Class-B Picking Up While Houston Multifamily Lags

Class-B properties are a bright spot in Houston’s rather flaccid multifamily real estate market. The buildings tend to be smaller and older, but for investors they aren’t as much of a risk to build or acquire, and for consumers, they don’t cost as much in rent.

Big Red Dog Engineering president Bob Brown has developed several Class-B projects and says business is gaining momentum; he has three projects that have either broken ground or are in permitting.  

While luxury has slowed, lending has also slowed significantly, and there just isn’t funding for inventory. But individuals who own property in less desirable areas are on the cusp of a golden age.

The built-in owner equity is very attractive, Bob says. Most of these properties were snapped up a long time ago for not very much money, and now those owner/operators are ready to react to the market. The only thing that adds value to land, Bob says, is time or money. And they’ve invested the time. 

The traditional Class-B suburban garden is a classic for a reason. It continues to be attractive for workforce individuals and small families. The tenants are definitely not the Millennials in the urban core, Bob says. They’re mostly families; 75% to 85% of the units are small two-bedrooms.

JLL’s managing director of multifamily investment sales Chip Nash agrees that Class-B is highly desirable. Rents are holding up, and occupancy is way up—93.1%. Potential tenants flock to Class-B units during downturns, Chip says, because they aren’t feeling very secure. But it’s no fad spurred on by low oil prices. Class-B has always been occupied by a very large segment of the population and always will be.

Class-B is in demand all over: in the suburbs, but also older properties in the urban core.