Mid-rises and small multi-family in the Inner Loop

[Dave Fagundes]

I've looked at a lot of smaller multi-family properties in the Inner Loop as buy/hold options (by smaller, I mean from a duplex to a six-plex). As I drive around the area to look at them, I'm struck by the quantity of mid-rises that continue to go up in Midtown, Montrose, Rice Village--basically, everywhere it seems. 

This got me thinking about what the expansion of mid-rises means for the market in smaller multifamily rentals. In particular, I wonder if the ongoing increased supply of mid-rise housing will suppress demand for traditional multifamily rentals from duplexes to quadplexes. Renting in a mid-rise gets you a newer place with modern amenities, while most of the multifamily housing stock I've seen around the Inner Loop is older construction, some without parking or HVAC.

For one example, I was just in the Montrose area north of Richmond and west of the 59 spur, where there are a lot of older small multifamily properties renting rooms. I know this because there were at least 5-6 for lease signs in just the several blocks I drove around, suggesting pretty high vacancy rates. And along the southern strip of this area, at Richmond & 59 there's a relatively new mid-rise advertising 1/2 BR apartments (I looked at this place had quite a few vacancies as well for what that's worth).

Of course, if there is an oversupply problem, it would cash out in pricing, and the rough numbers I looked at bore this out. The rental prices in the traditional smaller multi families in this area seemed to be around $1/sqft, while the nearby mid-rise was charging $1.7/sqft for similar places.  

So the big question is: Does the rise of the mid-rise in the Inner Loop spell decline for the market in rentals of units in smaller multi-family? Or are there other factors that cut back against this trend? Thanks for any thoughts on this.

[Dave Chapa]

@Dave Fagundes 

"So the big question is: Does the rise of the mid-rise in the Inner Loop spell decline for the market in rentals of units in smaller multi-family? Or are there other factors that cut back against this trend? Thanks for any thoughts on this."

Short answer, No.

Mid to high rises are a different class of properties compared to small older multi families. Classes D to B- in the small units because of age, condition, and location. While the mid to high rises are class B to A. Different demographics as @Kyle Bryant stated.

Gentrification can also plays a role in these small milt-family properties.

Vacancy rate can vary because of quality, management issues, hurricane, economical turn down, high crime, bad schools, etc...

So, I would look for class D to C- property in a solid class C+ to B area and not worry about the mid to high-rises. I would look at that as opportunity especially because of the type of property you are looking to buy.

My apartment, for example, was a class D- property in a class B area. After a complete renovation and turnover, it's a class C+/B- property and, we are above market in rents per S/F while maintaining high occupancy. In Katy there has been a huge influx of new apartments over the years, to the point of being overbuilt. however, we are still maintaining a high occupancy rate because of the class differences.