Multifamily Research

Market Report Fourth Quarter 2018

Houston Metro Area

Houston Recovering From Energy

Industry Layoffs and Harvey Floods Multifamily 2018 Forecast

Apartment dynamics shift in Houston during 2018. It has 12,600 units Construction:
been one year since Hurricane Harvey rains flooded thousands will be completed Deliveries remain on a downhill
of Houston homes, pushing many displaced residents into local slide for a second consecutive
apartments. Over 14,000 units were absorbed during the fourth year as total completions fall
quarter of last year, resulting in a 200-basis-point year-over-year below the nearly 19,400 units
drop in vacancy to 5.8 percent. As tenants have moved back brought online in 2017.
into repaired homes over the past three quarters, the market’s
apartment vacancy rate has ticked up to 6.2 percent, remaining 60 basis point Vacancy:
well below the rate of more than 7 percent operators experienced The positive absorption of 7,700
increase in vacancy
following job losses in the energy industry from 2015 through apartments this year is outweighed
2016. Energy-related firms have begun hiring again, however, by supply additions, and vacancy
and a stronger pace of job growth encourages healthy housing will rise to 6.4 percent. Last year,
demand through the remainder of the year. the rate fell 200 basis points.

Thinning construction pipeline met with economy turning 2.9% increase Rents:
the corner. Of the 12,600 apartments scheduled to come online Following a 6.7 percent ad-
in effective rents
in Houston this year, 6,000 are estimated for delivery in the final vance during 2017, the average
quarter. As a result, vacancy is anticipated to end the year up effective rent in Houston will rise
from 2017. The increase in the rate this year should be short to $1,103 per month this year.
term, as completions appear to dip dramatically during 2019 and
increased housing demand stemming from a growing economy
will continue to filter into apartments.

Investment Trends
Local Apartment Yield Trends • Low vacancy and strong rent growth among the market’s Class
B and Class C properties are attracting strong buyer interest.
Apartment Cap Rate 10-Year Treasury Rate
Buyer competition has compressed yields for these properties,
and depending on asset location and condition, first-year
12%
returns can range from 5 percent to 6 percent.
9% • A bright economic outlook, healthy property operations and
average returns that are the highest of the state’s four largest
Rate

6%
metro’s are luring both in-state and out-of-state investors to
3% Houston apartment assets. Increased demand led to a 30
percent rise in sales activity over the past year.
0%
* 00 02 04 06 08 10 12 14 16 18* • A busy port, oil and gas refineries, and a petrochemical boom
have attracted numerous investors to east, southeast and south
Houston, along the Texas Gulf Coast. Over the past 12 months,
Sales Trends cap rates for apartment assets in the area averaged 50 to 100
Sales Price Growth
basis points higher than properties in the core, as well as to the
north and west.
Price per Unit (000s)

* Cap rate trailing

$12012-month average through 3Q; Treasury rate as of Sept. 28
16%
Sources: CoStar Group, Inc.; Real Capital Analytics
Year-over-Year G

$90 12%

$60 8%
Houston
3Q18 – 12-MONTH PERIOD
Employment Trends EMPLOYMENT:
Local Apartment Yield Trends
Metro United States 4.3%
Apartment Cap Rate in total
increase 10-Year Treasury Rate
employment Y-O-Y
6%
Year-over-Year Change

• Houston
12% employment led the nation over the past year
4% as 128,600 positions were created through September.
9%
Professional and business services added 33,000 em-
2%
ployees, the most positions over the past year, while con-

Rate
6%
struction payrolls grew by 29,400 workers.
0%
3%
• The market’s unemployment rate tightened 50 basis
-2% points year over year to 4.2 percent in the third quarter.
0%
14 15 16 17 18* 00 02 04 06 08 10 12 14 16 18*

Completions and Absorption CONSTRUCTION:

Sales Trends
Completions Absorption 10,100Salesunits completed
Price Growth
Y-O-Y

Average Price per Unit (000s)

$120 16%
32 • During the past 12 months, completions fell by

Year-over-Year Growth
approximately 50 percent when compared
$90 12% with the
Units (000s)

24
previous year. The Downtown/Montrose/River Oaks
$60
submarket has received the largest8%share of new
16
deliveries, approaching 2,000 units this year.
$30 4%
8
• The construction pipeline has thinned, and nearly 13,100
0 units are under construction across the
$0 0%market.
14 15 16 17 18* 14 15 16 17 18*

Vacancy Rate Trends VACANCY:

8%
Metro United States 120 basis point decrease in vacancy Y-O-Y

7%
• Vacancy remains compressed following strengthened
Vacancy Rate

demand after Hurricane Harvey displaced many residents.

