Houston Multifamily Market Sees Heightened Demand, Maintains Affordability
Between 2014 and 2016, the Houston multifamily market struggled with an issue of oversupply as a result of accelerated apartment construction. When Hurricane Harvey hit in 2017, Houston residents displaced by the storm produced a surge in apartment demand that helped fill thousands of empty units over the ensuing 12 months.
Fast forward to 2019, and two key factors are keeping a strong apartment pipeline flowing and forcing developers to play catch-up: new residents and more jobs. Over the past two years, demand has outpaced deliveries, a welcome sign for investors following the 2014-2016 era. More than 20,000 units came on line in 2016 alone and caused absorption to lag.
According to the U.S. Census Bureau, steady increases in population have Houston competing with Chicago for the title of third-most populous city in the country. This demographic trend, coupled with the city’s strong labor market, has created a setting wherein capital keeps trying to find its way into the Bayou City. Underpinning the need for more housing product was the 94,000-plus new residents added during the last year, which ranked Houston’s net migration in the top three of U.S. metros.
Given the rise in demand stemming from jobs and in-migration, asking rents have increased slightly to settle at an average of $1,050, up about 1.8 percent over last year. However, given the nationwide crunch for housing, Houston’s affordability relative to other large cities is also noteworthy.
The metro area doesn’t just offer fundamentals that satisfy investment standards; it also sets a standard for other major markets in terms of how a pipeline can be designed for supply-demand equilibrium while keeping the share of wallet costs below the national average.
The Houston Advantage
The real estate market nationwide has been causing considerable shifts in demographics that play favorably into Houston’s future.
New York City and Los Angeles — the first- and second-most populous cities in the country, respectively — are seeing a decrease in residents, many of whom are setting new roots in places like Florida and Texas. Add to this the fact that Houston’s unemployment rate has tightened 50 basis points since 2018 to 3.7 percent, and the fundamentals are quite compelling.
Much of the job gains have been broad-based, as the Houston economy has continued to diversify. According to Berkadia’s third-quarter report on Houston’s multifamily market, approximately 89,000 new jobs have come to market since July 2018. About 26,400 personnel were added to the professional/business services and financial activities sectors combined, serving to sustain demand for housing near employment hubs that Class A developers are targeting.
Despite tepid rent growth overall, Class A apartment sales continue to clear the market. One recent example is an acquisition by New York-based Praedium Group, which purchased The Everly, a 387-unit infill community that was built in 2018 and is located between the Energy Corridor and Uptown/Galleria business districts.
Investors also continue to target value-add opportunities via deals like Starwood Capital Group’s sale of Lakes of 610, a 276-unit community built in 1983, to Western Wealth Capital.
The Affordability Factor
Nationwide, apartment rents settled at a monthly average of $1,472 in August, according to Yardi Matrix, which tracks various multifamily statistics and fundamentals. As previously mentioned, Houston’s rents have seen moderate upward pressure from job and population growth to reach $1,050 per month.
With a growing labor force and demand that outpaces supply, the rationale behind national investment coming to Houston is clear, regardless of effective rents being below the national average.
As the populations of New York, Los Angeles and Chicago dwindle, Houston is poised for success in the coming years. The economy is strengthening, and in-migration continues to be strong due to professional opportunities and a share of wallet costs at 18 percent for metro annual rent, significantly less than the 27.2 percent national average.
Multifamily housing in the Houston area is set for growth that now allows developers to take control of the supply-demand equilibrium.
Earlier this year, developers had sought a tapering of new construction to optimize that equilibrium. Yet developers have brought nearly 11,600 units on line so far in 2019 — a testament to the impacts of positive growth in labor and population rates.
With all of the momentum Houston’s multifamily market is experiencing, it’s still the fundamentals that make it a truly dynamic place to be.
— By Ryan Epstein, senior managing director, Berkadia, and Tucker Knight, senior managing director, Berkadia. This article first appeared in the November 2019 issue of Texas Real Estate Business magazine.