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Multifamily Value in Secondary Markets Like Houston

January 19, 2020

Today I read a great article from one of my favorite real estate news sources, NREI, about the general state of the multifamily market as well as where the most value can be found in the US. It is widely acknowledged that new supply has been hitting the multifamily space hard over the last few years, negatively impacting the supply/demand balance. However, taking a closer look reveals that new supply is really concentrated in the largest primary markets such as San Francisco, Los Angeles, D.C., and New York. Furthermore, the article disparagingly adds that these major cities experiencing a glut of apartments also are all projected to underperform the national average in job growth. In contrast, secondary markets such as Houston boast robust job growth and a more favorable supply/demand balance. Additionally, assets in secondary markets trade at a discount to comparable assets in primary markets. This gives investors a higher current income and more spread between debt payments (debt service coverage ratio). Current market conditions seem to be mis-pricing primary markets as there are more risks in primary markets especially for luxury and class A assets. In our opinion, class B and C multifamily properties that trade well below their replacement costs in secondary markets offer a very favorable risk-adjusted return.

The article also opines the secular shifts in demand as well as demographic changes that bode well for multifamily investments in the long run: