HOUSTON – (Realty News Report) – Over the past 18 months Houston’s multifamily market has experienced dramatic swings. The market was relatively soft until Hurricane Harvey struck, at which point much of the multifamily vacancy evaporated as displaced residents sought rental housing. Now, as many of those households return to repaired single-family homes, occupancy patterns are shifting again. Despite this normalization, developers continue to deliver new multifamily projects—particularly in Montrose, the Heights, and Katy—even as some newer units remain vacant. To better understand the direction of the sector, Realty News Report spoke with one of Houston’s experts: Bruce McClenny, president of ApartmentData.com, a leading provider of marketing and information to the multifamily industry. McClenny serves on the Houston Apartment Association board of directors and previously led its Product Service Council. He holds a BA in pre-law and accounting from Auburn University.
Realty News Report: How would you describe the state of the Houston multifamily market today?
Bruce McClenny: To explain Houston’s apartment market today, it helps to review recent history. In late 2014 oil prices began to decline, and by February 2016 WTI crude hit a low near $26 per barrel. The domestic rig count fell sharply from 1,960 active rigs in October 2014 to 404 by May 2016. That downturn in the energy sector triggered a wave of job losses—about 86,400 positions were cut across 2015 and 2016. Other parts of the economy—retail, healthcare, education, hotels and restaurants—helped offset losses, leaving overall employment relatively flat with slight declines of roughly 2,500 jobs in 2015 and 2,200 jobs in 2016.
The energy-driven slowdown reduced apartment demand just as developers were delivering more than 41,000 new units, creating an oversupply. Houston became out of sync with national trends and other major Texas metros. Investor interest waned, transaction volume declined, and new development plans stalled.
Realty News Report: How did the turnaround occur?
Bruce McClenny: The outlook improved in 2017. Hosting Super Bowl LI provided a one-time boost—Rockport Analytics estimated a $347 million net economic impact. Two additional, unanticipated factors delivered further stimulus: the Houston Astros’ run to the World Series and Hurricane Harvey. Playoff and World Series home games circulated an estimated $20–30 million through the local economy, according to the Greater Houston Partnership’s Patrick Jankowski. Harvey, while causing an estimated $97 billion in damage across the metro (Moody’s Analytics), also created a surge in apartment leasing as homeowners displaced by storm damage sought temporary housing.
From September through year-end 2017, Harvey effectively raised average rents by about $27 per month and increased occupancy by roughly 1.7 percentage points. Neighborhoods with the most single-family damage saw the biggest rent and occupancy spikes: the Energy Corridor saw rents rise by around $84 per month and occupancy climb 5.0 percentage points, while Katy experienced about a $69 rent increase and a 3.4 percentage-point rise in occupancy.
Harvey created abnormal market conditions that took much of 2018 to normalize. As homeowners moved back into repaired houses, properties faced the challenge of renewing leases at elevated rates. The storm also accelerated the market cycle by roughly a year. Where the development pipeline had been modest earlier, by the start of 2018 proposals grew—from about 15,000 proposed units to roughly 26,000 as developers moved to restart projects.
2018 became a transition year: the market was still adjusting from Harvey, and supply imbalances persisted in areas such as the Energy Corridor and Downtown. Looking ahead to 2019, steady job growth was expected to absorb at least 14,000 units, outpacing projected deliveries of roughly 9,000–10,000 units. Rent growth for the year was forecast in the range of 3.5–4 percent, favoring apartment owners.
Realty News Report: So rental rates and occupancy increased in 2018?
Bruce McClenny: Given the unusual Harvey-driven spike at the end of 2017, a flat performance in 2018 would be considered favorable. Occupancy began 2018 at about 89.4 percent, peaked near 90.1 percent mid-year, and by the end of October sat around 89.9 percent. Fourth quarters are traditionally weak or flat; October’s absorption was negative 731 units, suggesting occupancy would likely edge lower by year-end. The large Harvey-fueled absorption in Q4 2017—plus 9,851 units—raises questions about lease durations and how many tenants have since moved back into homes.
Average effective rent started 2018 near $1,010, climbed to roughly $1,032 mid-year, and by the end of October was around $1,025. Like occupancy, rents may decline modestly by year-end but should remain above where they began the year.