6% The rate remained at 6.2 percent during the third quarter.
• The rise in vacancy over the first three quarters of 2018
5%
has been led by increases in Class A and Class B vacancy
rates. Class C vacancy has tightened an additional 50
4%
basis points since the end of 2017 to 6.1 percent.
14 15 16 17 18*

Rent Trends RENTS:

Monthly Rent Y-O-Y Rent Change 6.9% increase in effective rents Y-O-Y
$1,200 9% • The average effective rent surged during the fourth
Year-over-Year Change
Monthly Effective Rent

quarter of last year with rent growth remaining positive

$1,100 6% through 2018. In the third quarter, the average advanced
to $1,104 per month.
$1,000 3%
• Tightening vacancy among Class C properties prompted
$900 0% a 6.8 percent advance in average rent growth over the
past 12 months to $875 per month.
$800 -3%
14 15 16 17 18*

* Forecast
 Multifamily Research | Market Report

DEMOGRAPHIC HIGHLIGHTS

3Q18 MEDIAN HOUSEHOLD INCOME 3Q18 AFFORDABILITY GAP MULTIFAMILY (5+ Units) PERMITS

Metro $65,717 Renting is $780 Per Month Lower 14,204 1H 2018

Compared with 1H
U.S. Median $61,789 Average Effective Rent vs. Mortgage Payment* h 4% 2014-2017

3Q18 MEDIAN HOME PRICE FIVE-YEAR HOUSEHOLD GROWTH** SINGLE-FAMILY PERMITS

Metro $239,587 248,000 or 2.0% Annual Growth 40,652 1H 2018

Compared with 1H
U.S. Median $260,016 U.S. 1.2% Annual Growth g 11% 2014-2017

*Mortgage payments based on quarterly median home price with a 30-year fixed-rate conventional mortgage, 90% LTV, taxes, insurance and PMI. **2017-2022 Annualized Rate

Lowest Vacancy Rates 3Q18 Stronger Property Fundamentals and Shift in

Economic Outlook Attract Additional Investment
Y-O-Y
Vacancy
Employment Effective Y-O-Y %
Submarket Basis PointTrends Local
• Over the past 12 Apartment Yield Trends
months, transaction activity increased
Rate Rents Change
Change
Metro United States by 30 percent,
Apartmentwith properties10-Year
Cap Rate pricedTreasury
over $15 million
Rate
6% generating the strongest rise in sales volume as REITs
and 12%
institutional-grade buyers moved off the sidelines.
Year-over-Year Change

East Inner Loop 3.9% -60 $1,105 15.0%

4%
SUBMARKET TRENDS

• Increased
9% sales activity of higher-priced properties
Galveston/Texas City
2%
4.7% 30 $952 8.1% also led to a 12 percent hike in the average price per
Rate
SALES TRENDS

unit, reaching
6% $108,600 per door over the past year.
Gulfton/Westbury 5.1% -140 $972 6.0%
0%
Outlook:3%Listings could rise as loans come due, and
Humble/Kingwood 5.3% -210 $1,057 3.8% investors weigh the option to refinance at greater
-2%
interest 0%
rates, alongside rising property taxes and higher
14 15 17 18*
Spring/Tomball 5.4% -150 16 $1,128 8.3% 00 02 04 06 08 10 12 14 16 18*
insurance premiums as floodplain maps are redrawn.

