Overbuilt? The Highs & Lows of Houston’s Apartment Market: Q&A with CBRE’s New Multifamily Group Leader

Clint Duncan

In Houston, Throughout the city, apartment construction is on the rise. At the beginning of the year, Apartment Data Services reported 102 apartment complexes under construction, 28,969 units, and another 16,000 units in 56 communities proposed. The new construction occurs as Houston’s diversified economy is recovering. While oil prices have increased over the past several months, energy prices are down from a year ago. Why the rush to build new multifamily projects? Will the supply be too much? What about rents? What neighborhoods are experiencing the softest market?. Ev Konut Proje talked with Clint Duncan, an industry veteran and senior vice president at CBRE’s multi-housing group in Houston. Clint Duncan recently joined CBRE from Berkadia. He has consistently been a top producer at both Transwestern and most recently CBRE, where he either originated or was a part of more than $1.7B in Class A and B multifamily sales over two years After a stint at another firm, Duncan recently rejoined CBRE to lead its multifamily investment property sales team in Houston and the Gulf Coast markets.

Ev Konut Proje: What’s your opinion on the supply? Too much?

Duncan: Houston has always been a market that loves new supply. We are coming off incredible job and rent growth from 2012, 2014. We are peaking with new supply currently and the downward slide will aggressively continue through 2017. We’ve added about 10% to the inventory in the last five years. Compare that increase to over 33% added in the 1980s. We will work through this supply just fine with limited units under construction going forward in 2017 and 2018.

Ev Konut Proje: How long will it take to work though this oversupply?

Duncan: It will depend on where the equilibrium in jobs will be going beyond 2016. We will struggle this year with oversupply. Much of it will be determined by job growth in 2017 and 2018 and beyond.

Ev Konut Proje: What areas are softest?

Duncan: The Inner Loop, Energy Corridor, and areas around the Woodlands are all soft.

Ev Konut Proje: Are rents getting softer? Are landlords giving away free rent? A month? Two? A Rolls Royce with a three-year lease?

Duncan: We continue to see a submarket by submarket story, there are certainly properties beginning to give away two and even three months free rent to lease up.

Ev Konut Proje: Do any of these projects actually make economic sense?

Duncan: It really all depends on when a developer starts leasing the project. Construction costs have not retreated at all. If a developer is just in the lease up stage now, they are likely nervous. If they’ve had the opportunity to take advantage of 2012-2014 rent growth, then they will be OK even with softer rents. Keep in mind that many developers will simply refinance with the current capital markets environment and exit when the timing is better.

Ev Konut Proje: The city was giving $15,000 per unit subsidy for new multifamily in the CBD. Currently there is about a dozen projects under way in downtown, including a high-rise rental tower by Hines. Can the CBD market handle all this activity?

Duncan: We will have to wait and see. Downtown has been historically underserved while the Midtown market has served much of the downtown market. Based on the number of jobs downtown, we should be OK. However, much of the demand will be based on renter lifestyle decisions.

Ev Konut Proje: What about Class B and C? Full? Are a lot being renovated?

Duncan: Class B and C assets continue to be the strength of Houston’s multifamily market. There has obviously been a lot of capital thrown at these deals and many of them have been renovated. However, the difference in A and B rents is about 44 cents per SF. That’s continues to be a significant gap and capital will chase that opportunity.

Ev Konut Proje: Are investors still interested in Houston multifamily? What about investor prices?

Duncan: Yes, investors are always interested in the fourth largest city in the country. Long term, Houston has a lot going for it and we will be fine. Institutional capital has scattered to other Texas markets with a safer economic story. But, private capital continues to drive most Houston transactions. It is still a little difficult to determine an exact impact on prices. However, flatter rent growth projections have certainly affected pricing.

Ev Konut Proje: Has the oil crash, aftershocks from the fall from $100 a barrel to $40, damaged the multifamily market? Can anybody get a loan to build new now?

Duncan: You need to look at this a different way. The slowdown in oil prices has put a cap on new supply and help limit the downside on rents. Bottom line: both job growth and population growth are the ultimate drivers of multifamily. We just need clarity of what these drivers look like going forward. It’s possible, but not at all probable, to get a new loan to construct multifamily. Not only do the economics, the story, and the developer need to make perfect sense, but in in general, lenders are oversubscribed toward multifamily. All of this make for a very tough sell to a construction lender.

May 6, 2016

Ev Konut Proje is a Texas-based publication led by Ralph Bivins.