Comment of the Day: How Did Houston Change from Townhomes to Apartments?

COMMENT OF THE DAY: HOW DID HOUSTON CHANGE FROM TOWNHOMES TO APARTMENTS? “Before the financial crash in 2008, developers were giddy to get large lots such as these and develop them into townhomes or high-end single family residential. See, for example, the townhomes that sit up against the railroad tracks on Center Street that now have a view of the Wal Mart parking lot. Or the gated community at Washington Ave. and Memorial Heights. Since then, I’m seeing more of these parcels developed into mid rise apartments, or shopping centers. Did something change in regards to bank financing or is this a response to more out of town money investing in Houston because it’s a ‘hot market’? Does anyone here know the answer?” [ShadyHeightster, commenting on A Second Midrise Alexan Planned Right Beside the First One on Yale] Illustration: Lulu

19 Comment

  • Developers go where the money takes them–it seems that the return on investment must be superior for these mid rises and shopping centers –lands sales on the inside of the loop Westside are soaring so I’m sure we’ll see more and more high density development that will maximize return on investment and more speculation building –let’s hope they don’t over build like in the feeding frenzy of the 80’s

  • MegaCorp’s a better credit risk than 300 individual creditors are.

  • Many property values in areas of the Heights have DOUBLED in the last five years. The real estate market in the area is super hot with very little inventory. That has a tendency to drive the rental market because it is an extremely desirable location with ownership being less-than affordable for a very large part of the population. I’ve been seeing efficiency garage apartments go for $800+ for less than 500 SF.

  • Yes, it is harder to get a mortgage, and people don’t have the 20% downpayment to buy. So there is a great demand for rentals. Also, highest and best use for land value is to build as big as you can support on the land – think parking. If you have a large enough of a piece of land to build 300 apartments and park them, you will make a lot more money off your land building that project than building 30 townhomes. Again, as long as you can rent it.

    However, without any rules in place to make sure the street infrastructure is properly designed, we are going to end up with an even uglier Houston as we continue to develop neighborhoods without trees, sidewalks and buildings that are nice to the people that may go outside.

  • Easy, the density is completely different and at $2/foot apartment developers can pay much more for the land, edging out residential users.

  • Smells like the 80s…

  • Is that over speculation I smell?.. yes, it does smell like the 80’s. Here we go again. All of these will be urban ghettos in another 20 years. Hope nobody was planning on feeding their property to future kids or grandkids… just sayin

  • There are a lot of factors that have tilted in favor of multifamily. But yeah, the bottom line is that that’s where the money is allocated.

    As an asset class, it’s damned safe. Even when a developer loses a property, there’s usually still a tenant base, there’s still cash flow, and there’s still some residual value that the bank can capture without having to reposition a property or dump it for pennies on the dollar. You don’t end up with disasters like Houston Pavilions or a spec office building that was only 40% leased when the market went south, or a strip center with a sexually-oriented business on a long term lease, or a single-tenant warehouse occupied by a firm that declared Chapter 13 bankruptcy.

    And then you compare it to mortgages on houses, townhomes, or condos, and things are still favorable. When you take a house from somebody that has been in financial distress, it is a standalone property like an apartment complex, but it is probably vacant, is more likely to be trashed out, it may have been “customized” with hideous interior decorating, and the individual may put up a fight by lawyering up, declaring bankruptcy, or just by being crazy. (Commercial developers typically won’t sacrifice their reputation by fighting a lender on a foreclosure proceeding.) If the house is within a still-developing subdivision, then unloading it may entail competing with builders that are trying to sell identical but brand-new houses. If the house is governed by an HOA, then there may be substantial dues and unpaid fines. If its a condo, the owner’s association is probably not run very well and probably is charging unreasonably high maintenance fees. There are a whole lot of other undesirable circumstances that can happen. Suffice it to say, homeownership peaked around 80%…and that’s just too high. Not that many people are sufficiently competent to own and operate a property; and if it were up to me, many of them would be spayed and neutered rather than given a six-figure mortgage.

