By Chris Curry and Todd Marix, senior managing directors of investment sales, Berkadia
Things are looking up in Houston, and that rings especially true for the city’s growing multifamily sector. In-migration, a rebounding labor market and a high concentration of Fortune 500 firms and talent have made the Bayou City an attractive place for investors and residents alike.
Recently, a slowdown in deliveries of new apartments has coupled with strong demand to bring rent levels to historical highs and elevate absorption across all asset classes. Part of this trend can be attributed to the continuing return of urban renters — those who left for suburban submarkets but are making a comeback into dense city centers.
Houston has earned a reputation for being a compelling market in the Sun Belt region. Aside from basic fundamentals that have buttressed its apartment market, the city’s low cost of living and outward expansion have historically offered developers and investors plenty of room to operate while increasing returns in the process.
Now, with demand easily surpassing supply, occupancy rates are over 90 percent for the first time in two years, which is truly remarkable considering how much more supply exists today. Even more resounding is the fact that Class B occupancy is at its highest level in five years — 92.6 percent — a testament to demand for the value-add assets that have become so highly sought-after by investors nationwide.
Of course, with lower supply and higher absorption comes an uptick in rents, which are seeing historical highs in a variety of classes. The Class B and C spaces are seeing record rates that reflect the consistent demand for workforce and value-add housing that has made Houston a top market to include in any portfolio.
Class A rents aren’t far behind — just off of historical peaks in 2015 — but have seen a 7.8 percent increase from the beginning of this year. Looking ahead at this class, we expect rents to continue rising as the return of urban renters brings further demand to Houston’s core.
Developers have taken note of this demand for apartments in Houston’s urban core, bringing new product on line to an area with sparse available housing. Despite this new product being delivered, developers can list these assets about a year after being built due in part to the high level of investors wanting to take part in this new trend of renters coming back into the central region.
To give an example of the rise of central Houston, the suburb of Katy is still the No. 1 suburban submarket in Houston, but central Houston’s Montrose/Museum has made its way to No. 2 overall behind the Heights — indicative of the return of urban renters.
The Heights submarket is also gaining steam with the influx of residents moving in and around the downtown area. The level of activity has given an opportunity for our team to help Phoenix-based developer Alliance Residential list two new properties as they quickly reach stabilization. The properties — 15th Street Flats, built in 2020 and located at 1414 N Shepherd Drive and Heights Waterworks, built in 2019 and situated at 515 W 20th St. — are clear examples of the types of assets and locations that developers and investors are seeking.
With all this being said, Houston is comparatively one of the strongest markets in Texas, a state that’s already one of the most competitive in the popular Sun Belt region. With almost 15,000 units under construction throughout the metro area, the level of absorption we’re seeing tells a story of continued success for the multifamily industry, and even more so for urban submarkets.
At the start of the fourth quarter of 2020, leasing activity in urban submarkets accounted for only 2 percent of total absorption. By the end of May of this year, that number was up to an astounding 22 percent. Houston is also the only major metro in Texas poised to see a consistent rise in absorption, with Dallas and San Antonio edging downward and Austin just barely making gains.
Houston has always been a place for those looking to migrate to a cost-effective market or invest in the local infrastructure or talent pool. The city still maintains that reputation and is set to punctuate that image with the return of urban renters.