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Houston Struggles to Digest 27,400 New Apartment Units in 2016; More Coming in 2017

HOUSTON  (By Dale King)  – Diversity in the city’s job market is helping to spur demand for ‘working class’-style apartments in Houston this year, despite continued drag on the economy from oil and gasoline sectors where employment and financial growth have been stifled by falling commodity prices, says a multifamily market study for the final quarter of 2016.

That same job diversity could, in the short term, prevent the luxury apartment market from hitting bottom. In the long term, the city’s multiplicity of jobs could be the incentive for a resurgence in demand for high-end units, says the Multifamily Research Market Report for the Houston Metro Area prepared by Marcus & Millichap, a firm whose research services divisions provide clients with market data.

Right now, “hiring in consumer-driven sectors such as leisure and hospitality, and retail trade, as well as other service sectors, are leading employment gains. Growth in these segments typically supports demand for Class B/C [‘workforce housing’] apartments, which hovered near 6 percent in the third quarter” of 2016, the study says. The attraction of middle class units was so strong that the market absorbed 10,000 of these rentals during the second quarter without a flinch.

Despite encouraging stats in workforce housing, the dark side of apartment growth is just being felt. Many luxury units – planned and built during the “energy industry boom” that followed the 2008 recession – are coming up for lease. “The enthusiastic economic expectations [that] prompted builders to move forward with a significant number of new units slated for delivery over the next several months” have dried up, the report says.

As a consequence, “demand for these [luxury] apartments has fallen as declining oil prices over the last two years resulted in large losses in upstream oil and gas and related industries in recent quarters, weighing on economic growth.”

M&M’s report says the impact is “localized primarily in the western half of [Houston] where builders have focused their efforts for the past few years.”

“The delivery of thousands of luxury units to inventory will raise the vacancy rate in some submarkets and contribute to an increase of 40 basis points (.4%) to 6.6% percent in December. As a result, operators of some apartment complexes – particularly recently completed ones – are offering ‘substantial concessions’ to those opting to lease. These include offers of six to eight weeks of free rent.”

“Vacancy has risen as much as 490 basis points (4.9%) in the western and northwestern portions of the metro since the third quarter of last year,” says the report. “The highest vacancy rate is in Memorial, rising 11.4% in the third quarter. Much of the advance was driven by a 750 basis point (7.5%) annual increase in vacancy at Class A [luxury] complexes in the area, to 15.6%.”

The stiffer hike in the vacancy rate was contained largely to the western half of the city while some eastern and southern submarkets saw a drop in the number of empty units. In fact, the report says, “vacancy is still below 5 percent in many of these submarkets, including inside the east loop, Pasadena, Baytown, Galveston and Brazoria County.”

Rent growth has slowed in the past year, with the average per-month cost of a unit at $1,028 in the third quarter – just 2.1% more than last year. The average rent is highest downtown at $1,883 per month after a 6.3% dip from a year ago. “The monthly apartment lease remains above $1,500 in the Heights, Greenway/Upper Kirby and Medical Center areas.”

On the bright side, the study says, “a positive long-term economic outlook is encouraging investment activity in the Houston apartment market this year. Job growth in downstream oil and gas operations, as well as consumer- and service-related industries, has many investors expanding portfolios with purchases of assets in eastern and southern areas of the metro.”

“Growth in the area’s petrochemical industry is raising demand for multifamily properties,” the report states, “with private, local investors targeting older assets in need of repositioning. Assets in the eastern and southern portion of the metro will remain in high demand as growth in the petrochemical industry supports healthy renter household formation.”

Other data reported by the M&M study include:

Economy: Houston employers will create 12,500 positions this year, increasing employment by 0.4%.

Employment: Hiring will remain elevated in the leisure and hospitality sector through the beginning of next year as Houston prepares to host the Super Bowl in 2017.

Housing: A number of households will remain in rental housing. A low-maintenance lifestyle, the inability to save for down payment obligations and the transient nature of some workers will keep demand strong for apartments in the metro.

Construction: Developers will complete 27,400 apartments during 2016, up substantially from the nearly 16,500 units brought online during 2015.

Dec. 13, 2016 Realty News Report Copyright 2016

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