago. For one, the local housing market has yet to gain footing, and traditional loans, including a 10 percent or more downpayment, still prevail for all but FHA-qualified, first-time homebuyers. As a result, renter migration into homeownership will be measured for the next several quarters. Additionally, current operators will not contend with an influx of new competition this year. Only 1,100 units are coming online in large properties, significantly less than the 8,200 apartments delivered in 2007. While vacancy at the end of both years measured the high-8-percent range; unlike 2007, momentum is moving in a favorable direction for operators heading into 2012. Sidelined capital from across the country is coming to Houston due to the favorable economic and demographic outlooks. Low interest rates and heavy competition from well-capitalized institutions and private buyers have compressed Class A cap rates below 6 percent. With spreads for top-tier properties near current coastal rates, some yield-seeking out-of-state investors will begin searching for Class B properties. Currently, few opportunities exist for mid-tier buyers, though heightened competition should put downward pressure on cap rates and encourage some owners to sell. In fact, with another building cycle looming, particularly within the Inner Loop, owners that plan on divesting in the next three years can take advantage of todays low borrowing rates and aggressive rent-growth presumptions to maximize listing prices. Significant demand for these assets will be in the Sugar Land, Katy and Galleria areas. In the lowest tier, operations still remain soft and distress dominates investors mindset. Most of these apartments trade between $15,000 and $20,000 per unit and upside is generated through improved management.

2011 Annual Apartment Forecast

3.4% increase in total employment

Employment: Employers will add 87,000 positions this year, marking a 3.4 percent advancement in employment levels. Last year, staffing increased 1.8 percent, as 46,000 jobs were added to the metro.

1,100 units will be completed

Construction: This year, developers will slow completions to 1,100 units, the lowest level of construction since the early 1990s. Last year, 7,900 units were delivered in Houston.

200 basis point decrease in vacancy

Vacancy: Strong household formation in the metro will bring the vacancy down to 8.8 percent in the fourth quarter, a 200-basis-point descent from 2010. Next year, job growth will spur additional occupancy gains.

2.6% increase in asking rents

Rents: Asking rents will climb 2.6 percent this year to $785 per month at year end, while effective rents will rise 3.0 percent gain to $714 per month. In 2010, asking and effective rents had similar levels of growth, posting increases of 2.5 percent and 2.8 percent, respectively.

Economy

Employment Trends
6%
Year-over-Year Change Metro Area United States

Year to date, employment levels in Houston have expanded 2.6 percent with a gain of Vacancy Rate Trends 65,300 jobs. Houston leads the nation in hiring through the first three Metro Area quarters, followed by nearby Dallas/Fort Worth. 15%
United States

3% 0% -3% 6% -6% 3% 0%

12%

Employment Trends
Metro Area United States

Number of Units (thousands) Number of Units (thousands) Existing Units (thousands) Existing Home Price (Y-O-YExisting Home Price (Y-O-Y Chg.) Number of Home PriceMedian Chg.) Median (Y-O-Y Year-over-Year Change Year-over-Year Change Median Chg.)

* Forecast Sources: Marcus & Millichap Research Services, BLS, Economy.com

Vacancy Rate

07

08

09

10

11*

United States Hundreds of high-paying engineering positions will be created in the coming 3% quarters. Burns & McDonnell Engineering Co. Inc. will hire 100 employees in 12% 07 08 09 10 11* the * Forecast next 18 months, with an estimated 300 employees by 2015.

6% 15%

Only the information and government sectors have contracted thus far in 2011. Major gains have been reported by professional and business services employers 9% and manufacturers, which have added a combined 28,700 since the beginning of the year. Vacancy Rate Trends
Metro Area

Vacancy Rate

Sources: Marcus & Millichap Research Services, Reis

9%

-3% 6% 16% -6% 3% 07 8% 0% 0%

Employment Trends Home Price Trends

Metro Area Metro Area United States United States

6% advancement in employment levels. Last Metro Area 15% Asking Rent 6% United States 46,000 jobs were added to the metro. Effective Rent 3% 12% 07 3% 08 09 10 11*

Outlook: Employers will add 87,000 positions this year, marking a 3.4 percent Vacancy Trends Rent Rate Trends year, staffing increased 1.8 percent, as

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, BLS, Economy.com

Vacancy Change Year-over-YearRate Median Price per Unit (thousands) Price per Unit (thousands) Price per Unit (thousands) Median Median Year-over-Year Change Year-over-Year Change

