Houston’s Energy Angst - Yardi Matrix Multifamily Winter 2016 Report

Rent Growth Decelerates;
Future Uncertain
Houston’s Energy Angst
Multifamily Winter Report 2016
New Development
Nearly Halved
Investors Sour on
Once Favored Locale

2
HOUSTON MULTIFAMILY
Market Analysis
Winter 2016
Contacts
Paul Fiorilla
Associate Director of Research
Paul.Fiorilla@Yardi.com
(800) 866-1124 x5764
Dana Seeley
Associate Director of Research
Dana.Seeley@Yardi.com
(800) 866-1124 x2035
Jack Kern
Director of Research and Publications
Jack.Kern@Yardi.com
(800) 866-1124 x2444
Author
Adelina Osan
Associate Editor
Energy Price Slump Weighs on Houston
Recent Houston Transactions
After years of outperforming its peers, Houston’s energy-driven economy is
being shaken by low oil prices. Although the economy has diversified in recent
years, the precipitous drop in the price of crude oil has dealt a reverberating
blow that has flattened job growth and dampened the apartment market.
The news isn’t all bad: The metro has a first-rate healthcare system that is
adding skilled workers and there is growth in the hospitality, education and
government sectors. The metro remains a target for international investment,
healthcare expansion, international trade and industrial investment. Projects
such as the Texas 288 tollway, a $2.1 billion public-private partnership between
the Texas Department of Transportation and Blueridge Transportation Group,
will offer easy access to major employment centers such as the Texas Medical
Center, covering a 10-mile stretch from U.S. 59 to the Harris County line. Still, the
energy sector will continue to challenge Houston’s economy, as recovery is not
expected to begin until 2017.
The outlook for multifamily fundamentals is uncertain, as the metro recorded
negative growth on a trailing three-month basis, caused by a dip in Lifestyle
rents. The large amount of construction will pressure rent growth, although
YardiMatrix forecasts 4.7% growth. Meanwhile, the investment market is
beginning to sour on Houston, with deal flow and pricing starting to slip.
City: Houston
Buyer: Nitya Capital
Purchase Price: $63 MM
Price per Unit: $57,861
Village at Piney Point
City: Houston
Buyer: Olympus Property
The Ranch at Shadow Lake Town Center
Park at Research Forest
City: Kingwood, Texas
Buyer: Cortland Partners
City: The Woodlands, Texas
Buyer: South Star Properties
On the cover: Photo by Zview/iStockphoto.com

Houston Multifamily | Winter 2016 3
Houston vs. National Rent Growth (Sequential 3 Month, Year-Over-Year)
Rent Trends
„„ Rents grew 3.5% year-over-year to an average of $960 per month as of February 2016, well below the 6.2%
increase nationally. Houston was one of the better-performing metros in the U.S. for several years due to
healthy job and population growth. However, the drop in energy prices led to an immediate and sharp
decline in rent growth beginning in May.
„„ Over the past three quarters, rent growth decelerated from 6% to 3.5%, and the future looks uncertain. On a
trailing three-month basis, Houston was one of only two U.S. metros with negative growth.
„„ Growth has been higher in the working-class Renter by Necessity segment, which rose 5.6% year-over-year
to an average of $812, whereas the higher-end Lifestyle segment rose by only 1.7% and has dropped by 0.4%
over the past three months. The stark contrast is caused by stronger demand for mid-price properties, while
supply is focused on the higher end of the quality scale. Lifestyle rents average $1,144 per month.
„„ We expect the growth rate to moderate and produce 4.7% gains in 2016, but market players should watch for
further effects from energy prices as well as increased supply.
Houston Rent Growth by Asset Class (Sequential 3 Month, Year-Over-Year)
Source: YardiMatrix
Source: YardiMatrix
12,600 Units
15,259 Units
35,540 Units
Planned Prospective Under Construction
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
0
50
100
150
200
250
300
350
2008 2009 2010 2011 2012 2013 2014 2015
Volume in Millions Number of Properties
Transactions: Total Volume (Houston)
0.0%
2.0%
4.0%
6.0%
8.0%
Houston National
Rent: YoY vs National (Houston)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Lifestyle Rent-by-Necessity
Rent: Lifestyle vs RBN (Houston)
12,600 Units
15,259 Units
35,540 Units
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
0
50
100
150
200
250
300
350
2008 2009 2010 2011 2012 2013 2014 2015
0.0%
2.0%
4.0%
6.0%
8.0%
Houston National
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%

