2022 REDnews Houston Apartment Summit

BY RAY HANKAMER

Takeaway: The sector is booming with record absorption, new construction and a new sub-sector, BTR. Debt and equity are chasing deals with interest in Houston and other fast-growing cities.

Apartment Market Update

Moderator: Stacy Hunt, Greystar Panelists: Bruce McClenny, Apartment Data Services; Feras Moussa, Disrupt Equity; Matthew Bronstein, BHW Real Estate Partners; Ryan Nunes, Life Changing Capital

• Texas returning to equilibrium between supply and absorption following COVID-19 • Lots of job growth; Texas replaced all jobs lost during COVID-19 • Slowdown of construction in 2022 due to lack of materials; a housing shortage might arise if demand remains strong • Demand for Class-B and Class-C units • With 40% still working from home, residents want in-apartment offices • New unit designs include more built-ins and cabinets • Suburbs are seeing 60% of new development • Equity providers are competing for deals; a 13 IRR over a 10-year is still big demand • Creating deals is difficult, but possible with 65–75% leverage; developers are building in contingencies because of fluctuating intangibles • Rent growth will continue in 2022 • Broker relationships are key; it’s ideal to be the first to see an ‘off market’ opportunity • Rising taxes are unpredictable and eat into returns; casualty losses have increased insurance premiums • Investors are doubling down on multifamily • In 2021, Houston absorbed 38,000 units with an area job growth of 152,000 • Turnover of existing tenants has slowed; this means big savings on operating costs • Developers in zoned communities are facing resistance from city planners

Capital Markets Update

Moderator: Gill Dolan, Greystone Panelists: Brock Trautenhahn, Texas Capital Bank; Clint Duncan, CBRE; J.C. Clemens, Flagship Capital Partners; Justin Boyar, CoStar; Ricardo Rivas, Allied Orion Group

• Capital is plentiful and development costs are increasing along with rents; IT is seeking multifamily deals • Debt funds are driving interest rates into in the 3.25–3.5% range; cap rates are the same for completed value-add deals and new construction sales; interest rates are the largest operating expense for owners and locking in floating rates is wise

• It is difficult for developers to deliver product on time and on budget • Houston’s absorption is double any time in history • Banks are expanding their multifamily lending; suburban walk-up projects are preferred • Markets like Sugar Land and Pearland are in demand and most secure for investors • Inflation is causing problems; some expect two-point rise in interest rates Ryan Nunes, Life Changing Capital; Matthew Bronstein, BHW Real Estate Partners; Bruce McClenny, Apartment Data Services; Feras Moussa, Disrupt Equity and Stacy Hunt Greystar.

Build-To-Rent (BTR)

Moderator: Reid Wilson, Wilson Cribbs + Goren Panelists: John Bellian, E Studio Group; Scott Davis, Location Strategy, LLC; Ting Qiao, Wan Bridge

• Many former multifamily renters are choosing to be residents in small purposebuild single family homes • City planners who are hesitant to permit standard multifamily are more motivated to approve rental single-family homes; the sector is very small but is growing rapidly • It offers ‘feel’ of home ownership to those who have been priced out of owning; starter home prices have soared from $250,000 to $375,000 • Most investors are institutional • Building codes for BTR developers are less stringent than those required to build regular multifamily developments • BTR communities offer Class-A level maintenance and amenities • Units run from 700–2000 square feet; developers are experimenting to find balance between size and rental rates

Developing, Designing, and Building A Successful Apartment Project

Moderator: John Cadenhead, Goree Architects Panelists: Bryan Tran, BHW Capital; Jim Hill, Kirksey Architecture; Kellie Mayfield, Mayfield & Ragni Studio; Swapnil Agarwal, Nitya Capital

• There is growth potential in Greater Houston, and most will happen on the periphery • Tenants prefer smaller units with more amenities • Units will feature studios with living done in the project’s common spaces • Units will attract empty nesters who do not want to pay for an extra bedroom and millennials looking for a social experience; tenants want a community • Class-A will have ‘community directors’ who organize events and create connectivity between tenants • Each project needs to be unique; developers need to research their markets • Exterior design should be tasteful with the aim of establishing a brand • Natural landscaping should be maintained