Multifamily Investors Paying Higher Prices
The multifamily residential market in Houston kicked off 2024 with mixed results distributed up and down the real estate ladder. Some tallies were good, some marginal and others – quite a few, in fact – ended up on the low side, says Colliers Multifamily Report for the first quarter of this year.
The document notes that absorption (a measure of demand for apartment units) was positive, but only when measured on a year-over-year basis. Absorption fell quite a bit from the fourth quarter of 2023 to the first four months of 2024, usually an indication of sluggishness.
There was also a marginal drop in rental unit occupancy rates, Colliers says, and the number of new apartment completions and projects already in the construction pipeline fell during the opening quarter of this year.
Investor Sales
But one positive statistic seemed to stand out above all the others, that is, the median sales price for purchasing a rental community in Houston. Colliers says that figure “jumped 49.7 percent to $162,727 per unit from the previous quarter’s $108,714.” The total for Q1 2024 is also up 23 percent from a year ago.
What adds a hint of remarkability to the number is the fact that the percentage hike for purchasing multifamily projects in Houston was larger than both the median price adjustment for the entire state of Texas – a figure which actually dropped – as well as the increase for the whole USA.
“The Texas median price per unit remained flat in the quarter at $135,112, but is down 16.4 percent year-over year,” says the Colliers report. “By comparison, the U.S. median sales price per unit increased 6.2 percent to $181,250 in Q1 2024 and is up 5.6 percent year-over year.”
And while the elevated price tag for buying Houston apartments may be good news for investors looking to pocket a few extra dollars per transaction, apparently not many of them took that route. “Regarding investments,” Colliers’ report says, “transaction levels remained low, recording the fewest sales in the past four years. The gap remains between the expectations of buyers and sellers, influenced by rising interest rates and insurance costs.”
In addition, Houston’s multifamily investment sales volume declined to $612 million during the first quarter of 2024, which is the third lowest recorded volume in a decade on an adjusted, quarter-over-quarter basis. The rolling four-quarter sales volume dropped to $3.2 billion, representing a 50.5 percent decline on an adjusted year-over-year basis.
Still, in his assessment of the report’s findings, Danny Rice, president of Colliers, said: “Looking ahead, the area’s ongoing population growth will keep the Houston market a favorable option for investors focused on multifamily.”
The following are some of the highlights in the Colliers report:
Overall net absorption in Houston dropped to 1,322 units during the first quarter of 2024, a 54.2 percent drop from the prior quarter when 2,885 units were absorbed. Still, the 2024 figure is a 9.3 percent increase year-over year.
Demand for all classes of rental units (Classes A, B, C and D) softened, with Class A units reporting the smallest decrease at 9 percent. The construction pipeline slowed with 20,702 units being constructed right now, 10.9 percent fewer than the previous quarter and 4.7 percent less than this time last year.
Occupancy, recorded at an average of 88.4 percent for all four rental unit classes, fell 20 basis points from the prior quarter but dropped 100 basis points year-over year. Class B units recorded the highest percentage of occupants, the report says – 91.1 percent. Class C units were 89.7 percent occupied, Class D reported an occupancy percentage of 88.3 and Class A bottomed out with an occupancy rate of 83 percent.
The new supply of rental residences delivered in the first quarter of 2024 totaled 3,069 units, a 49.7 percent drop from the prior quarter when 6,097 apartments hit the market. This year’s figure is also a decrease of 63.3 percent year-over year.
The report notes that “the drop in under-construction units could be why the number of proposed units increased to 32,883 during the first quarter.”
Average monthly effective rent increased marginally to $1,268 per unit from $1,264 per unit in Q4 2023, but rents were the same year-over year.
The Houston area has 753,050 multifamily units, up 2.8 percent from the 731,994 units reported a year ago.