HOUSTON – Class B is hot. Class A is not.
That’s the story of Houston’s apartment market today.
An oversupply has developed in the market for upscale Class A apartments, which are newer, fancier communities that command higher rents.
The occupancy rate in Houston’s Class A apartment market has dropped to 86 percent, according to a recent CBRE report. Meanwhile, Class B occupancy is at 96 percent, near a record high.
Things are only going to get tougher for Class A multifamily. Some 100 Class A apartment communities are currently under construction and will pile another 30,000 new units into Houston’s oversupply.
In recent years, the Class B story has been getting sweeter. As rents have increased in recent years, more apartment dwellers have been forced into lower-cost Class B or Class C units. And a number of older apartment complexes have been demolished, tightening the supply in an era of population growth.
So while the new Class A apartment communities get all the glamour, glitz and glory, it may be time to focus on Class B and C.
“Investors should expect to see strong gains in Houston multifamily valuations for older apartment communities, many of which have high occupancy rates of 95 percent,” says Matthew Deal, principal of Deal Sikes & Associates, a CRE valuation firm. “Houston’s older multifamily communities, which are categorized as Class B or Class C properties, have outstanding underlying investment fundamentals.”
More than a dozen Class A multifamily projects are under construction in downtown Houston than there are existing units, meaning the market size will double by 2017. Market Square Tower, a 40-story, 463-unit high-rise apartment building, will be the tallest multifamily building in downtown when it is completed next year.
The city’s Downtown Living Initiative granted apartment developers $15,000 per unit in tax abatements to facilitate residential construction
As Houston’s urban multifamily construction cycle winds down, the face of downtown residential continues to change rapidly. “Once a submarket struggling to stay alive after five, Houston’s urban core is benefitting from the Downtown Living Initiative along with quality-of-life projects — such as the new, 12-acre park, Discovery Green — which have changed the way Houstonians utilize the Central Business District,” according to a CBRE multifamily research report.
March 21, 2016
Here’s a novel idea: cut rents to fill the Class A apartments. Many people in Class B apartments would happily trade up if the price were right.