* Forecast Sources: Marcus & Millichap Research Services, Reis

Housing and Demographics

9% 0%

-3% -8% 16% -6% -16%07 8% 07 0%

Home Price Trends

Metro Area United States

Single-family permit issuance retreated 13 percent year over year ending in the third quarter, with 20,500 permits gathered. Multifamily activity, in contrast, Rent Trends 6% went up 3 percent asRent -3% Asking 5,460 units were permitted. Builder confidence in the rental 6% Effective Rent market remains healthy.
3% -6% 3% 07 07 08 08 09 09 10 10 11* 11*

* Forecast * Trailing Marcus & Millichap Research Services, BLS, Economy.com Sources:12-Month Period Sources: Marcus & Millichap Research Services, Economy.com, NAR

08 08

09 09

10 10

11* 11*

* Forecast * Forecast Sources: Marcus & Millichap Research Services, Reis Sources: Marcus & Millichap Research Services, Reis

-8% 16% 28 -16% 8% 07 21 0% 14

Home Price Trends ConstructionTrends

Metro Completions Apartment Area United States Multifamily Permits

At $152,700 in the third quarter, the median price of an existing single-family home was unchanged compared with last year. Meanwhile, the median house0% hold income rose 2.6 percent to $57,600. Minimum qualifying income for a Rent Trends Sales Trends median-pricedAsking Rent $22,400 below median household income. home is -3%
6% $60
Effective Rent

08

09

10

11*

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, Economy.com, NAR

Using traditional financing, monthly mortgage payments are $167 per month 3% 07 08 09 11* $45 below Class A asking rents in10 third quarter. the * Forecast
-6%

Sources: Marcus & Millichap Research Services, Reis

-8%7 28 -16%0 21 07 14

Construction Trends
Apartment Completions Multifamily Permits

Outlook: Although homeownership rates remain virtually unchanged in the Sales Trends metro, increasing affordability could entice some current renters into the owner-3% $15 $60 pool if the local economy continues to expand at the current blistering pace. ship
-6% $0 $4507 08 09 10 10 11* 11*

0% $30

* Trailing 12-Month Period Forecast Economy.com, NAR Sources: Marcus & Millichap Research Services, U.S. Census Bureau

07

08 08

09 09

10 10

11* 11*

Forecast * Trailing 12-Month Period Sources: Marcus & Millichap Research Services, Reis Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

07 08 Construction 09

Over $30

7 28 0 21 14 7 0

Construction Trends
Apartment Completions Multifamily Permits

$60

the last 12 months, nearly 1,100 units have come online in the metro. The 57-unit CityView Lofts, a five-floor residential renovation of the historic Nabisco Sales Trends cookie factory building, was the only project completed in the third quarter. $15

07

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, U.S. Census Bureau

3,186 units under construction in the metro. The Houston Galleria 08 09 10 11* Apartments will be the first project completed and is scheduled for delivery in the * Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA second quarter of 2012. This property will bring 321 units to the Briar Grove/ $30 WestChase submarket.

There are $0 07 $45

07

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, U.S. Census Bureau

More than 13,700 apartments are planned in the metro, although groundbreaking dates have yet to be finalized for nearly every development. Several of these $0 07 08 09 10 projects are considerably large, with 11* Hardy Yards consisting of 3,000 units to be * Trailing 12-Month Period Sources: Marcus in the North/Northeast Houston submarket. added & Millichap Research Services, CoStar Group, Inc., RCA

$15

Outlook: This year, developers will slow completions to 1,100 units, the lowest level of construction since the late 1980s. Last year, 7,600 apartments were delivered in Houston.
Marcus & Millichap
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Apartment Research Report

Vacancy

Marketwide vacancy lowered 50 basis points to 9.2 percent in the third quarter, bringing the year-to-date improvement to 160 basis points. Since reaching a peak Employment Trends Metro Area 6% in the first quarter of 2010, apartment vacancy has dropped 370 basis points.
United States Vacancy Rate

Vacancy Rate Trends

15% 12% 9%
Metro Area United States

3% Over the past 12 months, a surge in white-collar employment contributed to a 3.2 percent gain in apartment demand in the top-tier segment. Class A vacancy 0% plunged 240 basis points to 7.6 percent in that time.

Number of Units (thousands) Median (Y-O-Y Number of Units (thousands) Existing Home Price Median Chg.) Number of Units (thousands) Existing Home Price (Y-O-Y Chg.) Median Year-over-Year Change Existing Home Price (Y-O-Y Year-over-Year Change Chg.)

