2023 Houston Apartment Summit

Market Update & Investment Trends Moderator: Bruce McClenny, ApartmentData.com Panelists: Ben Suttles-Disrupt Equity; Bob Heard-Colliers; Chris YoungBerkadia; Ryan Nunes-Life Changing Capital; Shane Thomas-Catalyst Equity Partners; Stephen SmithKeener Investments

Takeaway: Rents and occupancy are flattening out and even falling marginally, right at a time that insurance and property taxes and interest rates are moving robustly upward, creating a cash flow pinch for some operators.

• 23,000 new units with 8,000 absorption in the greater Houston market

• Class A doing well; lower classes seeing move-outs and moderating rents; the Inflationary rent growth of 2012 and 2022 is a thing of the past

• The market was convoluted in so many ways by the pandemic and things are now ‘reverting to the mean’, and leveling out, although taxes and insurance and interest rates are soaring compared to last few years

• Properties which maintain 1.25 debt service ratio are faring well

• 4.5-5.0 caps are the range in which investment sales are taking place, provided the property is stable; half of cities in US are having negative rent growth; Houston is still barely positive, as is Orlando

• Projects with debt maturing this year are having challenges, although some lenders are renewing for a short term for a fee, to avoid taking back the property, for now at least

• Not many sales are taking place because of the significant spread between buyer and seller expectations

• In many properties today, there is not enough rent growth to cover expense growth; in some properties insurance has spiked by 300%

• Lenders are expanding tax and insurance escrows, cutting into cash flow, since rent has stopped growing

• Insurance companies are getting very sophisticated, tracking expected Gulf Coast storm patterns and also disallowing some projects built in the ‘70s & ‘80s-and they are limiting in some cases how many MF projects they will insure in a given market; Harvey in Houston and two hurricanes last year in FL have caused insurance companies to be very cautious going forward in these markets

• With regard to investment sales and refinancing, there is a lot of capital out there-it is just cautious

• Purchase of older properties for ‘value add’ has flattened out; owners are renovating their existing portfolio to keep existing tenants, which is cheaper in the long run than losing tenants and having to spend time and money to replace them

• Contractor pricing and material costs are all coming down, with a few exceptions

Capital Markets & Financing Options Moderator: April Daniel, REDnews

Panelists: Gill Dolan-Greystone; J.C. Clemens, Jr.-Flagship Capital Partners; Kelly Williams-Milestone Venture Group, LLC

Takeaway: MF owners should take this year as an “intermission year” and let the dust settle in the financial markets, with the Fed managing inflation and interest rates.

• 70-80% bridge loans are available, but at 10-11% rates

• Some life companies are creeping back into the market

• Some banks are buying loans and some banks are trying to offload real estate loans

• LTVs are around 55%;

• “The credit guys are running the banks now, not the loan producers, so beware”

• There are new construction deals available, and all solid deals can find lenders; most lenders, however, are focused on refinancings

• Some owners who have been in their deals for a while are ready to sell and take their profits

• Some lenders with stretched out borrowers would rather recast the loan than take back the property, although is may be expensive for the owner to ‘buy the breathing room’’; lenders don’t have big workout staffs so they are wanting to avoid taking back property

• There are a record number of lawsuits against appraisal districts who have jerked property appraisals very high and therefore the ad valorem taxes which go with them; however, these lawsuits by tax protest firms can take months or years to resolve

• MF owners are looking at 2-7 year holds on current investments to let the markets return to normal after the disruption by the pandemic

• Refinancings on deals that worked at 3% interest rates are now trying to be made to work at interest rates around 8%

• We don’t know if we are on the edge of a recession now

• Overall do not expect any relief on property taxes for the next 12-24 months

• Soaring insurance rates may fall slowly due to the free market competition among the many underwriters out there; one more reason to sit back and wait during this ‘intermission year’

• 2024 is an election year, which should result in moderation of interest rates

• “We are in the 6th or 7th inning of financial stress caused by multiple issues, which is one more reason to try to wait and let things settle down

• In fact, interest rates are NOT an any historic high right now-for decades in the memory of many of us rates were steady in the 6-8% range for decades; again, reversion to the mean is happening

Property Management & Tenant Relations Moderator: April Daniel, REDnews Panelists: Pamela McGlashen-Keener Investments; Ricardo Rivas-Allied Orion Group; Tyler Johnson-Asset Living

Takeaway: Property management is all important to the success of an MF investment; tenants must be kept happy and owners too. Building a ‘culture’ with the management team and the tenants is key, and this is done through personal responsiveness to the tenants needs, while at the same time being firm and professional with rent collections on time.

