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style and mid-rise properties. Urban product covers the geographical areas of Inner Loop 610, Galleria and Energy Corridor. There are 15 properties in this category with average effective rent of $1,651 per month or $1.84 per square foot. The occupancy for urban product without high-rises is 84 percent. There are nine properties that have eclipsed the 90 percent level, four are in the 80 percent range and two are below 80 percent occupied. The suburban product covers all areas outside the urban boundary described above. There are 27 properties in this product category that have average rent of $1,278 per month or $1.40 per square foot. The occupancy for the suburban product, omitting senior-only and affordable properties, is 85 percent. There are 17 properties over the 90 percent mark, five properties with occupancy rates between 80 and 90 percent and another five properties below 80 percent occupied. The 2017 properties have the distinction of being born in the year of Harvey. This group of properties had the most availability to welcome those flooded out of their homes. Some of these properties had the good fortune of timing to have been opening their doors in mid-2017 and leased-up by year end. However, there are two sides to storm-related leasing, first there is the spike of occupancy and rent immediately following the storm and then there is the exodus of evacuees and the winddown or flatness of fundamentals over the next 12 months. The 2017 group of properties was true to its storm-born heritage by exhibiting a very flat 12-month rent trend performance of 0.4 percent. Class A Stabilized (Without New Construction) Class A represents the highest priced properties based on their overall average market rate. As mentioned above, a bell curve distribution method determines which properties
make the A grade. Class A units without the new construction built since 2017 represents 20 percent of the overall supply of units. Taking new construction units out of Class A provides a stabilized occupancy picture. Class A’s overall occupancy is 87.2 percent. Filtering out units built in 2017, 2018 and 2019 creates a stabilized group of Class A product, which has occupancy of 91.7 percent as of the end of the March. Tracking occupancy back to the beginning of 2018 reveals a roller coaster ride where occupancy started at 89.8 percent, peaked at 91.9 percent in August and then fell to 91.2 percent by the end of the year. This slide in occupancy seems more than cyclical, especially with a $40 drop in overall average rent accompanying it. Rent peaked in July 2018 at $1,508 per month and ended the year at $1,468 per month. This slide in rent defined the negative 1.7 percent trend over the last 12 months. Apologies for bringing up Harvey again, but it is the most likely suspect to blame for this overweight drop in fundamentals juxtaposed to 2018’s job growth of 73,300, which was so strong. Don’t forget that the market impact of storms works outside and independently from the economic forces at play. Other suspects should be considered having a hand in or maybe being an accomplice to such a poor second half performance, but they do not seem as directly related as Harvey does. The Federal Reserve raised rates four times in 2018, bringing about a correction in the Dow Jones industrial average, which finished the year down by 12.5 percent. Crude prices were as high as $70 per barrel in October 2018 but fell to $45 in mid-December. Industry wisdom contends that prices need to be higher than $50 per barrel to sustain drilling. Another negative economic force to consider is that China is Houston’s number two trading partner. The trade tariffs against China in early 2018 started a tit for tat series of retaliation throughout the
year. The impact is still unclear, but it does not seem economically positive for Houston. The good news is that 2019 is off to a good start. Occupancy advanced to 91.7 percent by the end of the first quarter, which is just two basis points below 2018’s occupancy high point of 91.9 percent. In addition, rent has gained $19, almost half of the $40 loss suffered during the second half of 2018. This rent gain during the first three months represents a 3.8 percent annualized improvement. Class B Without New Construction Class B represents the second tier of highest priced properties. The bell curve distribution of market rate creates a Class B that represents 39 percent of the entire market’s supply. The affordable product built since 2017 was filtered out of this category. New construction affordable product is a hybrid that has Class C rents and Class A amenities. There are 13 properties with 1,835 units that were filtered out. These affordable properties have an overall average rent of $877 per month and an overall average occupancy of 74.9 percent as of the end of March. Class B’s performance during 2018 was very similar to the performance of Class A, with occupancy peaking in May at 91.5 percent and then falling to 90.7 percent by the end of the year. Overall average rent peaked in July at $1,010 and then slid back by $11, which made rent finish 2018 at $999 per month. By the end of March, occupancy moved ahead to 91 percent and average rent added $2, moving the overall average to $1,001 per month. This rent movement generated a very flat 12-month trend of -0.1 percent. The $2 rent bump over the first three months of 2019 created a slightly positive 0.8 percent annualized growth. Classes C and D Class C represents 31 percent of the overall
Houston’s best economic scenario for 2019 is dependent on the national economy growing Gross Domestic Product somewhere in the neighborhood of 2.5 percent. China trade negotiations are the wild card to this scenario. Higher tariffs could impair a best direction scenario.
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June 2019
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