3rd Quarter 2007 | Edited by Kathryn Koepke

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Of the submarkets with more than one property, Bryan/College Station reported the highest Class A occupancy at 98.53%, while the lowest Class A occupancy was found in Spring Branch at 51.97%. The River Oaks submarket led the way in the Class B market at 100%, while the Brookhollow submarket posted the lowest Class B occupancy at 81.50%. The strongest Class C occupancy was posted by the Kingwood/Lake Houston and Downtown submarkets both at 100%, while the Far West submarket posted the weakest at 74.79%. Conroe reported the highest Class D occupancy at 100.00%, with Katy recording the lowest occupancy at 48.00%.

The highest Class A rents were found in the Downtown submarket at $2.084 psf, while the lowest were found in Texas City/Dickinson at $0.861 psf. The River Oaks submarket posted the highest Class B rents at $1.047 psf, while the lowest rents were found in Northline/Aldine at $0.661 psf. In Class C, The Woodlands posted the highest rents at $0.994 psf, while the Tomball submarket reported the lowest rents at $0.602 psf. The Montrose/Memorial Heights submarket reported the highest Class D rents at $1.052 psf, while the lowest rents were found in Champions-West at $0.504 psf.

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Absorption Trends & Inventory

Metro Absorption Overview
For the third quarter in a row, overall quarterly absorption was in the black, as 3,576 units were absorbed. The positive quarterly figure brings annual absorption to 4,442 units. All Classes posted positive quarterly figures, with Class A recording the strongest absorption, with 1,668 units absorbed. Annual Class A absorption stands at 5,173 units. For the third consecutive quarter, Class B absorption was positive, as 1,556 units were absorbed over the quarter. Class B absorption over the past 12 months totals 341 units. Quarterly absorption in the Class C market registered 304 units, while absorption over the past year stands at –1,182 units, the weakest of all classes. The Class D market absorbed 48 units over the quarter, bringing annual absorption to 110 units.

Unit Absorption by Class (Quarterly)

Submarket Performance
Of the 53 Houston submarkets, the Richmond/Rosenberg submarket recorded the strongest absorption over the quarter at 408 units, followed by the Bryan/College Station submarket at 398 units. The weakest figures were found in the Champions- East and Gulf Freeway submarkets, which absorbed -376 and -110 units over the quarter, respectively.

The Richmond/Rosenberg submarket recorded the strongest Class A absorption over the quarter at 364 units, while the weakest was found in Bellarie/ West University at -75 units. The Inner Loop West submarket posted the highest figures in the Class B market, absorbing 381 units, while the Champions- East submarket posted the lowest at -184 units. The highest Class C absorption was found in the Pasadena submarket, which absorbed 241 units, while the weakest absorption was found in the Champions- East submarket at -139 units. The strongest Class D absorption was found in the Spring Branch submarket at 55 units, while the Braeswood submarket posted the weakest at -71 units.

Apartment Inventory
There are a total of 2,615 operating or under-construction projects in the Houston area market (greater than 25 units) with a total of 542,393 units. Approximately 28% of the total units are Class A units, 42% are Class B units, 26% are Class C units, and 4% are Class D units. The chart below displays market inventory by class.

* Class B also includes Affordable Housing developments
** There are additional Unclassified (Class U) projects

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Economic Fundamentals

Job Growth
The civilian labor force unemployment rate in the ten-county Houston MSA was flat at 4.1%, while the total number of nonagricultural wage and salary jobs increased to 2,519,000 in August 2007, according to the Texas Workforce Commission. This month’s total is 64,400 jobs more than at this time last year. Of the nonagricultural employers, Mining gained 6,800 jobs over the previous 12 months; Trade, Transportation, & Utilities gained 4,400 jobs; Education & Health Services is up 9,200 jobs; Construction added 11,100 jobs; Government added 2,000 jobs; Manufacturing lost 300 jobs; Other Services gained 5,400 jobs; and Leisure and Hospitality added 9,000 jobs; and the Information sector lost 100 jobs. The largest monthly gain was in the Professional & Business Services sector with 14,400 jobs.