• Property managers are now having to work with some special servicers as properties are foreclosed

• Expenses such as salaries are relatively fixed while other costs are rising and rents are flattening, creating a cashflow squeeze

• Concessions to attract new tenants and to hold existing ones are creeping in; building and maintaining an online reputation is a new duty of today’s management company

• Service is key to holding tenants; reducing tenant (and employee) turnover cost-which is expensive-is a major focus of the good management company

• It is imperative to keep your good managers and staff since new ones are expensive to find and train; also companies need to always have good young employees ‘on the bench’, in training and absorbing the company culture for the day when they will step up in authority

• Ai, Chatbot, and Proptech and other computerized tools can help in mundane tasks such as rental reminders and collection but property managers must be careful not to lose the human touch, especially with older tenants

• The trend toward working from home means tenants have different needs today, such as excellent wifi and in some cases work space outside of their living unit; some living units are being refitted with computer desks

• Common areas which promote tenant interaction creates solid MF ‘communities’, although too many amenities can be so costly to build and maintain that they eventually adversely affect the bottom line of the owner

• To minimize expenses, some property management companies with multiple clients are using centralized call centers to field enquiries from prospective tenants; the operators of these centers must be very careful to understand each and every property in their portfolio in order to ‘sell’ it to the tenant in a personalized way

• Get the manager away from the computer and insist that he walk the property daily, so he is aware of any problems or prospective problems before the tenants are affected

• Property manager needs to walk a fine line between collecting the rent right on time and working with a tenant who has a fleeting financial problem; it is better to help a tenant stay with you than to evict and then go through the pain of finding and qualifying a new tenant; always better to qualify the new tenant thoroughly before signing the lease; calling or physically knocking on doors to collect past due rents is more effective that a swarm of impersonal emails

• The market is pretty stable today but 2024 should see more addition to supply

• Conserving cash is ‘king’ in this time of rising costs and flat or slightly shrinking rents; lenders can’t kick the can down the road forever with slow pay projects and we may well start seeing more foreclosures

• Charging stations for new builds and for existing projects are under way, since EVs are in our future

Developing, Designing, & Building A Successful Apartment Project Moderator: Brooks Howell- Gensler Panelists: David Adame-Alliance Residential; Hachem Domloj-CIVE; Jim Hill-Kirksey; John Cadenhead-Goree Architects; Ting Qiao-Wan Bridge

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Takeaway: The owner should have a clear vision of the project he wants, but if he does not, he can rely on the collective experience of an established design firm. Simplicity and affordability of maintenance of the property over its life is key to a profitable project, as is the careful selection of mix of floor plans (the fewer the better!).

• Standardize everything you can from MEP to kitchen cabinets to framing specs; make the building as uniform as you can for future minimalized maintenance costs

• The trend now is to fewer amenities on properties, since they cost a lot of money and have to be paid for ultimately by higher rental rates; many amenities are not used by that many tenants anyway; amenities may be dual pools, party rooms (for rent), common computer work spaces, pickle ball courts, and even bowling alleys; but overall developers are ‘dumbing down’ amenities by 1/3 to ½ compared say to fifteen years ago

• Some developers are only having 2 floor plans; the mix is important, but in some cases the property must have one, two, and three bedroom units plus micro-units for entry-level tenants

• Some owners are using modular kitchens which are fully made in factories and slid into the building near completion

• Rainwater retention on tight sites involves underground box culverts which can cost up to $30 per cubic foot; no room on a tight site for a pond; and, due to global warming and its resulting weather patterns, onsite retention requirements have doubled or tripled in recent years

• The empty nester market is getting more robust now and owner experience must be relied upon to create the right amenity and floor plan mix for each location

• The best ‘amenities’ can come from locating your project near existing restaurants and parks and other walkable destinations

• The homes-built-to-rent market is growing and developers need to make sure their projects have rental rates that are lower than mortgage payments! These communities are also paying attention to the need for EV charging units

• New lightweight and modular construction materials are making their way into mid-and high-rise MF designs

• Material costs which peaked due to logistics problems during the pandemic have settled down

“The important thing for amenities is thinking outside the box and creating collaborative environments,” Alford stresses.

To entice workers back to the office, employers are embracing a live-workplay approach. Amber Carter, CEO and managing broker for Seven Fourteen Realty, highlights the importance of a supportive atmosphere and company culture.

“Offering healthy snacks that are available throughout the day, fitness centers/ gym memberships, outdoor walking space or trails have been a few of the top amenities that employers have incorporated,” says Carter. “Offering space for childcare and pet care has also reflected positively in attracting workers back to the office. Most families are having to decide whether to have the expense of childcare or have a parent stay at home if a work from home option isn’t available."

Carter predicts that the office space landscape will not return to prepandemic levels, but rather evolve into a new normal. She anticipates that property owners with larger buildings will explore repurposing options, combining housing, entertainment and office or co-working spaces to meet the changing demands.

As far as Houston office development, Cromwell believes it will slow down due to interest rates and how much space is currently available.

“You’re not going to see much in the way of speculative office development in the near term,” Cromwell says.

Looking ahead, experts in the Houston office market tell REDnews it will continue to evolve with property owners exploring creative repurposing options and emphasizing collaborative work environments. By embracing change and meeting the evolving demands of the workforce, Houston's office market is well-positioned for a successful future.

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