What To Expect From Houston's Topsy-Turvy Multifamily Sector

Stunted job growth and historic flooding combined to make 2017 a roller coaster for Houston's multifamily sector. In 2018, the asset class will see increased demand as oil jobs come back, limited supply as fewer units come online and increased scrutiny on Houston's low-end apartment stock. 

1. Rising Demand As Oil Rebounds

Houston is a city of renters, with more than 420,000 rental housing units and the third-highest number of occupied apartments in the country. Houston multifamily demand is driven by its job growth.

Greater Houston Partnership Senior Vice President and regional economist Patrick Jankowski predicts at least 45,000 jobs will come to Houston this year, while Moody’s Analytics estimates closer to 75,000. If crude oil prices stay around the mid-$60 per barrel range, Jankowski predicts even more jobs will come to town.

"In basic terms, Houston is growing," Colliers Senior Vice President of Multifamily Matt Guse said. "The industry estimates that one apartment is needed for every 10-11 people in a city’s population. Using that relationship, Houston will need to build 12,000 units in order to keep up with anticipated population growth."

2. Restrained Supply

While demand is expected to continue to rise, supply has been restrained. At the Houston Apartment Association's State of the Industry event, Apartment Data Services President Bruce McClenny estimated Houston will add 7,000 new apartments in 2018 compared to 21,291 in 2016 and 13,719 in 2017.

Last year started off overbuilt because in 2016, only 4,527 units were absorbed, but a spike in renters looking for temporary housing after Hurricane Harvey saw 2017’s absorption rise to 17,469 units. Rent prices increased by $42 on average in 2017, rising $15 before the storm and $27 after.

“Houston’s suburban areas will continue to attract investors with strong components, such as prominent amenities, recently built apartments and absorption rates that outpace new units coming online,” Berkadia Senior Managing Director Ryan Epstein said. “Over the last 12 months, the Katy/Cinco Ranch/Waterside submarket has seen almost 2,000 units become occupied, noticeably exceeding the 1,000 units added.”

The areas with the biggest jumps in rent include Katy, The Woodlands and Kingwood.

3. Decreasing Concessions 

Greystar Executive Director Stacy Hunt said Houston’s multifamily concessions have been all over the place, making 2017 an up-and-down roller coaster. A September report showed 41% of all apartment units in Houston came with concessions whereas a January report found that figure has dropped to 29%.

Concessions offered by landlords around town have slowed, McClenny said. Colliers' data shows 54 Houston communities are offering move-in specials, 252 are giving months for free and 413 are offering floor plan specials. 

4. Class-C & D Safety Concerns 

A major challenge for Houston’s multifamily sector will be confronting and correcting what a University of Texas study calls Houston’s “severely inadequate” apartment safety measures at the lower end of Houston’s multifamily market.

Class-D apartments accounted for 9.7% of all apartment complexes in the greater Houston area. These apartments contained 47,333 units housing potentially 100,000 tenants or more. Class-C apartments constituted another 32% of complexes, with 200,172 units.

In total, the report found 274 multifamily complexes in the city limits were in poor or unsound condition. According to the appraisal district’s tax records, 28% of Houston’s apartment complexes do not have an active certificate of occupancy.

There are also large volumes of apartments with habitually high levels of violent crime. For example, at one apartment complex in Southeast Houston, 284 major crimes were reported in a single year recently — an average of one major crime every 1.3 days.

The issues are primarily hitting minority demographics. The vast majority of high-crime apartments in Houston are clustered in neighborhoods with more than 75% African-American and Hispanic residents. Apartments in poor physical condition are likewise concentrated predominantly in neighborhoods with high percentages of African-American and Hispanic residents.