Clear Lake 5.4% -110 $1,082 5.5%

Completions and Absorption Sales Trends
Rosenberg/Richmond 5.4% -150 $1,122 7.3%
Completions Absorption Sales Price Growth
Average Price per Unit (000s)

Greater Heights/ $120 16%

32 5.5% -140 $1,522 6.1%
Year-over-Year Growth

Washington Avenue
$90 12%
Units (000s)

24
Bear Creek 5.5% -210 $1,053 5.0%
$60 8%
16
The Woodlands 5.5% -40 $1,284 6.6%
$30 4%
8
Overall Metro 6.2% -120 $1,104 6.9%
0 $0 0%
14 15 16 17 18* 14 15 16 17 18*

* Trailing 12 months through 3Q18

Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Vacancy Rate Trends
Metro United States
8%

7%
Multifamily Research | Market Report

Atlanta Office: By DAVID Office:

Columbus G. SHILLINGTON, President,
3Q18 Apartment Acquisitions Marcus & Millichap Capital Corporation
Michael
ByFasano First Vice President/Regional Manager
Buyer Type Michael Glass First Vice President/District Manager
1100 Abernathy Road N.E., Bldg. 500, Suite 600 5005
• Fed Rockside Road, overnight
pushes Suite 1100 lending rate higher, cites economic
Atlanta, GA 30328 Independence, OH 44131
Other, 1%
(678) 808-2700 Cross-Border, 9%
| michael.fasano@marcusmillichap.com strength in case for additional increases. The Federal Reserve
(216) 264-2000 | michael.glass@marcusmillichap.com
increased the federal funds rate by 25 basis points in late September,
Equity Fund lifting the Fed funds rate to 2 percent. Remarks from the Fed highlight
Austin Office: a robust
Office:economy, spurred by accommodative fiscal stimulus,
& Institutions, 23%
Dallas
Craig Swanson Vice President/Regional Manager while inflation remains broadly in line with expectations. Provided
Private, 63%9600 North Mopac Expressway, Suite 300 theSpeck
Tim economy continues
First Vice to perform
President/District as expected, the Fed is likely to
Manager
Austin, TX 78759 Listed/REITs, 4% 5001 Spring Valley
increase rates Road, Suite 100W as well as up to three times next year.
in December,
(512) 338-7800 | craig.swanson@marcusmillichap.com Dallas, TX 75244
(972) 755-5200 | tim.speck@marcusmillichap.com
• Benchmark interest rates, lending costs push higher post-

CAPITAL MARKETS
Baltimore Office: Fed meeting. After the Federal Reserve lifted overnight rates and
Fort Worth Office:
maintained a positive economic outlook, long-term interest rates have
Matthew
Apartment Drane Regional
Mortgage Manager
Originations
100 E. Pratt
By St.,Lender
Suite 2114 pushed higher. The 10-Year Treasury
Kyle Palmer Vice President/Regional Manager
yield has quickly traded toward
Baltimore, MD 21202 300the 3.25 percent
Throckmorton Street,range, which is prompting lenders to pass on the
Suite 1500
100% Tel: (202) 536-3700 | matthew.drane@marcusmillichap.com (817) 932-6100 |cost
kyle.palmer@marcusmillichap.com
increased to borrowers. However, fierce competition for loans is
Boston Office:
Percent of Dollar Volume