Houston vs. National Employment Growth (Year-Over-Year)
Economic Snapshot
„„ After outperforming the nation for several years, job growth in Houston remains rather flat: More than 23,000
jobs were added to the metro in 2015, but that was a quarter of what was added during the previous year.The
1.2% rate of growth is far behind the 2.3% national rate.
„„ Employment gains were led by the leisure and hospitality sector, which added 19,600 jobs, followed by
education and health services (19,000) and government (10,000). Home to the largest medical center in the
world, Houston benefits greatly from theTexas Medical Center, as the research facility employs more than
100,000 workers and has an annual budget of $15 billion.
„„ Houston’s continuous growth in industries such as medical research, education, tourism, life sciences,
petrochemicals and international trade is counterbalancing the energy sector’s negative growth. Manufacturing
lost 16,000 jobs last year, though the sector shows prospects of recovery. For example, Japan-based air
conditioner maker Daikin Industries Ltd. plans a $417 million campus expected to employ more than 5,000.
„„ Mining, logging and construction contracted by 5,600 jobs, and the future prospects are dependent on the
direction of crude oil prices, which briefly dropped below $30 a barrel. In late March, the price had recovered to
close to $40 a barrel; if it remains stable, that would stop the bleeding in jobs.
Houston Employment Growth by Sector (Year-Over-Year)
Sources: YardiMatrix, Bureau of Labor Statistics (not seasonally adjusted)
Current Employment Year Change
Code Employment Sector (000) % Share Employment %
70 Leisure and Hospitality 310 10.30% 19,600 6.80%
65 Education and Health Services 378 12.50% 19,100 5.30%
90 Government 394 13.10% 10,200 2.70%
50 Information 34 1.10% 1,400 4.30%
40 Trade, Transportation and Utilities 621 20.60% 800 0.10%
60 Professional and Business Services 471 15.60% 400 0.10%
80 Other Services 103 3.40% -1,500 -1.40%
55 Financial Activities 144 4.80% -5,200 -3.50%
15 Mining, Logging and Construction 319 10.60% -5,600 -1.70%
30 Manufacturing 243 8% -16,000 -6.20%
Sources: YardiMatrix, Bureau of Labor Statistics
2008
2009
2010
2011
2012
2013
2014
2015
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Houston National
Employment Growth: YoY 6mo-avg (Houston)
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2008 2009 2010 2011 2012 2013 2014 2015
National Houston
Supply: Percentage of Stock (Houston)
12,600 Units
15,259 Units
35,540 Units
Supply: Development Pipeline as of February 2016 (Houston)
$40,000
$60,000
$80,000
$100,000
$120,000
2008 2009 2010 2011 2012 2013 2014 2015
Houston National
Transactions: Price Per Unit (Houston)

Houston Rent vs. Own Affordability as a Percentage of Income
Demographics
Affordability
„„ Median home prices in the metro rose to $196,000 in 2015, reaching a peak for the current cycle. Houston
remains relatively affordable compared to most major metros, but as housing prices rise and employment
staggers, affordability issues may come up, as they have across the U.S. in recent years.
„„ Despite steady growth in home prices, owning remains more affordable than renting: The cost comprises
14% of the metro’s median income of $60,900, while rents, averaging $960, take up 19% of the median
income. Rents are highest in River Oaks, far above the metro’s average at $1,784. Located just miles away
from the Texas Medical Center, that area is one of the most expensive in Texas.
Houston Median Home Price
Sources: YardiMatrix, National Association of Realtors, U.S. Dept. of Housing & Urban Development, U.S. Dept. of the Treasury
Source: National Association of Realtors
2010 2011 2012 2013 2014
National 309,347,057 311,721,632 314,112,078 316,497,531 318,857,056
Houston 5,949,076 6,060,721 6,186,923 6,333,809 6,490,180
Source: U.S. Census
Population
„„ Houston is growing at a fast pace, as
young workers are following jobs.
„„ The metro’s population added
156,000 residents in 2014, at 2.5%
more than three times the 0.8% rate
of the U.S., and has grown by 9.1%
since 2010.
Houston vs. National Population

