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Peaked Out? Is Houston Multifamily Surge at Its Crest?

HOUSTON – With apartment construction at its highest level in 14 years, investment sales prices for Texas multifamily complexes have plateaued, according to a Houston real estate valuation firm.

“Apartment construction has been incredible in Texas metropolitan areas in recent years,” says Matthew Deal, principal of the Deal Sikes & Associates valuation and consulting firm. “With this massive new supply of apartments, a moderate degree of softening of occupancy rates and rental rates is expected. With these fundamentals, investors won’t see significant drops in multifamily pricing, but the days of rapidly escalating valuations have come to an end.”

The Texas multifamily market surged significantly over the last four years as the major cities in Texas led the nation in job growth and apartment construction.

“The multifamily market was the first sector of commercial real estate to rebound following the end of the recession and it will not be surprising to see some moderation in the apartment market in the coming months,” Deal said.

About 20,000 new units will be completed in Houston this year and dozens of additional projects are under construction.

New apartments are coming on stream across the U.S. at the highest levels seen in more than a decade, according to MPF Research.

Apartments finished in the nation’s 100 largest metros during the third quarter of 2014 totaled 66,813 units, the biggest block of new supply introduced during a three-month period since late 2000, MPF Research said.  The annual completion pace stood at 226,615 units at the end of September, likewise hitting a total last seen in late 2000.

Across the nation, a whopping 90,000 units will be completed in the fourth quarter and it will take a while for the market to digest those completions.

“Look for a minor bump in the road in the apartment market’s performance right at the end of the year, given so much new supply will be added during a period when demand is seasonally weak,” according to multifamily  analyst Greg Willett of MPF Research. “However, completions in 2015 should return to a level in line with 2013’s deliveries, allowing performance momentum to return quickly.”

“There’s about to be a brief window when renters looking for comparative bargains have a good chance of finding them, but that opportunity won’t last long,” Willett said.

Houston, which has been leading the nation in job growth, has had exceptionally apartment occupancy rates and rent growth.

Midyear numbers reported by CBRE pegged Houston’s rental rates with a 5 percent increase over the previous year. Citywide (all classes) rental rates hit all-time highs of $1 per square foot and occupancy has been well over 90 percent.

These outstanding statistics with the strong economy have encouraged developers to pursue robust development plans. In the heart of downtown Houston, a dozen new multifamily projects are under construction or planned, as the city’s financial incentives for new CBD residential have proven to be effective.

In the Inner Loop of Houston land prices surged significantly in recent years as apartment developers bought tracts for new multifamily construction.

“Land prices for urban infill locations suitable for apartment construction had risen dramatically in recent years, sometimes as much as 25 percent annually in major Texas cities, such as Houston, Dallas and Austin. Apartment developers purchased and demolished obsolete commercial structures to create multifamily construction sites. The large price increases for urban infill land are not expected to continue in 2015,” Deal said.

“The higher prices for land and development sites have encouraged developers to build taller high-rise and mid-rise residential towers in the urban areas of Texas,” said Mark Sikes, principal of Deal Sikes.

A 40-story rental project is under construction at 2929 Weslayan, near Houston’s upscale River Oaks neighborhood and the Greenway Plaza business district and another 40-story rental is under construction on Market Square in downtown. Other high-rise rental towers are under development in Houston’s downtown, Uptown and Montrose areas.

No one is expecting a great crash in the Texas multifamily markets. But lenders will taking a more cautious approach with new development in 2015. The market took huge leaps in recent years and that growth pace will not be sustained forever.

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