Our current asset allocation is heavily concentrated in residential rental real estate.  We are over weighted in this particular sector because asset values are severely depressed relative to investment returns. Restricted lending, negative market sentiment, and  depressed homeowner demand has created the perfect investment opportunity for the next 24-36 months.

The asset class that we have determined to be extremely undervalued, with great growth potential, produces cash flow, and has favorable local economic conditions is residential real estate in the Houston metropolitan area.  We are currently in a perfect storm of circumstances that make this asset class the most attractive for our investment objectives.  Why do we say that?  Our analysis has determined that:

Houston area employment is increasing

According to Marcus and Millichap a real estate services firm;  Houston employers are on track to add an additional 65,000 jobs in 2011 a 2.6% increase from 2010 when 45,900 new jobs were created. Residential real estate’s rental value is directly related to an areas job growth.  Texas in general and Houston in particular is projected to continue to grow jobs and currently has an unemployment rate at least 1% below the national average.  With the current price of oil hovering around $100 a barrel this will continue to buoy Houston’s job market, thereby leading to increased job creation and continued net increase in population growth through migration from states with higher unemployment.

Tightened lending standards secondary to the sub-prime mortgage crisis

This has led to a decline in the number of people who can qualify to purchase a home.  Couple this with the fact that tens of thousands of local resident have lost their homes to foreclosure but will still need a place to live this creates increased demand in the rental market.  Because of the lack of new home buyers there has also been:

A marked decrease in both single and multifamily housing construction

Developers in the Houston market will only complete 1200 units in multifamily rental housing this year, down from 7500 units in 2010 and clearly below the 9000 unit annual average over the past 10 years. This creates a situation where rental inventory is declining as jobs growth is growing and the population is also climbing.

 

Demand for single family rental homes has increased 31% from March 2010, while sales of single family homes have decreased.  This confirms what we believe to be the beginning of a long term trend nationwide.  We may have seen the peak of home ownership rates in the United States, but this does not mean that people and families do not want to live in single family rental real estate, it just means that they may no longer want to OWN the real estate.  This has created one of the biggest bull markets in residential rental real estate (both single and multi-family) since the savings and loan crisis in the early 1990’s.  What makes this time especially exciting is that once these assets are purchased they will have a locked in investment basis at very low levels.  Because of this increased demand, rental real estate is projected to have double digit rental increases in the multifamily space and we fully expect this in single family housing as well.  We have already begun to see increased rental rates in our own single family housing portfolio.