Is There A Silver Lining To Houston's Multifamily Storm?
Houston’s multifamily market (the subject of our event Aug. 24) is taking on water. The combination of low oil prices and abundant construction has brewed the perfect storm for Houston. The region is forecast to add about 22,000 jobs in 2016; at the same time, more than 29,000 units in 102 properties are under construction. While the waters certainly are rocky, the metaphorical ship isn’t sinking anytime soon.
On the surface, the numbers aren’t pretty. Allied Orion CIO Ricardo Rivas shared some sobering stats. About 25,000 units will open this year, even as job growth has slowed significantly. Some of the bumpiest numbers are in Katy/West Houston/Energy Corridor. That area has delivered approximately 5,000 units recently and has another 2,700 under construction. Rents show a downward trend while occupancy growth begins to show some decline, and Ricardo says that while the area's projects show positive absorption, they're offering the equivalent of up to 2.5 months free rent on a 13-month lease when factoring gross potential rent adjustments, move-in specials, leasing incentives (such as move-in gifts) and recurring concessions.
The Woodlands and Downtown are also having a rough go of it. The influx of new units in Downtown has rents declining. After concessions, new lease-ups in luxury units Downtown are only getting $1.85/SF. But all the new Class-A construction has driven the average price of all asset classes in the Houston MSA upwards—it’s likely to top $1k for the first time soon. There are other signs that may be a silver lining.
Alliance Residential managing director Cyrus Bahrami (above with his family) has nine deals in lease-up, so he knows the struggles of the market better than most. He isn’t too worried. Cyrus says despite the bad headlines, things are by and large on par with the initial underwriting. In fact, Cyrus claims rents, net of concessions, and lease-up velocity are outperforming underwriting on three of its assets at 105% to 120% of projections, and the other six deals are within 90% of underwriting.
Cyrus thinks people are forgetting the tremendous amount of market rent growth that occurred between 2012 and 2015, and broader social trends. With Millennials putting off buying a house, homeownership rates have been slipping, even in cities like Houston and Dallas whose housing markets traditionally have been dominated by single-family homes. Digesting the oversupply will take time. Things aren’t great now, sure, but Cyrus expects things to bounce back in about a year.
Ricardo, on the other hand, thinks it’ll be at least until 2018 before the current supply can be digested. Still, he isn’t throwing in the towel. There are strong areas, like Pearland. It’s the opposite of the issues affecting the rest of the area. There’s virtually no supply and tons of demand from the expanding Medical Center. With $5B in new healthcare construction around Houston (and the TMC getting the lion's share), Ricardo thinks the multifamily submarket is the strongest in Houston.
One thing is for sure, there are plenty of questions surrounding the Houston multifamily market. Hear Ricardo, Cyrus and the rest of Bisnow’s expert panel at the upcoming Houston multifamily event on Aug. 24.
