Tumbling rents, landlord concessions and weakening levels of absorption have defined Houston’s multifamily market for much of the duration of the oil bust that spanned from late 2014 to mid-2016, but the multifamily market is now on the mend, says a third-party multifamily data analyst.
Bruce McClenny, president of Apartment Data Services, which tracks the vital signs of nearly 3,000 multifamily properties nationwide, believes Houston’s multifamily market is about nine months past the rock-bottom point.
As the opening speaker at the Interface Houston Multifamily Conference before 170 industry professionals on Tuesday, March 28, McLenny explained why he believes that a turnaround, albeit a slow one, has already begun.
“The first six months of 2016 was the bottom, economically,” McLenny said during the conference, which was held March 28 at the Royal Sonesta Hotel in Houston’s Galleria neighborhood. “Things have gotten better from that moment on. There’s absorption out there. Through the first two months of this year, we had more than 1,900 units absorbed.”
In 2016, submarkets on the city’s south and east sides — Pearland West, Baytown, Pasadena, Galveston — fared markedly better than submarkets in other parts of town, according to McLenny. All four of these submarkets attained positive rent growth, with only Pearland West clocking in less than 4 percent year over year.
Negative rent growth in 2016 was more pronounced in submarkets on the west side — Katy, Medical Center, The Energy Corridor — where there are more units under construction.
The biggest hit to Houston occurred between 2015 and 2016, when annual net absorption across the greater Houston area dropped from 13,296 units to 4,552 units. Furthermore, rent growth shrunk from 4.8 percent to -0.1 percent during this period, a trend stemming from the poor performance of Class A properties. Escalated construction of these properties coincided with the oil slide, which compounded their negative impact on rents, with the absolute nadir coming early last year.
“2016 became a year of flat, mildly negative rent growth, led by Class As and all their new construction,” he said. “We just didn’t have the absorption for it.”
While McLenny anticipates a continued slide in average rents, other positive factors should limit the severity of the problem, he said. The Greater Houston Partnership is forecasting 37 percent job growth year over year, and a positive net absorption of 2,448 units.
McLenny also points to the Energy Information Agency’s projected median oil price of $53 per barrel for 2017, as well as a growing number of oil rigs — 404 to 750 between 2016 and 2017 — as indicators of oil’s newfound stability.
Within Houston at least, consistency in oil trading is bound to produce steadier job growth, which in turn will raise the ceiling for wages. This enables consumers to afford higher-rent properties and bolsters investor confidence in quick stabilization periods for newly developed properties of this caliber.
These figures, while far from stellar, give credence to his notion that the worst has passed and that investors should have a bullish outlook for 2018.
“2018 is going to be a year, for sure, where we’re back in the green,” said McLenny. “It’s time to get back in the market. The later you wait, the more opportunity you’re going to miss.”
Slow Healing Process
The Houston multifamily market must wait for renter demand to absorb much of its existing supply before the benefits of the job growth and stabilized oil prices can be leveraged and the turnaround made complete, according to McLenny. Concessions like free rent won’t dry up until this happens.
Harris County led the nation in population growth for eight consecutive years before the disappearance of oil and gas jobs caused it to drop to No. 2 in 2016. This routinely robust growth will be instrumental in eating into that excess supply and keeping the recovery moving forward
According to McLenny, when people start seeing more leasing activity with their own eyes, the snowball effect will occur. “As these properties start to get some occupancy and leasing behind them — when they start to see more people opening the doors — concessions are going to ease back.