Employment Trends -3% A rise in blue-collar employment, including manufacturing, construction, and the Metro Area 6% natural resources sector, accelerated demand in lower-tierUnited States prompting apartments, -6% a 210-basis-point annual improvement to 10.6 percent in the third quarter. 3% 07 08 09 10 11*

Year-over-Year Change

6% 15% 3% 12% 07 9%

Vacancy Rate Trends

Metro Area United States

Outlook: Strong household formation in the metro will bring the vacancy down 0% to 8.8 percent in the fourth quarter, a 200-basis-point descent from 2010. Next Home Price Employment Trends year, job growth will spur additional occupancy gains. Metro AreaTrends -3% Metro Area
16% 6%
United States United States

* Forecast Sources: Marcus & Millichap Research Services, BLS, Economy.com

Vacancy Rate

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, Reis

6% 6% 15% 3% 3% 12% 07 0% 9%

Rent Trends Vacancy Rate Trends

AskingArea Metro Rent Effective Rent United States

* percent year over year Asking rents in the metro increased 2.4ForecastMarcus & Millichap Research to $778 per month Sources: Services, BLS, Economy.com 0% in the third quarter. Effective rents, similarly, posted a 2 percent gain to $707 per 0% month. Last year, asking rents ticked up 0.8 percent whilePrice Trends lost 1.1 effective rents Home -8% -3% percent. Metro Area 16%

-6% 8% 3% 07

08

09

10

11*

Vacancy Rate Year-over-Year Change

Rents

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, Reis

United States

-3% 6% 6% -6% 3% 3% 07 07 0%

Rent Trends
Asking Rent Effective Rent

Median Price per Unit (thousands) Price per Unit (thousands) Price per Unit (thousands) Median Year-over-Year Change Year-over-Year Change Median

-16% -6% Over the last 12 months, Class A asking 8% 07 climbed 2.6 percent to $960 per rents 08 09 10 11* 07 08 09 10 11* month. Average Class B/C asking rents improved 2.1 percent in that time to *Forecast12-Month Period Trailing * Sources: Marcus & Millichap Research Services, Economy.com, NAR Sources: Marcus & Millichap Research Services, BLS, Economy.com $622 per month. 0%

Forecast **Forecast Sources: Marcus & Millichap Research Services, Reis Sources: Marcus & Millichap Research Services, Reis

08 08

09 09

10 10

11* 11*

Construction Trends Home around 32 days Owners still rely on concessions, with incentives averagingPrice Trends of free ApartmentArea -8% Metro Completions 16%28 Multifamily Permits rent in the third quarter. As vacancy tightens, operators willStates considerable United gain leverage to cut concessions. -16%
8%21 07 08 09 10
* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, Economy.com, NAR

-3% 6% $60 -6% 3% 07 $45 $30 0%

SalesTrends Rent Trends

Asking Rent Effective Rent

11*

08

09

10

11*

Outlook: Asking rents will climb 2.6 percent this year to $785 per month at year 0%14 end, while effective rents will rise 3.0 percent gain to $714 per month. In 2010, Construction Trends asking and effective rents had similar levels7 of growth, posting increases of 2.5 -8% Apartment Completions 28 percent and 2.8 percent, respectively. Multifamily Permits
* Forecast * Sources: Marcus & Millichap Research Services, U.S. Census Bureau Trailing 12-Month Period Sources: Marcus & Millichap Research Services, Economy.com, NAR

* Forecast Sources: Marcus & Millichap Research Services, Reis

$15 -3% $60 -6%$0 $4507 $30 $15 $60 $0 $45 $30 $15 $0 07 07

Sales Trends

Sales Trends**

0 -16% 21 07

07

08 08

0909

10 10

11* 11*

Transaction velocity jumped 62 percent during the most recent 12-month period 14 as both local and out-of-state buyers stepped up acquisitions. Local investors Construction Trends nearly doubled their purchases from one year earlier. Apartment Completions 7
28
Multifamily Permits

* Trailing 12-Month Period *Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA Forecast Sources: Marcus & Millichap Research Services, Reis

08 08

09 09

10 10

11* 11*

Sales Trends

0 The median sales price climbed 15 percent in the past 12 months to $31,500 per 07 08 10 11* 21 unit. As the threat of another economic downturn dissipated,09 investors sought * Forecast newer, larger apartment complexes. Sources: Marcus & Millichap Research Services, U.S. Census Bureau 14

08

09

10

11*

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

Over the past year, average cap rates dropped 90 basis points to the low-7-percent 7 range. With an active buyer pool, downward pressure on first-year returns will persist into next year. 0
07 08 09 10
* Forecast

11*

07

08

09

10

11*

Outlook: Investment activity within Sources: Marcus &Loop will remain U.S. Census Bureau the Outer Millichap Research Services, very healthy, forcing some yield-seeking buyers into nearby first-ring suburbs. Major transportation corridors, including Interstate 10 near the Energy Corridor and U.S. 290, will generate significant attention from these investors.