Houston vs. National Completions as a Percentage of Total Stock (as of February 2016)
Supply
„„ Despite Houston’s shaky economy, new development remains high. More than 15,000 apartment units were
added in 2015, a 2.6% expansion. That’s slightly above the 2.3% national rate. Meanwhile, roughly another
20,000 units are scheduled to be completed in 2016.
„„ Development has been fueled by high population growth and the strengthening employment market.
Demand mostly comes from the metro’s core, which is seeing the greatest job and population growth.
Another area seeing heavy supply is Houston’s northwest.
„„ The pipeline consists of more than 63,000 units, including over 35,500 currently under construction. Most of
the pipeline was conceived during the market’s bull run, and it remains to be seen whether developers will
put projects on hold or whether banks will rein in construction financing. About 12,600 units are already in the
planning and permitting phase, suggesting a continued pace of new supply for several years.
„„ The West End/Downtown submarket leads supply with 7,200 units. Other submarkets with a large pipeline
include Piney Point Village North (2,200 units) and Katy (2,000 units).
Development Pipeline (as of February 2016)
Source: YardiMatrix
Source: YardiMatrix Source: YardiMatrix
Houston Completions (as of February 2016)
2008
2009
2010
2011
2012
2013
2014
2015
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Houston National
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2008 2009 2010 2011 2012 2013 2014 2015
National Houston
12,600 Units
15,259 Units
35,540 Units
$40,000
$60,000
$80,000
$100,000
$120,000
2008 2009 2010 2011 2012 2013 2014 2015
Houston National
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
50
100
150
200
250
300
350
2008
2009
2010
2011
2012
2013
2014
2015
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Houston National
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2008 2009 2010 2011 2012 2013 2014 2015
National Houston
12,600 Units
15,259 Units
35,540 Units
$40,000
$60,000
$80,000
$100,000
2008 2009 2010 2011 2012 2013 2014 2015
Houston National
$2,500
$3,000
$3,500
$4,000
200
250
300
350
2008
2009
2010
2011
2012
2013
2014
2015
2%
4%
6%
$40,000
$60,000
$80,000
$100,000
$120,000
2008 2
Transactions: Price Per

Houston Sales Volume and Number of Properties Sold (as of February 2016)
Transactions
„„ Some $2.8 billion worth of properties changed hands in 2015, far below the $3.5 billion of both 2013 and
2014. It seems that investors are starting to sour a little bit on Houston, only recently one of the darlings of
the value-add crowd.
„„ The average price per unit in Houston, just shy of $80,000, remains well below the national average.
„„ During the past 12 months, investor appetite was highest in West Bellaire, Nassau Bay/Seabrook, The
Woodlands and Jersey Village/Salsuma. Louetta rounded out the top five. The 624-unit Ranch at Shadow
Lake was the most expensive property to change hands in Houston over the past year. Olympus Property
acquired the luxury complex in May for $65.7 million.
Houston vs. National Sales Price per UnitTop Submarkets for Transaction Volume1
Submarket Volume ($MM)
West Bellaire 184
Nassau Bay/Seabrook 158
TheWoodlands 144
JerseyVillage/Salsuma 142
Louetta 116
Sugar Land - South 99
Source: YardiMatrix
1
From 3/1/2015 to 2/29/2016.
Source: YardiMatrix
Source: YardiMatrix
2008
2009
2010
2011
2012
2013
2014
2015
0%
2%
4%
6%
$40,000
$60,000
$80,000
$100,000
$120,000
2008 2009 2010 2011 2012 2013 2014 2015
Houston National
0.0%
0.5%
2008 2009 2010 2011 2012 2013 2014 2015
National Houston
12,600 Units
15,259 Units
35,540 Units
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
0
50
100
150
200
250
300
350
2008 2009 2010 2011 2012 2013 2014 2015
0.0%
2.0%
4.0%
6.0%
8.0%
Houston National
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%

