Rents are up, occupancy is on the rise and investment interest is back. Houston’s multifamily market has put the challenges of an energy sector downturn, the coronavirus pandemic and an apartment oversupply issue behind it, and experts say the future looks bright even with supply chain disruptions, rising costs and labor shortages casting a few shadows.
Enthusiasm about the sector ran high at Bisnow’s The Future of Houston Multifamily event Oct. 7, with Morgan Group Chief Operating Officer Stan Levy declaring his national multifamily development, construction and property management firm had an unprecedented $1.8B in its development pipeline and Greystar Executive Director Stacy Hunt explaining why he was still in the game after joining the property management company nearly 40 years ago.
“If business wasn’t so good, I’d retire,” Hunt said. “But it’s way too good to quit.”
By most traditional measures, business is good for multifamily developers and owners. Houston might not be enjoying the skyrocketing rent renewal increases of some major cities, but panelists said increases are now approaching or even slightly exceeding double digits. That’s in line with Apartment List’s latest rental report, which showed rents were up 1.5% for the month in September, the ninth consecutive month of increases, and reflecting a 9.8% hike over the same month a year ago. Meanwhile, the metro has absorbed more than 33,000 apartment units over the past 12 months, according to ApartmentData.com.
Houston trails the national annual rent growth rate of 15.1% and other Texas cities like Austin, where rents rose 24%, and Dallas, which grew 15.5%.
“Compared to the rest of the country, it’s a little behind, it’s been a laggard,” Camden Property Trust Executive Vice President of Operations Laurie Baker said. “But take a look at where we were just a year ago when Houston had some challenges.”
At their 2020 nadir, Houston apartments were less than 87% occupied and the average monthly rent was around $1,040. As of September, that had risen to about 91% and $1,190 across the metro, with rent in suburbs like League City in southeast Houston spiking to $1,900, Pearland to $1,830 and Sugar Land to $1,770.
Several panelists said there is an opportunity now to raise rents, particularly in those suburbs where the population is flocking to apartments as they get priced out of what has been a frenzied homebuying market. Levy said rents declined precipitously through the pandemic due to job losses, an inability to make rent payments and an exodus of young people back to their parents’ homes or doubling up with friends to cut costs.
“We’re really good at lowering our rents to regain occupancy, but we’re not as good at raising them as quickly to get back to where we were, because it seems offensive,” he said, adding that nationally, 75% of Morgan Group’s markets have elevated rents back to pre-pandemic levels or higher. “Houston has been one of the slower markets to get there, but now it’s really catching up … There’s a tremendous demand, and when people go online and look at what their unit would rent for, they realize that they can’t get a better deal anywhere else.”
Now that Houston’s multifamily oversupply issue is being resolved, the market is finally beginning to attract the kind of investment interest showered on other cities. Baker said after being effectively blackballed by big-money players worried there was too much product in the pipeline, two properties now being marketed by Camden are attracting avid attention from institutional high-worth buyers. JE Dunn Construction Senior Vice President Patrick Dennis said he is seeing it as well in phone calls about new builds.
“The time for Houston is now,” he said. “The anecdotal piece is that typically, we would have about 75% local inquiries about high-rise product,” he said. “Now, it’s reversed and 75% are from out-of-town entities — New York, Austin, Dallas. My advice is call us today, go quick, because they’re coming.”
That’s welcome news for developers and the 15,760 new multifamily units expected to be delivered by the end of 2021, according to RentCafé. But persistent supply chain issues that have driven up costs and led to months-long delays are throwing a wrench into some plans, although that isn’t deterring lenders and equity partners from investing.
Hunt said returns on costs have been steadily shrinking. One example is a two-phase garden apartment project in Fort Bend County that came in at an already “incredibly high” $140K a unit in Phase 1 and will cost somewhere around $170K per unit in Phase 2.
“A garden project in Fort Bend County with surface parking, it’s really unbelievable,” he said. “And it’s everything — it’s windows, it’s sheetrock, it’s roofing materials, it’s siding. The guy yesterday told me he was having a hard time getting nails. Nails, of all things. It’s pretty amazing what the costs have done for new construction apartments, and it’s really staggering that people are still willing to put money into the deals with the risk that’s always there in new construction … But the demand is there and the equity is there, so you know, people will find a way to build.”
Barvin founder and CEO Eric Barvin said his firm’s only local development project, going up near the Texas Medical Center, cost $185K a door when construction began last year. A similar product today, he said, would cost more like $235K due to the cost and difficulty of sourcing materials.
Baker said navigating supply chain issues was tacking average delays of about 60 days onto Camden projects. The company was told its unpainted siding supplier was suspending sales to the multifamily industry in August and its national appliance supplier, Whirlpool, has struggled with lengthy delays due to shortages of steel, plastics and computer chips. In some cases, she said, team members have hit every Lowe’s and Home Depot in an area to find the appliances necessary to turn a unit around.
“These are unprecedented times and we’re working through them but it makes everybody’s jobs a lot harder,” she said.
The shortage of labor is an even bigger hurdle.
“There’s no people to work on the properties and get us the supplies,” Baker said. “Again, we’re dealing with it, but on top of everything else the teams have had to deal with, it just seems like another added pain point when you’re dealing with your customers.”
“Every place we turn, people are stealing our talent and we kind of joke with sending these messages, these pictures of Buc-ee’s now hiring people for 19 bucks an hour, but we never in our lives thought Camden would be competing with Buc-ee’s,” she said. “There’s this war on talent and it makes us have to step back and get incredibly creative to figure out how do we run our company and our properties in a different way so we’re reimagining everything about our business, we’re rethinking how do we staff our teams, and we’re taking advantage of technology.
Publication: Houston Bisnow