Investors Coming Off The Sideline As Houston's Multifamily Sector Begins To Tick Up

For nearly two years, sliding oil prices and rent growth have had many investors around the nation red-lining deals in Houston. But now rent growth in the majority of the area's submarkets has experts predicting sunnier days ahead. 

"At the beginning of the year, only three areas in Houston weren't still falling. Now, of Houston's 42 submarkets, only 11 still have negative growth," Colliers Multifamily Senior Vice President Matt Guse said. "We stabilized. Rents hit their bottom, now they're up." 

Guse said the perception of Houston is finally changing. With oil prices stabilizing in the mid-$50 range and the rig count steadily rising, confidence is returning to investors in Houston. At the same time, the construction pipeline is quickly emptying, allowing the market time to rebalance. 

"Construction will seem like it has come to a halt once we get past this year," Guse said. 

But just because there is renewed demand from investors does not mean the transactions are back. Guse said deal volume is way off, about half of what it was last year, across the board. That is not unique to Houston. 

"There's a ton of capital seeking deals," Guse said. "There's just so few sellers. Guys around here feel like with rent increases, they have another bite at the apple. Everyone's seen rents begin to lift off their slide and they're holding."

The investors Guse is talking to see Houston as a known quantity, which is appealing. Dallas and Austin are hot right now, but investors are unsure how long that is sustainable. 

Houston, though in a rough patch, has strong fundamentals. A new study by the National Multifamily Housing Council and National Housing Council claims Houston will need 214,000 new units by 2030. 

Chances are growth will not be in Class-A high-rises. Guse believes demand will be concentrated in the suburbs. 

Projects like Amazon's new distribution facility in Katy, Daikin's new factory or the billions being poured into petrochemical on Houston's east side are driving demand outside of the city's urban core.

Most of Houston's action during the oil slump has been in the value-add space. About 60% of transactions last year were Class-B and C apartments, which constitute the bulk of Houston's market. 

Value-add is still in demand but Guse said Houston is picked over.

"There's not any heavy lifts left. At this point you're looking for little lifts, like new appliances or countertops," Guse said. "A lot has been done for properties around town, that's been good for renters and landlords." 

“This year is a new slate,” Guse said. “The whole context of the conversation around Houston has changed. People’s opinions about Houston have changed. I haven’t had to convince anyone that things didn’t get that bad here.”