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Enough Already – 2016 Record Year for Houston Apartment Construction

(By Dale King) HOUSTON – A third quarter report on the status of multifamily unit construction and occupancy in Houston says a record number of apartments is hitting the local market this year, most of them during the second half of 2016.

And while this may look good in the Guinness Book of World Records, it’s not so good for city’s rental market, says the Multifamily Research Report prepared by Marcus & Millichap, a national commercial real estate brokerage firm specializing in investment services.

Before oil and gas prices tanked, a number of investors — seeing a growing market for high-end rentals — came forward with plans to build luxury apartments in and around Houston’s downtown. Many of these have been coming onto the lease market during the second half of the year.

The report says Houston’s economy, which shed a number of oil and gas industry workers during the past year or so, is picking up jobs in several non-oil fields. “Consumer-driven retail and hospitality establishments along with service-oriented employers within educational institutions and government entities are leading these gains.”

Folks coming to town to take jobs in these fields are focusing on Class B and Class C rentals – so-called “working class housing.” The M&M report says the “unifying aspect of these employers is that many support income levels typically associated with workers who rent Class B/C apartments.”

Because this group has taken up residence in mid-range rentals, Houston was able, during the second quarter of the year, to make a positive net absorption of 10,062 rentals which the report says is “evidence of demand” for working-class domiciles. The second quarter achievement followed two quarters of negative absorption.

At the same time, the M&M report scolds those with “zealous economic expectations” who “initiated mass development of new units prior to global forces drastically impacting Houston’s energy market growth.”

The high-end rental units coming onto the market during the second half of 2016 will “dim the past quarter’s positive absorption through the remainder of this year. The new supply will surmount demand, pushing the calendar year vacancy average up for a second consecutive year.”

In a nutshell, says M&M, “rental rates priced close to the metro average or lower will be in high demand by new households employed in the service and labor markets as overall annual rent growth slows compared with the previous years’ performance.”

Builders are expected to complete 27,600 apartment units in 2016, “a calendar year historical high.” The highest concentration of these is in the Downtown/Montrose/River Oaks submarket, a total of 3,500 rentals.

This will cause the metro vacancy rate to rise to 7% “as the large number of new units coming online awaits lease-up. “Effective rental growth will remain relatively flat,” says the study, “ticking up 1.6 percent in 2016 as concessions rise.” Renters are being enticed to lay their money down with move-in allowances, gift cards, Apple watches, flat-screen TVs and cruises, among other things.

Rent growth showed much stronger muscle in 2015, increasing 5.5 percent.

Still, the report offers hope for the future. William E. Hughes, senior vice president of Marcus & Millichap Capital Corporation, said that “as the homeownership rate continues to plumb new lows, investor interest in the multifamily sector remains upbeat.” He did hedge a bit, adding that because “new supply is heavily concentrated in a few large metros,” the national impact will be blunted.

The report also concludes on an upbeat note. It says: “Tame job growth and moderating incomes haven’t dampened the need for residences, evidenced by home sales increasing 2.1 percent over the past 12 months. One of the largest apartment developments in metro Houston is the Tate at Tanglewood, located in the Galleria/Uptown submarket. The 431-unit, five-story structure is near universities, restaurants and retail, “providing an urban environment that many younger residents are seeking.”

Oct. 24, 2016 Realty News Report Copyright 2016

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