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Q3 2017 Texas Multifamily Update

Summary of Costar data and analysis of Multifamily market with focus on Texas.

National

Occupancy=93%; Forecasted to increase to 94% over next few years. Unemployment at 4.4%.

Rent Growth=2.5%; (Avg. rent=$1,379) continues to slow as supply has increased. Rents are falling in energy reliant- Houston and Oklahoma City. Hurricane Harvey will likely change the dynamics of Houston’s multifamily market by reducing supply and increasing demand from residents unable to return to their homes.

Supply=Last 12 months Delivery=236K; Net Absorption=129K; 25% of units have been in urban areas with extremely high rents.

Sales= Deal Volume in first half of 2017 was $65B compared first half of 2016 of $80B. Weaker rent growth and higher interest rates have made deals more difficult to underwrite. Higher interest rates have undermined the attractive relative value offered by commercial real estate.

Risks= High-end supply, homeownership (increased by 1% in 2016 from 63% to 64%), and Impacting Class A; Shortage of housing is building the case for workforce housing (B &C).

Macro force: Immigration has accounted for 33% of population growth since 1999, but Trump administration could slow in-migration. Millennial generation is aging into their 30s, which is traditionally when family buy their first homes.

Case for Class B: Relatively high rents, high demand, steady rent growth, low volatility, low homeownership risk- ideal defensive asset as 3rd longest economic expansion. Looking for 20% discount to current rents to average rent in metro.

San Antonio

3 industries providing stability: travel, military, and healthcare.

Occupancy=90%, lower than historical average due to high supply deliveries in 15, 16, 17 outpace absorption. Small leap to homeownership from Class A due to low median home prices. Occupancies expect to continue to decline for next 2 years.

Rent Growth=0.8%; (Avg. Rent=$956). Not expected to get above 2% in the near term.

Supply=Last 12 months Delivery=4.8K; Net Absorption=3.3K; Developers have added 20% to inventory since 2010. 164K units total in MSA. 8K units currently under construction (downtown and NW side).

Sales= Pricing is 21% above previous peak in 2007. A assets trading at 5% and B assets trading at 6% cap rates. C assets at 7%.

Austin

Occupancy=92.0%, metro’s long term average expected to stay flat over next couple years

Rent Growth=0.0%; (Avg rent=$1,198) Most employees moving to Austin are coming from more expensive metros, but new supply has reduced rent growth.

Supply=Last 12 months Delivery=6.4K; Net Absorption=5.0K; since 2012, 36K units (23% of inventory). 1 in 4 units have been built in this cycle. 194K total inventory. 11K are under construction. Development shifting to suburbs vs. early in the cycle was concentrated downtown. Developers have switched to building condos at $700/sf on average due to California buyers moving to Austin and they are selling. Is this the beginning of the end?

Sales= Never recorded more than $700MM in apt sales prior to 2012, but has surpassed that the last 5 years ($2B per year in 2014-2016). Investors priced out of core markets started looking at Austin’s demographics. All cap rates for A, B, and C product have compressed between 5-6%. Average price per unit at $140K/unit.

Houston

Occupancy=90.5%, Impact of Hurricane Harvey improved fundamentals in one month’s time. Displaced residents looked to both single family and multifamily units. Occupancy increased 1% in one month.

Rent Growth=1.6%; (Avg rent=$1,068). Displaced resident due to Hurricane Harvey resulted in immediate rent growth, up 2% in one month. Class A saw even a larger bump. Concessions were cut in half at newer properties after the storm.

Supply=Last 12 months Delivery=18.3K; Net Absorption=20.1K; Last 18 months 27K units have come online and 45K units came online 2012-2015. 15K expected to be added in 2017. Drop to 5k in 2018 and almost none in 2019. Total inventory of 580K units.

Sales= Cap rates of A=6%; B=7%; C=8%; Mostly local/regional buyers in the last 2 years as institutional capital has left.

People are still moving to Houston due to climate, low cost of living, affordable home prices, and immigrant migration. (2nd only to DFW in 2016 with 125,000 residents added).

DFW

Occupancy=93.0%, Historical average is 92%.

Rent Growth=3.0%; (Avg rent=$1,097) Rent growth has gone flat to negative in higher end submarkets like Uptown and West Dallas due to heavy supply. Mid-Cities and older Dallas suburbs (Garland, Richardson, Mesquite) continue to outperform- 1980s B class properties due to lack of supply and relative affordability keep occupancies and rent growth high.

Supply=Last 12 months Delivery=18K; Net Absorption=14K. 660K total inventory. 20K in 2017 and 25k in 2018 in deliveries. Most in 3 mile radius around downtown and in North Dallas (Plano, Frisco, Allen, McKinney). 100K in new jobs over last 12 months. Home prices growing near double digits keeping some Class A renters jumping into starter homes as single family homes are being built at half the rate as previous cycle.

Sales= A at 4.5-5%, B at 6%, C at 6.5-7%. A are trading at $125K/unit and up. B are trading in $80k-$100k/unit and C at $55-70K/unit.

Corporate relocations driving thousands of jobs in northern suburbs along DNT.

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