HOUSTON – Hurricane Harvey significantly disrupted Houston’s multifamily housing market. The city had been recovering from years of overbuilding when Harvey, which made landfall as a Category 4 hurricane on Aug. 26 and then stalled along the Texas coast, became the wettest tropical cyclone in the contiguous United States. Real estate research firm CoStar estimated that roughly 72,000 apartment units and 20 million square feet of office space were affected by the floodwaters. To understand the hurricane’s impact on multifamily housing, Realty News Report spoke with Teresa Lowery, Senior Managing Director of Multifamily at Colliers International’s Houston office. Lowery, who has transacted more than $4 billion in multifamily sales, has been recognized among her firm’s top producers and was honored in 2015 as one of the top 10 percent of Colliers brokers across the U.S., Canada and Latin America.
Realty News Report: Hurricane Harvey delivered a hard blow to the Houston multifamily sector. How would you summarize the status of the market now that we are in a recovery mode?
Teresa Guidotti Lowery: Whether Harvey delivered a hard blow depends on which side you’re on — renter or owner. Before Harvey, Houston’s multifamily market was already moving into recovery. In the 12 months ending July 31, 2017, the Houston-area economy added 54,200 jobs, one of the strongest gains since 2015, according to the Texas Workforce Commission. With about half of Houstonians renting by choice, strong job growth quickly translated into improved apartment occupancy and absorption. As of August 2017, Apartment Data Services reported overall apartment occupancy at 89.1%, with Class B and C occupancy at 91.2%. At the same time, new multifamily construction had slowed: 11,499 new units were added while 14,437 units were absorbed, marking the first positive multifamily absorption in five years. The market had been moving toward a balance of supply and demand, and rental-rate growth had been relatively flat for the prior 18 months. Hurricane Harvey changed that dynamic. Houston shifted away from being a renter’s market: owners now control more of the leverage. Insurance claims also create an opportunity for owners—those with adequate coverage can use insurance proceeds to accelerate value-add renovation programs. Renters, by contrast, will face fewer choices, tighter availability and upward pressure on rents, with limited alternatives for displaced residents.
Realty News Report: Information is still coming in. There are a number of estimates about the number of units that have been damaged or destroyed. What’s your assessment?
Teresa Guidotti Lowery: I’ve spoken to owners with no damage and to managers whose portfolios experienced flood damage on up to 40 percent of assets. Areas in the west, northwest and northeast quadrants of the region—including Kingwood—saw ground-floor flooding. An early survey by Apartments Data Services sent to Houston Apartment Association members collected 241 property responses; 43 of those reported damage totaling 1,700 affected units. Keep in mind Greater Houston contains 2,725 apartment communities and only a portion have reported so far. My estimate is that ultimately 2–3 percent of the city’s total inventory of 638,601 units may have been damaged—roughly 13,000 to 19,000 units. With an overall occupancy of 89.1%, Houston had about 70,246 available units. Subtracting the damaged units would reduce available inventory to approximately 51,000 units. The region has already reported about 30,000 displaced residents and thousands more temporary residents, such as construction workers, aid workers and insurance adjusters. Given the reduced supply and increased demand, those roughly 51,000 available units are likely to fill very quickly.
Realty News Report: Obviously, with many single-family and multifamily homes damaged, vacant units in the Houston market will be absorbed quickly. Will evacuees also occupy new Class A properties?
Teresa Guidotti Lowery: Absolutely. Class A properties will benefit as well. For example, Colliers International Houston has offices in the Galleria, The Woodlands and Sugar Land; among our 100 Houston-area employees, about 20% reported flood damage or vehicle loss. Many white-collar workers displaced by flooding will seek newer Class A communities. Some homeowners have chosen to demolish and fully rebuild their flooded houses—a process that can take 12 to 18 months depending on the availability of labor and materials—meaning those residents will remain renters during reconstruction. I’ve heard of a 90%-occupied Class A property in Katy jumping to full occupancy overnight. There has also been an urban migration: residents from western neighborhoods affected by flooding and extended commutes are choosing to move closer to jobs, often into areas with a higher concentration of Class A projects.
Realty News Report: As of now, it’s unclear whether FEMA will initiate an apartment voucher program. How would that work?
Teresa Guidotti Lowery: Anyone displaced by flood damage—whether from an apartment or single-family home—can apply for FEMA assistance. FEMA’s Transitional Sheltering Assistance (TSA) program initially provided expedited rental assistance for up to two months, with payments up to $2,000 per month. To date, hundreds of thousands of individual assistance applications have been approved, and tens of millions in housing assistance have been authorized, though not always immediately distributed.
Realty News Report: A FEMA apartment voucher program could be very beneficial to the market at this time, correct?
Teresa Guidotti Lowery: Temporary housing support will benefit Houston’s apartment market whether or not a broader FEMA voucher program is extended beyond the initial period. Many of the hardest-hit neighborhoods—Memorial, Katy, Sugar Land and Kingwood—have median household incomes above $100,000. Displaced homeowners in those areas are unlikely to qualify for voucher-based assistance, but they may access other resources and will likely pay market rents while rebuilding. Voucher programs aside, multifamily owners will see an immediate increase in revenue from the sustained, widespread displacement produced by Harvey.
Realty News Report: Looking further out, what do you expect for the Houston apartment market in 2019 and 2020?
Teresa Guidotti Lowery: I expect relatively low levels of new multifamily construction for several reasons. Houston has experienced three major floods since 2015, which will raise lender concerns about flood risk and increase insurance costs. With demand outpacing new supply, I anticipate sustained annual rent growth near 4.5%—about 2 percentage points higher than the national average of roughly 2.5% at the time. Of the city’s 2,725 apartment communities, about 2,000 are Class B and C. As these older communities age, they will require renovation and modernization. The combined effect of higher occupancy, stronger revenue streams and insurance proceeds from Harvey will likely enable many owners to invest in upgrading their properties, a positive outcome for long-term apartment residents in Houston.