4th Quarter 2007 | Edited by Kathryn Koepke

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Occupancy & Rent Trends

Metro Occupancy Overview
The Houston apartment market experienced a quarterly decrease in occupancy in all classes. At 88.17%, overall occupancy is down 0.69 points over the quarter and down 0.45 points over the year. A loss of 2.24 points over the quarter brings Class A occupancy to 88.61%, the second strongest of all classes. With the loss, Class A occupancy remains 2.16 points below last year’s level. Class B posted the lowest quarterly decrease in occupancy, falling 0.18 points to 89.78%. Class B occupancy has risen 0.32 points over the last year, the only annual increase of all classes. Class C posted a decrease in occupancy of 0.21 points to 85.81%. Class C occupancy is down 0.43 points over the last year. Class D recorded the weakest occupancy of all classes at 84.27%. Class D occupancy was down 0.67 points over the quarter, but only down 0.05 points over the year.

Occupancy

Quarter	Class A	Class B	Class C	Class D	Overall
4Q/06	90.77%	89.46%	86.24%	84.32%	88.62%
3Q/07	90.85%	89.96%	86.02%	84.94%	88.86%
4Q/07	88.61%	89.78%	85.81%	84.27%	88.17%

Metro Rent Overview
Overall Houston-area rental rates gained $0.003 per square foot (psf) over the quarter, and are up $0.015 psf over the year to $0.848 psf. The Class A market posted a quarterly rental increase, rising $0.002 psf to $1.122 psf. With the quarterly gain, Class A rents are $0.022 psf above last year’s level. Class B rents rose $0.002 psf also over the quarter to $0.821 psf, and have gained $0.009 psf over the year. Rents in the Class C market, at $0.698 psf, posted a quarterly increase of $0.002 psf and an annual increase of $0.010 psf. Class D rents increased $0.001 psf over the quarter, reaching $0.607 psf. Class D rents are up $0.012 psf over the last 12 months.

Rental Rates

SubmarketPerformance
Of the 53 Houston submarkets, overall occupancy was highest in the Bryan/College Station submarket at 95.21%, while the lowest occupancy was found in the Tomball submarket at 73.45%. The Downtown submarket posted the highest rental rates at $1.992 psf, while the lowest rents were found in the Sharpstown/Westwood submarket at $0.684 psf.

Of the submarkets with more than one property, Bryan/College Station reported the highest Class A occupancy at 98.72%, while the lowest Class A occupancy was found in Tomball at 48.86%. The Montrose/Memorial Heights submarket led the way in the Class B market at 100%, while the Brookhollow submarket posted the lowest Class B occupancy at 80.58%. 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 75.67%. Conroe reported the highest Class D occupancy at 100.00%, with Alief recording the lowest occupancy at 48.56%.

The highest Class A rents were found in the Downtown submarket at $2.070 psf, while the lowest were found in Texas City/Dickinson at $0.859 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 $0.666 psf. In Class C, The Woodlands posted the highest rents at $0.994 psf, while the Tomball submarket reported the lowest rents at $0.624 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 first time since the fourth quarter 2006, overall quarterly absorption was in the red, as -1,256 units were absorbed. The negative quarterly figure brings annual absorption to 7,516 units. All Classes posted negative quarterly figures except Class A. Class A recorded the strongest absorption, with 211 units absorbed. Annual Class A absorption stands at 5,316 units. For the first time in four quarters, Class B absorption was negative, as -993 units were absorbed over the quarter. Class B absorption over the past 12 months totals 1,350 units. Quarterly absorption in the Class C market registered -339 units, while absorption over the past year stands at 869 units. The Class D market absorbed -135 units over the quarter, bringing annual absorption to -19 units, the weakest of all classes.


Unit Absorption by Class (Quarterly)

12-Month Ending	Class A	Class B	Class C	Class D	Overall
4Q/05	10,379	11,394	5,229	263	27,265
4Q/06	1,026	-4,579	-6,001	-78	-9,632
4Q/07	5,316	1,350	869	-19	7,516

Submarket Performance
Of the 53 Houston submarkets, the Far West submarket recorded the strongest absorption over the quarter at 145 units, followed by the Inwood submarket at 125 units. The weakest figures were found in the Inner Loop West and Pasadena submarkets, which absorbed -488 and -218 units over the quarter, respectively.

The Greenway Plaza submarket recorded the strongest Class A absorption over the quarter at 104 units, while the weakest was found in Steeplechase at -94 units. The Far West submarket posted the highest figures in the Class B market, absorbing 173 units, while the Inner Loop West submarket posted the lowest at -589 units. The highest Class C absorption was found in the Sharpstown/Westwood submarket, which absorbed 97 units, while the weakest absorption was found in the Deer Park submarket at -232 units. The strongest Class D absorption was found in the Northshore/Woodforest submarket at 73 units, while the Pasadena submarket posted the weakest at -93 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.

Operating Projects Units Class A 519 138,197 Class B 1,075 226,423 Class C 810 140,738 Class D 158 21,893 TOTAL 2,562 527,251 Under Cons. Projects Units Class A 73 21,267 Class B * 20 3,347 TOTAL** 93 24,614

* 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 4.0%, while the total number of nonagricultural wage and salary jobs increased to 2,557,700 in November 2007, according to the Texas Workforce Commission. This month’s total is 58,800 jobs more than at this time last year. Of the nonagricultural employers, Construction added 11,300 jobs; Education & Health Services is up 10,100 jobs; Mining gained 7,000 jobs over the previous 12 months; Leisure and Hospitality added 5,800 jobs; Government added 5,700 jobs; Other Services gained 2,800 jobs; Manufacturing is at the same level as last year; Trade, Transportation, & Utilities lost 300 jobs; and the Information sector lost 500 jobs. The largest monthly gain was in the Trade, Transportation, & Utilities sector with 5,600 jobs.

Interest Rates
The yield on the 10-year Treasury note fell to 4.03% in December2007 up 0.68 points from its 4.71% yield
one year ago.

The 30-year fixed-rate mortgage (FRM) averaged 6.10% in December 2007. One year ago, the 30-year FRM was at 6.14%. The average for the 15-year FRM in December was 5.75%, down 0.13 points from a year ago.

The Prime Rate in December was reported in the Wall Street
Journal at 7.25%, the same level 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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