Strong Fundamentals, Opportunity Zone Laws Define Houston Multifamily Market
Houston continues its trajectory as an exemplary market with strong multifamily fundamentals that continue to attract large-scale investment nationwide. The positive trends of strong job growth and sustained apartment demand are forecast to hold thanks to a confluence of factors.
To better understand the dynamics shaping Houston’s multifamily market, it is important to look closely at several major drivers, including residual demand from Hurricane Harvey and record employment growth, as well as the impact of rising interest rates and incentives introduced by the Opportunity Zone legislation.
More than a year since Hurricane Harvey made landfall, Houston’s multifamily market continues to rebound. Overall occupancy has risen 180 basis points year over year to its current rate of 90 percent. Residents displaced by Harvey’s flooding, particularly in hard-hit areas like the Energy Corridor, contributed to the increased demand for apartments.
In the third quarter of 2018 alone, absorption greatly outpaced deliveries, with almost 9,200 units newly occupied and less than 6,000 units delivered. As developers taper new apartment deliveries, we expect demand to continue to outpace deliveries for the foreseeable future.
Rents advanced 3 percent between October of 2017 and 2018 — almost twice the rate of growth of the previous 12 months. As of October this year, average effective rent stood at $1,030 per month.
Record Employment Growth
Robust job growth underpins Houston apartment demand. The Houston economy created a record number of jobs between September 2017 and 2018 — nearly 129,000 jobs, to be exact, according to the U.S. Labor Department.
Higher oil prices boosted hiring at many Houston area energy companies, and for the first time this year, oil barrels exported out of the Houston-Galveston port region exceeded imports.
Houston’s economy continues to diversify, adding jobs in non-energy related sectors as well. Total nonfarm employment expanded 3.7 percent annually through August 2018 — more than double the 1.1 percent growth during the preceding year.
As residents and builders recovered from the effects of Hurricane Harvey, the construction industry led employment growth, with approximately 29,100 new construction jobs created. The natural resources and mining sector was another blue-collar field with employment gains. Hiring was also robust among professional and business services companies.
With these strong fundamentals, investors continue to be bullish on Houston’s multifamily market. However, transaction volume has been tempered by a limited supply of available multifamily product, as well as by rising interest rates. Property pricing is at a premium, and unless prices come down — or buyers are willing to accept lower yield thresholds — trading may remain constrained.
One caveat to this trend is the interest generated from the federal government’s Opportunity Zone program: a piece of last year’s tax reform legislation that encourages developers to invest in economically distressed areas by offering certain capital gains tax deferments and reductions.
There are more than 100 designated Opportunity Zones in Harris County, including parts of downtown Houston. The Opportunity Zone program has generated tremendous demand for desirable tracts of land in Houston’s downtown and midtown submarkets, resulting in a high degree of activity and multiple offers, as well as many off-market transactions.
In summary, Houston’s multifamily market is enjoying strong fundamentals of job growth and constrained apartment supply. Premium property pricing and rising interest rates are putting pressure on yields and making it harder to push some deals through, but the tax benefits offered by the Opportunity Zone legislation provides a creative investment vehicle that will continue to drive investor appetite in Houston.
— By Ryan Epstein, senior managing director of investment sales, and Tucker Knight, senior managing director of mortgage banking, Berkadia. This article first appeared in the November 2018 issue of Texas Real Estate Business magazine.