Houston’s multifamily market has endured battles from all fronts in recent years: the oil slump, hurricanes, flooding, overbuilding in select submarkets, sluggish rent growth of late and lavish concessions to new renters that have been mainstays during this period. But the market now appears to be moving in the right direction with a sense of normalcy.
From late 2014, when the oil downturn began, through the price bottoming in early 2016, Houston’s energy economy consistently made headlines across the nation’s publications. Each article claimed that at lower oil prices, the city’s over-reliance on energy would shut off job creation and growth.
Yet this period also provided an opportunity to illuminate the incredible diversity within the greater Houston economy. Up until the oil downturn, the city’s diversity had been theoretical and unproven; now, along with the city’s resilience, it is indelible.
Expanded activity at Port Houston, particularly in terms of manufacturing, in addition to plastics and petrochemicals, has propelled Houston’s job growth. The same applies to the market’s emerging role as a logistics hub and the expansion of the Texas Medical Center and regional healthcare providers, as well as strong growth in financial services and construction sectors. All told, the metro area added about 86,000 new jobs during the 12-month period between April 2018 and 2019, according to Greater Houston Partnership.
Multifamily investors have taken note of the economic diversification and ensuing job growth, coupled with natural in-migration and a relatively limited pipeline of new supply. In 2018, only 8,000 or so new units hit the market — a scant 1.7 percent of the total inventory. Absorption has been stronger with improved economic conditions in Houston, particularly in submarkets with limited new construction or where Hurricane Harvey reduced supply levels.
Due to these factors, Houston’s multifamily fundamentals have improved significantly since the oil slump began. The significant decrease in deliveries over the past year and absorption following Hurricane Harvey helped the market snap back to equilibrium.
Class A rents are seeing modest growth due to more supply coming on line and pressures on the renter-by-choice segment of the market. Class B rent growth of almost 2 percent has stemmed from the renter-by-necessity segment. Supply continues to dwindle and the discrepancy between Class A and B rents is expanding due to rising construction costs.
Landlords are beginning to burn off concessions and see stable levels of rent growth that can justify bringing their properties to market. The outlook remains favorable given the current, projected and diverse job growth in Houston. But an increasing supply of new construction and damaged units coming back on line could impact that outlook.