MARKET SNAPSHOT: Houston

By Erika Schnitzer, Associate EditorHouston—Despite the economic crisis, the forecast for Houston’s apartment market offers a relatively positive outlook, according to the 2009 National Apartment Report by Marcus & Millichap.According to the firm’s National Apartment Index (NAI), an annual analysis of 43 apartment markets based on 12-month forward-looking supply and demand indicators, Houston has moved up six places this year and is now ranked No. 29. Houston cap rates were in the mid-7 percent range at the end of 2008.“The Texas and Houston economy the last year had held up fairly well, until about October or November, whereas other markets had a lot of deterioration in terms of job markets,” says Robert Su, vice president, investments and director of Marcus & Millichap’s National Multi Housing Group in Houston. Despite layoffs throughout the country, the job market in Houston is expected to grow to 13,400 jobs, a 0.5 percent increase, according to the firm’s Houston Apartment Research Report.“One of the bigger challenges is that we still have a lot of properties in the pipeline,” Su tells MHN. The apartment stock will expand 1.5 percent as 9,100 apartments are delivered this year, according to the report.Consequently, vacancy rates are expected to rise 11.4 percent, as supply-side pressure pushes it up 110 basis points, following a 150-basis point rise in 2008. As a result, the report shows, owners will likely offer greater concessions. “Right now the city, as far as occupancy, is at about 86 percent as a whole, but that’s not necessarily bad because Houston is historically a 90 percent occupancy town. It doesn’t usually go beyond that,” Su notes.Displaced Galveston residents—from Hurricane Ike—boosted Brazoria County apartments, but the improved occupancy rates here are not expected to last, nor will they impact metro-wide fundamentals in the coming year, according to the report.“What you will see is more pressure on Class A deals, which will spill over and affect Class B, as far as occupancy and prices. Rent growth will be offset by concessions and there will be some downward pressures on Class A and B. There are some isolated benefits from Ike because there are some C properties that have been taken offline,” predicts Su.    Asking rents are projected to finish the year at $771 per month, a 1.6 percent gain, while effective rents advance 0.9 percent to $711 per month. However, rent growth for Class A properties will most likely be tempered by concessions as new units come online, predicts Su, while Class C properties may have some growth simply due to their more affordable place in the market.From a sales standpoint, Su tells MHN that he expects 2009 to be a slow transactional year, and those sales that do take place will be most dominated by lender deals. He says that as a result of the uncertainty surrounding the economy and the lending environment, sellers are holding onto their properties and buyers are thinking that prices will continue to decline and are therefore holding off on purchasing.“As far as sales, it’s been quiet the last quarter and it will continue to be quiet. A lot of activity will be foreclosures, and most casualties will be first-time buyers who came in 2004, 2005 and 2006, who bought at peak where interest rate was different. We anticipate a spike in lender deals. A lot of owners and investors are sitting on the sidelines,” Su contends.