    Contrast that with apartments. If you’ve got 300 units and the projected rents were too high, then the developer drops their rents in order to stabilize and understands that they’ll be taking a haircut. The deal is what it is. But…the asset will stabilize, it will cash flow positively, and it will have a residual value and a market for resale. If they ever want to develop again, then the developer has every incentive to act in good faith. And they probably wouldn’t have received the money in the first place if they weren’t at least a little bit professional in the manner that they do business. So the average commercial developer is going to be a whole lot easier to deal with than an individual homeowner.

  • One man’s overdevelopment is another man’s opportunity to have what he could not previously afford.

  • Look at the apartment cities in SW Houston and you may be looking at the inner loop of the future. These were the boom town equivalent of the 1960’s and 70’s. These new complexes don’t have any longer life expectancy as “the upwardly mobile” continue to strive to have the best new place on the market. Trying not to be negative and hoping I am wrong, but those who don’t learn from the past are destined to repeat it.

  • Supply and Demand.
    For about two to three years, during the worst of the recession, there were zero apartments coming on line, even though the Houston population kept growing. In fact, there was a lot of in-migration because our economy was “less bad” than the rest of the country. However, credit markets were frozen, so developers could not keep up with the demand.
    Even with a somewhat better credit environment, lenders still want strong proformas – and the pent-up demand makes a good case.
    Now, it’s possible we have will reach equilibrium by the time all the units under construction are delivered. I would expect the rate of new announcements to start slowing down soon.

  • I’m glad others are feeling the same unease that I have about the number of units coming on line. Granted, some are needed to ease pent-up demand, but we’ve been down this road before. Just look at SW Houston and Greenspoint for an object lesson. It does indeed feel like the 80s all over again, but with much higher rent prices.

  • @sjh – I’m not going to claim to be an expert on Houston’s last real estate bust (although I did grow up in Alief and Mission Bend from ’80 – ’88). But as I recall, and have subsequently read, all of that development was built on cheap land and intended for middle class residents (and the related strip malls). The current wave of developments are being built on expensive land and are geared towards 25 – 35 year old professionals making $70k+ or the extremely affluent. Couple that with the long term trend of bifurcating income in the US, and we have a development environment that is very different from the one of Houston in the ’80s. So, other than “there was a lot of building in the 80’s and it went bust; and there’s a lot of building going on now, so it must be headed towards a bust” type of logic, I’m not seeing many similarities between then and now. But, as always, I’m open to being politely educated on points I might be missing.

  • Well, the era of higher interest rates is here, whatever effect that may have.

  • Walt, every bubble has its reasons…

  • Apartments ruined SW Houston.

    Rentals en masse are not good for a neighborhood.

    I hope friendly developers buy as much land as possible.

  • Greg – well said. They built too many apartments in Southwest Houston in the 1970s and early ’80s, and they didnt build enough offices, light industrial properties, schools, parks, and transit to go with them. The result was that the rental market was flooded, and when the economy went south, the market in these areas completely crashed. 30 years later, and it still hasn’t really recovered. (Despite all the demand for rentals, we still have 20%, 30% vacancy at some older apartments)
    Niche – I wish you hadn’t written that, because you make it sound like anyone can invest in apartments, enjoy a good return, and sit pretty. That might be true for the big, rich REITs that invest in Class A and B properties. But Class C and D properties (of which we always seem to have too many here in Houston) are a different beast. We get too many amateurs and fly-by-night investors buying up these kinds of properties. Sometimes it’s intentional – they go cheap on management, and defer maintenance for the money (those are the worst). But often they just don’t realize that they paid too much for the property, that they don’t have money left for necessary repairs, and that they are now reaponsible for a crimeridden nuisance.

  • @ ZAW: Since the subject under discussion is about new development, I limited the scope of my comment to new development. You’re right that Class C and Class D investors are often unprofessional and amateurish.

    Also, I thought that I had made it clear that a developer or investor’s position is risky. Its the bank’s position that is not as risky. The availability of loanable funds and the terms that they are willing to offer reflect that fact, and implicate an answer to ShadyHeightster’s original question.

    None of this has ANYTHING to do with Sharpstown or the southwest side.

  • In the 80’s developers built 800-1000 units in a complex with very poor quality construction now it’s about 250-350 units with high quality construction on good long term dirt…this is a boom but it’s nothing like the 80’s….