Realtynewsreport.com interview Teresa Lowery, Senior Managing Director of Multifamily, Colliers International Houston.
Houston’s multifamily market has seen better times. The sector’s pricing is weak, rent growth is close to disappearing and multifamily construction continues unabated. Free rent is being offered in some neighborhoods. Can the situation get worse? Or better? To find out where the multifamily investment market is headed, Realty News Report talked with Teresa Lowery, Senior Managing Director, multifamily, in the Houston office of Colliers International. Teresa, who was ranked among the firm’s Top 5 as a production broker and honored as one of the top 10 percent of all Colliers brokers across the U.S., Canada and Latin America in 2015, has more than $4 billion in sales.
Realty News Report: You’re involved in sales in excess of half a billion of Class A and Class B multifamily sales in the first half of 2016. How’s that going? Any announcements soon?
Teresa Lowery: We tend to fly under the radar with our multifamily sales activity. We are staying busy with private capital investors in the Class B and C “value-add” sector. This is a sector where investors see the most opportunity to fill the gap created by the wide difference between the average rent of our new Class A communities compared to the average cost of a Class B and C apartment. There can be a difference to the medium income resident by a couple of hundreds of dollars in monthly savings. My team is well entrenched in a number of sizable transactions that are set to close by year-end. It is premature for me to discuss them in any detail. Class B and C is not the only multifamily space where we are gaining traction.
Realty News Report: What about foreign investors?
Teresa Lowery: Despite the rising gap between delivery and absorption, in the first six months of 2016, we have met with a handful of foreign investment groups – predominantly China-based – who have their eye on acquiring Class A, core-located multifamily assets either through a joint venture partnership on a new multifamily development, or the acquisition of a stabilized core-asset. Foreign investment groups are long-term holders; the need for immediate cash flow is not as important to them as the location. Many foreign investors are condominium developers in their countries and the concept of paying $300,000 per unit for a multifamily asset is in line with their development costs back home. According to New York City-based research firm Real Capital Analytics (RCA), the volume of investment in apartment properties involving foreign buyers grew by 180 percent in 2015. In Houston, foreign investors do not seem to be overly concerned about the drop in oil prices. Recent favorable changes to the Foreign Investment Real Property Tax Act (FIRPTA) also has spurred interest in foreign multifamily investment in the U.S. across the board, including here in Houston.
Realty News Report: Are investors still interested in Houston multifamily? What about investor prices? Up? Down? Steady?
Teresa Lowery: Absolutely! Investors backed by private capital remain very interested in Houston multifamily. It is a very competitive environment. Two years ago, there might have been 20 offers for each multifamily family investment offering and, in my opinion, multifamily sales activity remains strong at 8 to 10 offers for each deal. I remind investors that nothing has really changed – regardless of the number of offers. It has always come down to the top two or three offers competing for the winning position. Investor prices remain steady in the Class B and C sector. In the case of Class A, we continue to see a rise in the price investors are willing to pay in both core and suburban locations.
Realty News Report: What about downtown Houston? A dozen projects are happening there. Can those units all be absorbed? Will owners discount rents to fill their units?
Teresa Lowery: I am a detail freak, so here’s my take on the new building within the urban core. There are six multifamily developments under construction within the downtown submarket area. While 1,800 units in the CBD are the most we have ever seen, it is not a huge oversupply. I do not lump the urban core submarkets all together because each has its individual appeal. There are six to seven multifamily communities currently under way, spread out in each of the urban core submarket areas — Midtown (1,400 units), The Heights (1,700 units), Highland Village (1,600 units) and the Medical Center (1,300 units). Of course, all of those units can be absorbed because they will not all deliver at the same time. High-rise and mid-rise construction can take 2-3 years and must be 100% certified for occupancy, unlike the suburbs where you can release one building at a time in some cases. The urban core units will deliver in 2016, 2017 and in rare cases, 2018. As the same time lenders — and equity – have put the brakes on new multifamily development in the urban core, unless a developer has an exceptionally strong balance sheet. I predict we will continue to see one to two months of “upfront free rent” in the Class A urban core space for the next 12 months, which is not the same as discounted rents.