Area # Submarket
1 Greater Third Ward
2 East End
3 Mount Houston
4 Cloverleaf
5 Pasadena
6 South Houston - Crenshaw Park
7 South Houston
8 William P Hobby Airport
9 Pirce Junction
10 Clear Creek
11 Pearland/Friendswood
12 Nassau Bay/Seabrook
13 Deer Park
14 La Porte
15 Atascocita
16 Humble/Westfield
17 Spring
18 The Woodlands - East
19 Porter
20 Kingwood
21 Baytown
22 League City/Dickenson
23 Texas City/San Leon
25 League City - West
26 Alvi
27 Galveston
28 Conroe - East
29 Lake Jackson/Angleton
Area # Submarket
1 West End/Downtown
2 The Heights
3 Museum District
4 Reliant Park
5 Bellaire
6 River Oaks
7 West Bellaire
8 Piney Point Village - South
9 Piney Point Village - North
10 Hunters Creek
11 Bunker Hill Village
12 Spring Valley
13 Rosslyn
14 Missouri City
15 Suger Land - South
16 Sugar Land - West
17 Suger Land - North
Houston Submarkets
Area # Submarket
18 Royal Oaks Country Club
19 Addicks
20 George Bush Park
21 Bear Creek Park
22 Jersey Village/Salsuma
23 Bammel
24 Louetta
25 Richmond
26 Rosenberg
27 Cinco Ranch - South
28 Katy
29 Cinco Ranch - North
30 Tomball
32 Magnolia
33 The Woodlands
34 Conroe - West

Read All About It!
Greystar Starts Pre-Leasing
Luxury Community in Houston
Historic Neighborhood
Get the latest Dallas real estate news at
HFF Closes Sale of 270-Unit
Ranch at City Park
Regency Centers in JV for The
Market at Springwoods Village
Kimco’s Grand Parkway
Marketplace Lands Target
Photo by cheng8/iStockphoto.com

Definitions
Lifestyle households (renters by choice) have wealth sufficient to own but have chosen to rent. Discretionary
households, most typically a retired couple or single professional, have chosen the flexibility associated with renting
over the obligations of ownership.
Renter by Necessity households span a range. In descending order, household types can be:
„„ A young-professional, double-income-no-kids household with substantial income but without wealth needed to
acquire a home or condominium;
„„ Students, who also may span a range of income capability, extending from affluent to barely getting by;
„„ Lower-middle-income (“gray collar”) households, composed of office workers, policemen, firemen, technical
workers, teachers, etc.;
„„ Blue-collar households, which may barely meet rent demands each month and likely pay a disproportionate share
of their income toward rent;
„„ Subsidized households, which pay a percentage of household income in rent, with the balance of rent paid
through a governmental agency subsidy. Subsidized households, while typically low income, may extend to
middle-income households in some high-cost markets, such as New York City;
„„ Military households, subject to frequency of relocation.
These differences can weigh heavily in determining a property’s ability to attract specific renter market segments. The
five-star resort serves a very different market than the down-and-outer motel. Apartments are distinguished similarly,
but distinctions are often not clearly definitive without investigation. The Yardi® Matrix Context rating eliminates that
requirement, designating property market positions as:
Market Position Improvements Ratings
Discretionary A+ / A
High Mid-Range A- / B+
Low Mid-Range B / B-
Workforce C+ / C / C- / D
The value in application of the Yardi® Matrix Context rating is that standardized data provides consistency; information
is more meaningful because there is less uncertainty. The user can move faster and more efficiently, with more accurate
end results.
The Yardi® Matrix Context rating is not intended as a final word concerning a property’s status—either improvements or
location. Rather, the result provides reasonable consistency for comparing one property with another through reference
to a consistently applied standard.
To learn more about Yardi® Matrix and subscribing, please visit www.yardimatrix.com or call Ron Brock, Jr., at
480-663-1149 x2404.
©Yardi Systems, Inc., 2016. All rights reserved. All other trademarks are the property of their respective owners.

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