MARKET SNAPSHOT: Houston Transaction Market Picks Up Speed in 2Q11

Houston—The second quarter of 2011 marked the sixth consecutive period of effective rental rate increases in Houston, according to Transwestern’s second-quarter 2011 Houston apartment report.

Average effective rental rates increased 3.7 percent over the past three months and 3.4 percent over the past year, on an annualized basis, according to the report.

The submarkets with the highest annual reported rental rate growth were Woodlands/Far North (8.3 percent), Greenspoint (7.4 percent), Katy/Far West (5.3 percent), Brookhollow (6.6 percent) and Montrose/Museum District (6.6 percent).

“The infill markets are outperforming the broader markets,” says Ed Cummins III, senior vice president, investment services group-multifamily, Transwestern. “You’re seeing in the Interloop-Greenway Plaza area effective rental rates annualized over the past three months are up over 10 percent, and you’re seeing that also in some suburban markets [such as Pearland], effective rents are up close to 8 percent,” Cummins tells MHN.

At the same time, occupancy rose from 86.6 percent in the first quarter to 87.2 percent in the second quarter.

Class A properties posted average occupancies of 92.5 percent, followed by Class B properties averaging 90 percent and Class C assets averaging 83 percent, according to Cummins, who adds that the latter is due to a large amount of distress.

About 5,000 units were absorbed in the second quarter of 2011. Over 4,100 units have opened in the past 12 months, with an additional 3,500 units under construction and close to 14,000 units in the pipeline.

“I don’t believe they will all get built, and they certainly won’t get built in a 12-month span,” notes Cummins. “We probably won’t see any major new supply until 2013. For a three-year rolling average, that’s not a lot of units.”

In the investment market, 45 transactions closed in the second quarter, up from 21 sales in the first quarter, Cummins reports. “Everything is pretty liquid,” he tells MHN. “On the B- and C-quality assets, you have motivated lender/owner sellers who are taking advantage of a good market to sell into, with values popping up since the loans got into trouble. On the upper end,” he adds, “you have a lot of institutional capital looking for Class A assets. … Infill stuff is trading on cap rates that are near historic lows.”

As for the future, Cummins believes the market looks bright. “Texas has been responsible for about half the job growth in the country over the past year,” he notes. “Houston, specifically, has been growing and doing well. Job growth is predicted to be 50,000-60,000 jobs over the next 24 months.”

At the same time, notes Cummins, residential sales are down 11 percent month-over-month and 6 percent year-over-year. “There’s clearly a push to rent versus own,” he notes.

“Texas is on everybody’s radar screen,” he adds. “Houston is up there with Austin and Dallas—maybe we’re a little behind in our recovery, but with the energy business here and being the energy capital of the world, [with a] huge medical center, port [and] business-friendly climate, there’s all sorts of good reasons to buy here and have an interest in this market.”