Multifamily Renter Demand in Houston Elevated, Supporting Rent Increases

Healthy absorption levels in the Houston multifamily market have helped to stabilize vacancy conditions in the face of elevated construction during the past two years. Apartments in Houston recorded net move-ins of nearly 8,000 units through the first three quarters of 2024, nearly doubling levels recorded in the prior 12-month period. Still, record levels of inventory growth since early 2023 have resulted in supply-side pressures. That trend is expected to reverse course, as the construction pipeline has contracted significantly during the past year as new units have come online and starts have slowed. Projects totaling roughly 20,600 units are under construction in Houston, down 25 percent from levels recorded 12 months ago. Strong demand allowed apartment operators to continue to push rents higher, with rents rising by 2.5 percent during the past year, making Houston the only major market in Texas to post annual rent gains through the third quarter. Inner-Loop Houston continues to record strong property fundamentals despite inventory in the area expanding by 24 percent since the beginning of 2019. Asking rents in the area are elevated compared to the overall market, averaging $1,878 per month.
Although sales continue to occur in the Houston multifamily investment market, transaction volume in the region has been limited since the closing months of 2022 as financing costs have been elevated. Sales velocity as of the third quarter was nearly identical to levels recorded in the same period in 2023. Still, recent sales volumes are less than half the region’s historical average from 2014 to 2022. The Northwest Houston submarket has been among the most active submarkets in the region for sales, continuing trends recorded in the past decade. While most of the areas leading in transactions are historically strong submarkets, activity in the up-and-coming Neartown/River Oaks submarket has been elevated to this point in the year. This submarket lags only Northwest Houston for sales activity, accounting for 12 percent of the total sales to this point in the year and roughly 60 percent of the trades involving top-tier assets. During this past decade, Neartown/River Oaks had not topped 10 percent of sales in a single year while making up just 4 percent of the transaction mix, but an influx of new product has prompted transaction activity, with the submarket’s inventory expanding by 40 percent during the past five years.
Looking ahead
Operating conditions in the Houston multifamily market are expected to remain stable through the end of 2024, with some improvement likely in 2025 as completions slow. Multifamily deliveries are forecast to remain on their recent pace to close the year, pushing annual completions in 2024 up to 22,000 units, nearly identical to levels from the prior year. Although 2024 will mark the second consecutive year of heightened inventory growth, completion levels in the second half of the year were mild compared to the first half, a trend that should continue into 2025. Lighter levels of deliveries in future quarters will likely keep vacancy conditions steady going forward.
Transaction volume in the Houston multifamily investment market was showing signs of gaining momentum leading into the end of 2024. Sales activity may continue to ramp up into 2025, although total sales are not expected to return to long-term historical levels. There are areas of the Houston market that will likely generate heightened investor interest, however, including Neartown/River Oaks, which features solid property fundamentals, a strong local labor pool, and elevated development, all factors that should bode well for this submarket. Additionally, investors have gained momentum in this submarket in recent quarters which will likely carry over into the coming periods.
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