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Turning the Page: Houston’s Multifamily Market Poised for Growth in 2018

Overall, Houston's multifamily market stands to really turn the corner in 2018 via positive expectations of rebounding oil prices, accelerated job growth and minimal deliveries of new product.

Houston’s resilient multifamily market has turned a corner and is poised for growth this year, according to experts across a range of industries.

While the city faced significant headwinds in 2017, mainly a sluggish energy sector and a major hurricane that damaged thousands of homes and apartments, Houston’s strong fundamentals have paved the way for the multifamily market to post its strongest performance since 2015.

The impacts of Hurricane Harvey generated unexpected changes in the multifamily market. The storm, estimated to be one of the costliest in U.S. history, damaged nearly 135,000 homes and more than 100,000 apartment units.

Jennifer Ray, Berkadia

Jennifer Ray, Berkadia

Consequently, the rental market saw a spike in absorption from displaced homeowners and existing renters whose apartments were uninhabitable, thus reversing the supply imbalance and anemic rent growth that had stifled the market since the multifamily building boom — and subsequent oil bust — of  2015.

Basic Numbers

A surge in demand drove multifamily occupancy up 120 basis points to 90.1 percent between August and September of 2017, its highest level since the fourth quarter of 2015. The heightened demand translated into a monthly rent increase of 1.4 percent. In effect, rent grew to $999 per month on average in September, and in most cases, concessions were eliminated.

The storm also delayed the completion of apartments that were under construction, spreading out deliveries over a longer period of time. By the end of the third quarter, approximately 11,298 multifamily units had been delivered, year-to-date; more than double that amount — 23,911 units — were absorbed during that period.

Prior to the storm, many real estate professionals had expected the Houston apartment market to stabilize in the coming years. However, due to the slowdown in deliveries and the Harvey-driven surge in demand, this expectation was realized much sooner than anticipated. We expect this accelerated absorption to translate into increased pricing power for Houston landlords in 2018.

Underpinning the rise in demand for apartments, Houston employers also accelerated their hiring during the fourth quarter of 2017. According to the Texas Workforce Commission, the Houston area added more than 43,000 new jobs in October 2017 — the metro’s largest single-month gain on record.

Other telltale factors point to 2018 being a rebound year for Houston’s multifamily market. The year-over-year oil rig count is up 293 units, year to date. The value of all construction projects in Houston clocked in at approximately $1.87 billion in October, an increase of 25.3 percent from $1.49 billion in October 2016, according to the latest report from Dodge Data & Analytics.

In addition, economists at the Institute for Regional Forecasting at the University of Houston predict that the local economy could add as many as 70,000 new jobs in 2018. This figure would be especially viable if prices of U.S. crude oil, which look to close the year around $55 or $60 per barrel, continue to rise.

Investor Outlook

Due to the anticipated steady job growth and a more favorable climate for business in 2018, the overall dynamics of the Houston multifamily market should attract both domestic and foreign investors.

Unlike the development scene in  similar markets — such as Dallas or Atlanta, which have full pipelines  — the volume of deliveries in Houston is expected to taper off substantially in the coming years. According to Axiometrics, only 6,422 new units are expected to hit the market in 2018, followed by just 1,497 in 2019. Investors will find opportunities to acquire quality assets at normalized cap rates on temporarily depressed rents, and in a metro whose major industries are all poised to perform well in 2018.

However, it’s worth noting that some changes in the national financing environment could create challenges for Houston’s multifamily market in 2018. Fannie Mae and Freddie Mac, which account for the lion’s share of production of multifamily loans, are expected to scale back their green financing programs. These initiatives offer favorable loan terms to borrowers whose properties have achieved water- or energy-saving certifications and/or retrofits.

These programs were a significant driver of deal volume in 2017, but may be less so this year. On the other hand, we expect to see more life insurance companies and banks enter the multifamily finance space in the new year.

In summation, as 2018 gets underway, Houston’s multifamily market is officially moving out of the recovery phase and into the growth phase. Tax and policy changes at the national level that reflect a pro-business mentality are expected to benefit the city’s corporations, which also bodes well for the office sector.

In addition, the demand for housing in the wake of Hurricane Harvey, a rebounding oil sector and a strong employment forecast into 2018 should position Houston to be one of the most enticing markets for multifamily investment in the years to come.

— By Jennifer Ray, director of multifamily investment sales, Berkadia. This article first appeared in the January 2018 issue of Texas Real Estate Business magazine. 

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