New, Pricier Apartments Are Carrying Houston Multifamily As Economy Takes A Toll On Older Properties

Two parallel trends have pushed down the fortunes of older multifamily properties in Houston just as they’re increasing at newer, more highly amenitized developments.

But the reason isn’t the oft-cited flight to quality driving Houstonians to relentlessly trade up, analysts told Bisnow. 

Instead it is the result of newcomers and frustrated would-be homebuyers flocking to luxury apartments as interest rates soar, while on the other end of the spectrum, Class-B, C and D renters are getting priced out of their homes, forcing them to double up or move in with family.

According to a just-released economic snapshot from the Greater Houston Partnership, Class-A apartments are on an upward trajectory with occupancy hitting new highs in October and absorption reaching 13,100 units, “as many as Houston absorbs across all classes in a typical year.”

But, per the same report, Class-B and below apartments have performed poorly over the past 12 months, reporting negative absorption, declines in occupancy, and, in line with national drops, falling rents. Their performance, the report notes, has brought down the market average.

“People are leaving Class-B every single month in big numbers,” ApartmentData.com President Bruce McClenny said. “People move back home with relatives, they double up and move down the class chain.”

Older, less-amenitized Houston properties have seen negative absorption for three quarters running as inflation, high interest rates, and previously skyrocketing rent increases meant renters had to make tough decisions, moving down the spectrum, getting roommates or moving in with relatives.

Average rent prices have finally started to cool off, dropping from $1,769 to $1,746 from September to November in Class-A, and from $1,258 to $1,244 from September to November in Class-B, the report shows. Yet they haven't dropped enough to ease the financial pressure many tenants are experiencing.

“There are all sorts of cost pressures now on lower-income families, lower-income households because of inflation," Greater Houston Partnership Senior Vice President of Research Patrick Jankowski said. "[It’s] questionable whether someone who is already struggling to pay for groceries and gasoline and other things can absorb another $6K a year in rent.” 

Tenants moved out of more than 1,500 Class-B units in Q3, and nearly 3,500 units overall this year, Transwestern reported in its Q3 Houston Multifamily Market report. Meanwhile, Class-A’s net absorption in Q3 was 3,213 units, bringing overall absorption to 743 units for the quarter.

Class-B occupancy still remains higher than Class-A — 92.1% vs. 87.6% — but a trend is clear, according to an ApartmentData.com report. Class-A’s occupancy has increased from 74.4% in March 2017, while Class-B’s has stayed relatively stagnant.

Class-A apartments' recent absorption is high enough to balance out the negative absorption seen in Class-B apartments, but only because of a healthy job market and an influx of in-migration — as well as thwarted homeowners, put off by rising interest rates, but wanting prime accommodations.

There are two “flights” happening simultaneously, Transwestern Vice President of Research and Investment Analytics Robert Kramp said. There is a flight to quality for renters who move into Class-A buildings, primarily driven by new population, job growth and people recently priced out of homeownership, and a flight to value on the other side, he said.

“So Class-B is sort of left in the middle,” Kramp said.

On the other end of the spectrum, Class-A apartments are where people new to town want to live, especially if they can’t afford to buy a house, McClenny said. With the average interest rate on a mortgage hovering around 7%, homebuyers are losing purchasing power, with just 10% of Houston homes now categorized as affordable, per Point2 data.  

Many developers are focusing on building or acquiring Class-A apartments in the Houston suburbs.

“Suburban growth markets throughout Texas continue to be some of the most dynamic housing markets in the country,” The Praedium Group President Peter Calatozzo said of its purchase of one such property, Lenox Crossing apartments in Katy. “Katy is a high-quality suburb that has seen material population growth over the last two decades.”

Katy is by far the fastest-growing multifamily market in the Houston area, according to Transwestern numbers. It has 3,108 units under construction, which is 600 more than Bear Creek/Copperfield/Fairfield’s 2,408 units under construction, the next highest number. The two submarkets border each other.

The number of Class-A units in Greater Houston has increased from 112,568 in March 2017 to 190,913 in November 2022, an ApartmentData.com report prepared for Bisnow shows. That is a 69.5% increase in Class-A apartments over a time period that saw the number of apartments in Greater Houston grow just 13%.

The Signorelli Co. has in recent years added Class-A apartments to its developments in New Caney and Porter, in the Lake Houston/Kingwood submarket. That submarket has 1,047 units under construction, according to Transwestern. It is also a place affluent renters have drifted to as part of a migration from  congested urban areas to the suburbs, Signorelli Vice President of Resident Retail Operations Dana Dovell said.

“It’s really very diverse,” Dovell said of the types of tenants renting in their apartment complexes, The Gregory in Porter and The Pointe at Valley Ranch Town Center in New Caney.

Tenants include families and various professionals, with a large number of teachers and administrators, as well as firefighters and law enforcement workers, she said.

"All of the Class-A product that has been brought to market in the last five years is the direct result of the job gains we’ve had during the same time," Kramp said.

During that five-year time frame, some Class-B apartments within the inner loop were razed to make room for Class-A developments, he said, though he doesn’t expect to see much more demolition and predicts a comeback for Houston's older stock of multifamily.

“I think the Class-B sector has a lot of runway because those properties that are primely located … Energy Corridor, CityCentre, Briar Forest, those are all areas that are near major employers that have different levels of employees,” Kramp said. “The proximity to work is going to be very important to them and these locations always bounce back.”

And despite a somewhat fractured market that is feeling some pain in its lower rungs, the Houston multifamily market is on an upward trajectory, Kramp said.

“Houston has a very resilient multifamily market,” he said. “I’ve been studying the multifamily markets since the late '90s, and I have seen this trajectory of construction, occupancy, price increase, pretty much on a steady upward climb.”