also leading to some cost absorption among lenders. While greater

75% Gov't Agency Denver Office:
Tim Thompson Regional ManagerFinancial/Insurance
borrowing costs may prompt buyers to seek higher cap rates, strong
100 High Street, Suite 1025 Reg'l/Local Bank Skyler Cooper
economic performance should enable rent growth above inflation. As
Regional Manager
50% Boston, MA 02110 1225 17th Street, Suite 1800
Nat'l Bank/Int'l Bank
(617) 896-7200 | tim.thompson@marcusmillichap.com a result, sellers remain committed to higher asking prices, which is
CMBS Denver, CO 80202
widening
(303) 328-2000an expectation gap as property performance and demand
| skyler.cooper@marcusmillichap.com
25% Charleston Office: Pvt/Other
trends remain positive.
Benjamin Yelm Regional Manager Detroit
0%
151 Meeting Street, Suite 450 • The Office:
capital markets environment continues to be highly
14 15 16 17 18* competitive. Government agencies remain the largest source of
Charleston, SC 29401 Steven Chaben Senior Vice President/Regional Manager
(843) 952-2222 | benjamin.yelm@marcusmillichap.com Twofunds, commanding
Towne Square, Suite 450 slightly over 50 percent market share. National
* Through 2Q Southfi
Include sales $2.5Charlotte Office:
million and greater
andeld,regional
MI 48076banks control approximately a quarter of the market.
(248) 415-2600 | steven.chaben@marcusmillichap.com
Sources: CoStar Group, Inc.; Real Capital Analytics Pricing resides in the high-4 percent realm with maximum leverage of
Benjamin Yelm Regional Manager 75 percent. Portfolio lenders will typically require loan-to-value ratios
201 South Tryon Street, Suite 1220
closer to 70 percent with interest rates in the low-5 percent range.
National Multi Housing
Charlotte, Group
NC 28202
Fort Lauderdale
(704) 831-4600 | benjamin.yelm@marcusmillichap.com The passage ofOffice:
tax reform and rising fiscal stimulus will keep the U.S.
Visit www.MarcusMillichap.com/Multifamily economy growing, underpinning strong rental demand and supporting
Ryan Nee Vice President/Regional Manager
a national
5900 apartment
N. Andrews vacancy
Avenue, Suite 100 rate of 4.6 percent at the end of 2018.
John SebreeChicago Area Offices: Ft. Lauderdale, FL 33309
First Vice President, National Director | National Multi Housing Group (954) 245-3400 | ryan.nee@marcusmillichap.com
Richard Matricaria Senior Vice President/Division Manager
Tel: (312) 327-5417
333 West Wacker Drive, Suite 200, Chicago, IL 60606
john.sebree@marcusmillichap.com
(312) 327-5400 | richard.matricaria@marcusmillichap.com
Prepared and edited by Houston Office:
Jessica Hill David Bradley Regional Manager | Chicago Downtown Ford Noe Regional Manager
Market Analyst | Research
333 West Services
Wacker Drive, Suite 200, Chicago, IL 60606 Three Riverway, Suite 800
(312) 327-5479 | david.bradley@marcusmillichap.com Houston, TX 77056
For information on national apartment trends, contact:
(713) 452-4200 | ford.noe@marcusmillichap.com
John Chang Steven Weinstock First Vice President/Regional Manager
Senior Vice President, National
One Mid Director
America Plaza |Suite
Research
200 Services
Tel: (602) 707-9700
Oakbrook Terrace, IL 60181
john.chang@marcusmillichap.com
(630) 570-2250 | steven.weinstock@marcusmillichap.com
Indianapolis Office:
Josh Caruana Vice President/Regional Manager
Price: $250 600 E. 96th Street, Suite 500
Indianapolis, IN 46240
© Marcus & Millichap 2018 | www.MarcusMillichap.com (317) 218-5300 | josh.caruana@marcusmillichap.com

Cincinnati Office: Kansas City Office:

Colby Haugness Regional Manager
The information contained in this report was obtained from sources deemed to beRichard Matricaria
reliable. Every effort wasSr.made
Vice President/Division
to obtain accurateManager
and complete information; however, no
600 VineorStreet,
representation, warranty 10th Floor
guarantee, express or implied, may be made as to the 7400 CollegeorBoulevard,
accuracy Suite
reliability of the105
information contained herein. Note: Metro-level employment
Cincinnati, OH 45202
growth is calculated based on the last month of the quarter/year. Sales data includes Overland Park, KS
transactions 66210
valued at $1,000,000 and greater unless otherwise noted. This is not intend-
(513)
ed to be a forecast 878-7700
of future events| colby.haugness@marcusmillichap.com
and this is not a guaranty regarding a future event.
(816)This is not intended
410-1010 to provide specific investment advice and should not be considered
| richard.matricaria@marcusmillichap.com
as investment advice.

Cleveland Office:Pipeline; U.S. Census Bureau Las

Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Vegas
Group, Inc.;Office:
Experian; National Association of Realtors; Moody’s Analytics; Real Capital
Analytics; RealPage, Inc.; TWR/Dodge

Michael Glass First Vice President/District Manager Eric Molfetta Regional Manager
3800 Howard Hughes Parkway, Suite 1550
5005 Rockside Road, Suite 1100
Las Vegas, NV 89169
Independence, OH 44131
(702) 215-7100 | eric.molfetta@marcusmillichap.com
(216) 264-2000 | michael.glass@marcusmillichap.com