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Houston renters are nothing if not spoiled with choices for places to live.

The Bayou City saw a surge in multifamily construction in 2019, and new construction is only going to accelerate over the next two years.

Crews have already broken ground on 79 new communities, which will add 23,000 apartment units to the city’s multifamily market. Developers have proposed adding another 28,316 units in the future, according to data collected by ApartmentData.com, a Houston-based research firm.

The construction boom has created a market that heavily favors tenants. Many communities have been forced to waive multiple months of rent to attract residents. The sheer number of new units opening up has caused rents in the city to stagnate, making it harder for landlords and real estate investors to turn a profit. And it could be years before the units coming to market have anyone living in them.

But industry observers say they remain bullish on the future of multifamily in Houston, even if the market is overbuilt right now. Many say the city’s shifting demographics heavily favor the market in the long run.

“The city has seen a pretty sizable volume of new supply hitting the market. In the areas that are seeing the most development, the market is going to be soft, meaning you’re going to see the inducements continue through at least 2021, when the pipeline looks like it’s going to fall off,” said Todd Marix, a senior managing director in the Houston office of JLL (NYSE: JLL). “But there’s a lot to be excited about.”

Out of step

In recent years, Houston’s multifamily market has often operated out of step with the rest of the country. Hurricane Harvey and the oil downturn created volatility that was largely unique to Houston, said ApartmentData.com President Bruce McClenny.

McClenny said that while much of the United States underwent a steady rise in apartment absorption rates, Houston has seen far more peaks and valleys.

“While the rest of the country was in recovery mode after the recession, Houston had the unique complication of having a hurricane hit amid the oil downturn,” McClenny said.

The hurricane forced many Houstonians out of their homes, driving a significant increase in the number of people leasing apartments. Between 2016 and 2017, the number of apartment units absorbed by the market increased by an additional 12,284 units.

However, because many of those same people were able to return to their homes, the uptick in apartments absorbed by the market was short lived.

McClenny said the swings in demand sparked a rush to build new apartment buildings across Houston. And many of the new apartment buildings that opened up were loaded with the latest amenities, including on-site restaurants and grocery stores, and high-end finishes. Currently, about 90 percent of the city’s 663,799 multifamily units are occupied.

“But the boom in new construction came about a year too soon. Supply started to outpace the demand,” McClenny said.

What that meant, McClenny said, is that rents have remained relatively flat in recent years. In 2019, the average apartment rent in Houston grew by just 2.9 percent to $1,047, ApartmentData.com found. That’s well behind the growth rate in Austin, Dallas and San Antonio, where rents have increased by 7.2 percent, 5.2 percent and 4.4 percent, respectively, over the past 12 months.

Much like the city’s office market, the supply of flashy new product coming online has put increased pressure on older, Class B and Class C apartment complexes, which account for 70 percent of all the apartments in the city.

Many landlords have tried to stay competitive by launching costly remodel projects, offering move-in stipends and months of free rent as concessions. ApartmentData.com found that renters received discounts equaling about 6.2 percent of their total rent on average in 2019.

McClenny said it’s unclear how long Houston’s multifamily market will continue to favor tenants, especially if the national economy struggles this year, as some economists have predicted.

“The rule of thumb is that for every five jobs created, you get one unit of absorption,” McClenney said. “If the economy slows, you’ll have fewer people moving here looking for an apartment.”

Driving demand

Even if Houston’s multifamily market is oversupplied right now, few, if any, real estate experts think the supply of apartments will continue to outpace demand in the long run.

The city’s surging population and recession resistant economy make it an attractive market for two demographics that favor apartment living: younger professionals and empty nesters.

Marix said that hasn’t gone unnoticed by real estate investors, even if rents have stalled in recent years. Many investors have favored buying into existing buildings, he said.

“The capital is still there,” Marix said. “They’re willing to take a flat rent environment for a year or two rather than try to build a building.”

Investing in Houston’s multifamily market is likely to become even more attractive in the future, thanks to the city’s changing population.

Like the rest of the United States, aging Baby Boomers account for the fastest growing segment of Houston’s population, said Stephen Klineberg, director of the Kinder Institute for Urban Research at Rice University.

At the same time, younger residents are waiting longer to start families.

“So, you have two segments of the population that favor apartment living that are growing,” Klineberg said. “These are really huge shifts that are occurring in both the downtown areas and in the suburbs.”

Add in that Houston is expected to add another 50,000 jobs in 2020, and demand for multifamily units is likely to increase, though not at the same rate as the supply of new units coming to market.

Klineberg said Houston’s infamous traffic also has a role to play in driving the multifamily market. People of all ages increasingly want to live, work and play in the same area. Many are willing to pay more in rent if it means they can limit their time sitting in traffic. So finding apartments that are closer to urban centers spread across greater Houston has become much more attractive, Klineberg said

“As the population grows and traffic gets worse, fewer people are going to want to spend an hour driving to their home way out in the suburbs — especially if they aren’t trying to raise a family,” Klineberg said.

Hot pockets

While Houston’s multifamily market has seen a flurry of development, most of the new construction has been limited to a handful of submarkets in and around Houston.

Houston’s booming Heights-Washington Avenue neighborhood alone accounts for 14 percent of all apartment units under construction, with 3,336 in the works, according to ApartmentData.com.

Among the complexes to open in the Heights last year was St. Andrie, a 230-unit mid-rise that forms the residential component of Houston-based Midway’s Buffalo Heights mixed-use development. In addition to apartments, Buffalo Heights features an H-E-B store, as well as a 37,000-square-foot office building.

Buffalo Heights is located at 3663 Washington Ave., near the intersection of Washington Avenue and South Heights Boulevard.

Not far away, Houston-based CityStreet Residential Partners plans to build a four-story, wood-frame apartment building, which will be called Domain Heights. The 629,808-square-foot structure will include an integrated club and leasing office.

“In urban areas, young folks want to live where the fun is. The Heights is the perfect example. All the cool kids want to live there,” Marix said.

Inside Houston’s 610 Loop, other hot pockets of multifamily development include Montrose-Museum-Midtown, Highland Village-Upper Kirby-West U and downtown. Those submarkets account for a combined 5,479 units under construction.

The downtown submarket will soon boast Houston’s largest for-rent residential high-rise tower.

When it opens in 2022, The Preston will stand 46 stories tall and will include 373 luxury apartments, offering views of the Houston skyline.

The Preston, which will be located at 414 Milam Street, is being developed by Houston-based  Hines, along with Cresset Wealth Advisors and Levy Family Partners.

But it’s not just the buzziest neighborhoods inside the Loop that are seeing new apartment buildings going up.

Houston-based MetroNational is well into construction of The McKinley Memorial City, a 25-story, 278-unit apartment tower that will have an adjacent nine-story office building. Both the multifamily tower and the office building are scheduled to be completed by summer 2021. The McKinley Memorial City will be located at 9757 Katy Freeway in Memorial City near the Energy Corridor.

Meanwhile, the Katy-Cinco Ranch-Waterside submarket is one of the fastest-growing in the area, with 2,542 units currently under construction — nearly as many as in Montrose-Museum-Midtown. Much of that growth is because Katy has seen a range restaurants, entertainment venues and retail establishments open recently, Marix said.

“Katy is getting its fair share of supply, partly because of the schools that are there and partly because of all the activity out there,” Marix said. “People want to be close to where the action is.”



Publication: Houston Business Journal

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