COMMENT OF THE DAY: KEEP CALM WHILE WAITING FOR FINAL GRADES ON MULTIFAMILY HOUSING 
“Yup. I saw another apartment crisis coming in Houston, and true to form, it’s here. . . . If you managed to keep your job, you’ll find that you can now afford a better apartment for the same rent due to concessions. But it could be a terrible, awful thing for older Class D apartments and the neighborhoods around them. Tenants in Class B apartments will find that they can now afford a Class A apartment, and so on down the line. The Class D apartments that lost their good tenants to Class C apartments will have nowhere to turn. Crime on the property will skyrocket as they give up on what little tenant screening they had. Maintenance will be deferred even more as they try to control the financial bleeding. Worst case scenario, the two problems will feed each other until the complexes are totally derelict and need to be condemned. Granted, this is just a worst case scenario. The damage could be limited to only a handful of complexes. Fingers are crossed.” [ZAW, commenting on Houston’s Multifamily Problem; River Oaks District Apartments Open for Business] Illustration: Lulu
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Man….I really hope you’re wrong. That would be very bad for transitional neighborhoods.
I really hope I’m wrong, too, MrEction! The last thing Houston needs is a late 1980s style multifamily bust.
What do you mean “if you managed to keep your job”? The big layoffs are still to come. Expect to hear a lot of pain and moaning around town in a couple months time.
We are nowhere near the oversupply conditions of the 1980’s. Its a fraction of what was brought to market back then, and the market was smaller then. I must admit some concern that developers are pressing on with many projects under these conditions, but it could be so much worse.
That being said, concern over Class D properties and for Class B and C submarkets seems warranted at this point. The thing that would probably push things over the edge would be a major hurricane or flood that brought about the need for many properties to meet their insurance deductibles. That scenario is plausible. It could’ve gone that way for Ike, but not for the advent of fracking.
A Certificate of Need is required to build a new skilled nursing care facility – based on demographics, projections… There’s even regs on regional shopping malls – so not located too close together.
Multi-family seems to get funded whether there’s need or not. What are the chances that an agency is put in place to put a cap on all the speculative building?
When times are tough, people tend to stay put.. Apartments keep people from movin on up (cue music) by offering free rent instead of drastically dropping rents. So you may have an actual rent of 900 when you spread out the incentives but you have to have income to show you can afford 1200.
If there is any movement it will be people taking advantage of incentives to move closer in. That is a good thing.
Finally, remember that the great bust of the 80s was not just oil. The S&L crisis was as bad for real estate as was the thousand of energy workers heading out of town.
The overbuilding of apartments is real. It is going to effect all classes of apartments. As well as the half million dollar town home market. Especially if they raise interest rates. Houston never was and never will be a half million dollar town home and $2g/month luxury apartment city.
Zaw: Normally the cost basis on the class C is such that it’s not hard to weather any occupancy storm.
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When you’re paying ~$20k/door, you can be half occupied and charge $500/month and get by.
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The people who are going to get nailed are the people buying class C in Montrose where they’re paying excess of $100k/door for not a whole lot of rent. They’re going in with low CAP as a proforma. Any hicup and they’re toast.