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

** Data reflect a full 12-month period, calculated on a trailing 12-month basis by quarter.

Marcus & Millichap

Apartment Research Report

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Capital Markets
By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation

Visit www.NationalMultiHousingGroup.com or call:

John Sebree National Director National Multi Housing Group Tel: (925) 953-1700 john.sebree@marcusmillichap.com

Apartment mortgage rates should remain favorable through 2011, enhancing property returns and supporting values. While the 10-year Treasury yield likely will remain in the low- to mid-3 percent range over the next few quarters, the relatively wide spread to all-in lending rates provides some cushion against potential upticks. Encouraged by sustained improvements in occupancy and rents, nearly all lending sources have increased funding for apartment deals. As a result, mortgage debt has become readily available for performing assets across markets and property classes, supporting a 40 percent increase in multifamily origination volume over the past six months when compared to the previous period. The agencies continue to dominate but have lost marketshare as insurance companies, private capital sources and local/regional banks, in particular, compete more aggressively for new business. In the near term, life insurance companies will continue to favor larger, best-of-class assets in primary markets, while local and regional banks focus on lower-quality assets with consistent revenue streams and strong, proven sponsorship. Underwriting requirements eased over the past year as strengthening apartment fundamentals and firming property values restored lenders confidence in the market. Debt-service coverage requirements slipped to 1.15 to 1.25, while loanto-values on new loans generally improved to 70 to 75 percent, and in some limited situations, have pushed to as high as 80 percent.

Submarket Vacancy Ranking

Rank
1 2
Prepared and edited by Tina Leung Research Associate Research Services For information on national apartment trends, contact John Chang Vice President, Research Services Tel: (602) 687-6700 ext. 6803 john.chang@marcusmillichap.com Houston Office: David Luther Regional Manager dluther@marcusmillichap.com 777 Post Oak Boulevard Suite 900 Houston, Texas 77056 Tel: (713) 452-4200 Fax: (713) 452-4210 Price: $150

Submarket
Sugar Land/Fort Bend County Bellaire/West University Katy/Bear Creek North Loop East/Sheldon Kingwood/Lake Houston Cypress/Fairbanks Energy Corridor Montrose/River Oaks Clear Lake Westchase/Woodlake Spring Branch Medical Center/Museum District Montgomery County Pasadena/Deer Park Sharpstown Braeswood/Meyerland Inwood/Northwest Houston Alief Spring/Champions Baytown Heights North Houston San Jacinto/Galena Park

Vacancy Rate
5.0% 5.7% 6.1% 6.3% 6.8% 7.1% 7.3% 7.5% 7.8% 7.9% 8.5% 8.9% 8.9% 9.6% 9.6% 11.4% 11.6% 12.4% 13.3% 14.8% 15.1% 16.3% 18.2%

Y-O-Y Basis Point Change

-210 -310 -260 -220 -380 -220 -310 -260 -270 -130 -320 -250 -200 -110 -240 -200 -230 30 -300 -400 -440 -40 260

Effective Rents
$872 $957 $765 $624 $741 $765 $738 $1,093 $724 $795 $641 $629 $742 $576 $558 $545 $574 $575 $659 $523 $556 $505 $571

Y-O-Y % Change
2.5% 2.1% 2.8% 2.3% 0.8% 3.2% 3.5% 3.0% 1.5% 2.1% 3.2% 2.4% 2.2% 1.8% 3.7% 1.9% 3.1% 4.7% 2.6% 1.2% 4.7% 3.5% 4.0%

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Marcus & Millichap 2010 www.MarcusMillichap.com

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty 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 using seasonally adjusted quarterly averages. Sales data includes transactions valued at $500,000 and greater unless otherwise noted. Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics, CoStar Group, Inc., Economy.com, National Association of Realtors, Real Capital Analytics, Reis, TWR/Dodge Pipeline, U.S. Census Bureau.