Realty News Report: How long will it take to work though Houston’s multifamily oversupply?
Teresa Lowery: I wish I had a crystal ball! I expect by the end of 2017 – 18 months out – the rental landscape for Houston’s multifamily will look completely different and the urban core developments will be balanced by 2018 first quarter.
Realty News Report: The multifamily sector is softest in what area of Houston? Any idea why?
Teresa Lowery: Interesting question. The two sub-markets that are often brought up in my conversations with multifamily investors are Katy and The Woodlands, both heavily driven by energy-related employment and both considered to be ‘soft’ due to over building. The fact is that most multifamily owners in those submarkets tell me that they are pleased with their lease-up activity. I have not heard of a single resident who has terminated a lease due to a job loss within the energy sector. I point to the medical hospital epicenters around Houston, which continue to create jobs and pick-up the talented work force that has become available due to the downturn in the price of oil.
Realty News Report: Has the oil crash damaged the multifamily market here? Can developers obtain a loan to build new multifamily or is Houston multifamily investment being put on hold?
Teresa Lowery: Not in my opinion. I am not seeing any effect on the Houston multifamily market as a result of the drop in oil prices. I remind investors that the middle management engineers are not apartment dwellers – they are homeowners. Senior level employees may be asked to take early retirement which will result in a 20 percent savings to the energy company’s bottom line; however, the energy corporation is still on the hook for 80 percent of the employee’s previous salary, so the employee is not going to see much of an impact in his family’s style of living. An established developer with a strong record and healthy balance can still get a multifamily development loan – and that equates to the upper 10 percent. I can say with confidence that Houston multifamily investment has most definitely not been put on hold. In fact, there is renewed interest in Houston.
Realty News Report: Do you think foreclosures are a possibility, at least in the Class A market?
Teresa Lowery: No. I do not expect to see a tsunami of foreclosures, especially in the Class A market. Unlike a decade ago when a construction loan had an ironclad two-year term, multifamily developers today routinely obtain a minimum term of three years on their construction loans, typically with two, one-year options to extend. A developer may be asked to make a principal pay-down of $1 million to exercise the extension option; however, it is a relatively small price to pay for more time to stabilize the new communities.
Realty News Report: In Houston, there are still more than 20,000 Class A units current under construction. Your thoughts on this? Will today’s situation get worse?
Teresa Lowery: Let’s immediately cut that 20,000 number in half because 50 percent of the Class A communities under construction today are urban core high-rise and mid-rise product, which takes substantially longer to build and will be delivered in 2016 and 2017. Lenders strictly governing the number of new units coming out of the ground today and limited new development will help to stabilize the urban core market.
Realty News Report: What about the Class B and C multifamily projects? Has that market been impacted too?
Teresa Lowery: Class B and C multifamily statistics remain strong with occupancy rates averaging 93 percent+ across the Greater Houston area. Rentals rate of 90 cent/sf to $1.10/sf remain affordable for the medium income resident and overall healthy for investor/owners. Rental rate growth over the past three months is 3.5 percent. It is really property-specific because we are seeing “value-add” properties achieve $100 to $150 per month increases in rental rates once improved, which can translate to 6 percent to 8 percent rental growth and higher.
Realty News Report: Any other comments?
Teresa Lowery: Houston, the fourth largest city in the United States, remains a preferred market for multifamily investment. Over 50 percent of our residents are “renters by choice.” Millennials, empty nesters and year-over-year population growth – 1.3 million people moved to Houston in 2015 – will continue to attract capital investment by national and international investment groups. I have been a part of the multifamily investment sales industry for 35+ years and it has never been more exciting than today!
Copyright 2016 Realty News Report