Houston Area Still Attractive Market for LIHTC Development
By Caitlin Jones & A. J. Johnson
6 min read
Tax Credit Advisor, February 2009: While most of the nation is mired in recession, unemployment, and foreclosures, Houston’s economy continues to surge forward.
“We have been anticipating seeing the effects of the national recession, but we haven’t seen them yet,” said Patrick Jankowski, vice president of research for the Greater Houston Partnership, a business development organization. “We have seen a few layoffs here and there but the most recent data we have received from the state employment bureau is still showing pretty strong job growth.”
Buoyant Economy
Known as the “Energy Capital of the World,” the Houston metro area features a major presence by five of the six huge energy companies, including ConcocoPhillips, ExxonMobil, Shell Oil, British Petroleum, and Chevron. Additionally, Marathon Oil, Apache Corporation, and Citgo are also headquartered locally.
Houston is the most populous city in Texas and the fourth largest city in the U.S. with 2.2 million residents. The city’s metro area, with a population of 5.6 million, is the nation’s sixth largest metropolitan area. Houston is also the site of NASA’s Johnson Space Center and the Texas Medical Center, the world’s largest concentration of healthcare and research institutions.
Houston has seen rapid population growth since 1950 other than for a period in the 1980s. Between 2000 and 2007, the city’s population expanded from 1,953,631 to 2,208,180.
According to a December 2008 research report by Columbus, OH-based Red Capital Research, “overall employment figures for Houston are among the best in the nation.” Red Capital said a net 56,200 new jobs were created in Houston in the third quarter of 2008 – a 2% growth from a year earlier. Red Capital projects 2.3% job growth in 2009.
Multifamily, LIHTC Trends
Slowing new single-family home construction has helped firm up apartment demand, according to Red Capital, evidenced by a positive net absorption of 1,999 apartment units in the third quarter of 2008. Despite the national housing slump, the National Association of Realtors reported the median homes sales price for the Houston area increased by 2.8% to $160,200 in the third quarter from a year earlier. The median condo sales price surged by 8.1%.
According to the Red Capital report, asking and effective rents for multifamily units generally increased by 3.8% and 3.7%, respectively, in the third quarter from a year earlier. However, annual effective rent growth is expected to slow to 1.8% in 2009.
Donald Sampley, Assistant Director of Housing and Community Development, for the City of Houston, reports “hefty demand” by investors for 9% low-income housing tax credits but “weak demand” for 4% credits. He noted Houston will receive around $25 million in housing credits in 2009, an increase due in part to increased per capita authority nationally and because of extra credits due to Hurricane Ike.
“There is still a huge demand for tax credit housing in Houston,” says Bob Coe, appraiser and market analyst for Houston-based O’Connor & Associates. “Certain areas have a lot of supply but the over-all occupancy rate is phenomenally high. This certainly suggests pent-up demand.”
In addition to strong job growth, another apparent reason for healthy demand is a rather substantial gap between typical market-rate rents and low-income housing tax credit (LIHTC) rents. According to data from the U.S. Department of Housing and Urban Development (HUD), the City of Houston, and Red Capital Research, the average monthly market-rate rent for a one-bedroom apartment in the Houston area is $725. According to the City of Houston, the typical LIHTC monthly rent for families earning 60% of the area median income (AMI) is $600. This result is a rent gap of 17%. Sampley said some tax credit properties earmark some of their units for households at or below 50% of AMI, producing even larger gaps.
Coe said the competitive nature of securing 9% tax credits has caused sponsors of some proposed projects to promise to rent some units at levels affordable to tenants at or below 30% of AMI. “This create an even more significant gap with market rate and is a major cause of the tremendous demand for tax credit rentals,” he noted.
Impact of Shocks
Houston continues as an economic dynamo despite three major external shocks to the local economy in the last three years. These are: (1) Hurricane Katrina, which caused a major influx in population as displaced New Orleans residents sought refuge in Houston; (2) last summer’s Hurricane Ike; and (3) the recent sharp decline in oil prices, which has chilled Houston’s economy, which counts roughly one-third of all jobs as energy-related.
As for the impact of these three external shocks on the local economy, the Greater Houston Partnership’s Jankowski believes all three are being adequately addressed.
“The Katrina population influx is old news,” he says. “Those that were going back to New Orleans have gone back. The rest are staying in Houston and are making a life for themselves here,” he said.
As for Hurricane Ike, Jankowski points out that Houston didn’t suffer major devastation everywhere but rather only pockets. Sampley figures maybe 10,000 multifamily housing units suffered some degree of damage from Hurricane Ike, and many are still being occupied.
As for the recent oil industry problems, Jankowski notes the industry is reluctant to lay off people that it might want to re-hire when the market turns. “The industry is mindful of what happened in the Ô80s,” he said, “when they laid off people and needed to hire them back when things picked up, and those people were not available.”
Local Market Trends
Sampley says a major recent trend in Houston has been a movement away from developing LIHTC family housing units in favor of LIHTC housing units for the elderly. He said two such major projects were completed in 2008 and another two will come online in 2009. In addition, two new LIHTC single-room occupancy (SRO) projects have been built and several more are under construction. Sampley says there is major interest in new construction but little appetite for rehabilitation projects.
Robbeye Meyer, Director of Multifamily Programs for the Austin-based Texas Department of Housing and Community Affairs, believes the administration of Houston Mayor William “Bill” White is responsible for the city’s aggressive and effective low-income housing activities.
Mayor White’s new “Houston Hope” initiative is a comprehensive housing program that includes development of multi-bedroom LIHTC apartments for families.
Even though corporate profits have been hurt by the recession, Coe maintains there continues to be an appetite for 9% credits by corporate investors. “There are still corporations and very wealthy individuals that seek credits, but buyers are far more selective.” Meyer adds “financial institutions continue to be in the market for tax credits to satisfy CRA requirements.”
Unlike many cities, Houston with its lack of zoning is famous for its urban sprawl. Rather than create suburbs and submarkets, Houston has continued to spread out. The Outer Loop has a radius of approximately 20 miles from the city’s downtown; the Inner Loop, a 10-mile radius from downtown. “There really isn’t any area [in the Houston area] that is not desirable for LIHTC projects,” says Coe. “It’s all driven on land availability and the price of the dirt.”
– James. T. Berger