Interest Rates
The yield on the 10-year Treasury note fell to 4.58% in September 2007, down 0.05 points from its 4.63% yield one year ago.

The 30-year fixed-rate mortgage (FRM) averaged 56.38% in September 2007. One year ago, the 30-year FRM was at 6.40%. The average for the 15-year FRM in September was 6.05%, down 0.03 points from a year ago.

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Houston Market Map

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Methodology

Data Collection
Our in-house research team continuously updates over 100 fields of data for nearly 6,000 apartment complexes in our database. We update at least 90% of properties on a monthly basis to generate accurate market trend reports on rents, concessions, occupancy, etc. Our monthly surveys also update other property-specific data such as fees, policies, management, and owner information. On a less-frequent basis we update amenities, schools, and other data fields that change rarely. We perform current and historical data audit after we close each month's survey to identify any data inconsistencies or incorrectly keyed values.

Research
We monitor various news media, press releases, marketing materials, web-sites, CAD records, permit issuance, and other sources to capture new construction, planned projects, financing, and sales. Our researchers conduct phone interviews with relevant developers, brokers, or lenders to gather information on new construction and sales. We add properties to our database on a regular basis to ensure we offer the most up-to-date and complete apartment database.

Market Coverage
Our online apartment database covers all four major Texas metro markets - Austin, Dallas-Fort Worth, Houston, and San Antonio. The Austin market includes Caldwell, Hays, Travis, Bastrop, and Williamson counties. The DFW market covers Dallas, Tarrant, Wise, Denton, Collin, Hunt, Rockwall, Kaufman, Ellis, Johnson, Parker, and Erath counties. The Houston market includes Harris, Montgomery, Fort Bed, Brazoria, and Galveston counties (Brazos county is also included in the database but excluded from the trend reports). San Antonio includes Bexar, Comal, Guadalupe, Kendall, and Kerr counties.

We subdivide each market into submarkets (see map above): Austin has 23 submarkets, DFW has 50 submarkets, Houston has 53 submarkets, and San Antonio has 26 submarkets. The submarkets are based on neighborhood-style areas with defining boundaries such as major roads and other factors that establish a neighborhood. This approach allows the user to view distinct areas of properties that have evolved into their own sections of town and can be identified together.

Glossary
Absorption = Change of Occupied Units, including new construction. Absorption is a proxy for demand.

Occupancy = Percentage of physically occupied units on property.

Pre-leased = Net of percentage of units that have been pre-leased but not yet occupied and units on notice to be vacated.

Rents = Market rents (excluding concessions).

Class = Properties are classified as A, B, C, D, or Unclassified (U) based on various factors, such as age, location, amenities, curb appeal, overall condition, rents, etc. Class A properties are generally less than 10 years old, have excellent amenities, prime location, and great appeal, thus they tend to have the highest rents. Older properties built in early 1900s that were converted from warehouses or office buildings, or older apartment projects that have had major renovations may also be classified as A. Class B properties are generally 10 to 20 years old, have good locations, good level of amenities, are somewhat less appealing than Class A projects, and are in overall good condition. New affordable projects are also classified as B. Class C projects are usually 20 to 30 years old, have few amenities, are in poor locations, and are not well maintained. Class D projects are generally more than 30 years old, in poor condition, have no or limited amenities, are in poor locations, and have poor curb appeal. They tend to have the lowest rents per unit (although per-square-foot rents may be high since the units are usually small). Unclassified or Class U projects are senior housing, student housing, or other properties that have unusual lease terms, include meals with the rent, or other services, so their rents and occupancies are not representative of the actual market. We exclude these from our statistical reports as they skew the averages for the other classes.

Reporting
Occupancy, Rent, and Absorption trend data is based on Operating, Under-construction, and Under-renovation projects, Classes A, B, C, and D (excluding Class U).

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