The State of Houston’s Apartment Market: Q&A with Bruce McClenny
HOUSTON – (Realty News Report) – Houston’s multifamily market has been on a roller coaster ride these past 18 months. The market was relatively soft until Hurricane Harvey hit, then much of the multifamily sector vacancy disappeared. Now, as those Harvey renters move back into their homes, Houston’s occupancy scenario is changing again. Yet developers are still building new multifamily product, primarily within the Montrose, Heights and Katy neighborhoods, even though more multifamily units are sans tenants. To find out more about where the sector is headed, Realty News Report sat down with one of the city’s experts: Bruce McClenny, president of ApartmentData.com, a leading marketing and information supplier to the multifamily industry. A current member of the Houston Apartment Association’s Board of Directors and past President of HAA’s Product Service Council. Bruce has a BA in pre-law and accounting from Auburn University.
Realty News Report: How would you describe the state of the Houston multifamily market today?
Bruce McClenny: To describe the state of today’s (Nov 2018) Houston apartment market, a review of the past few years is necessary. In the latter part of 2014, the price of oil began to fall and by February of 2016, the price for WTI crude bottomed at $26 per barrel. In addition, the domestic rig count plummeted from 1,960 active rigs in October of 2014 to 404 in May 2016. These events initiated a shake-out in energy employment that resulted in a loss of 86,400 jobs over 2015 and 2016. The good news was that overall employment was buoyed by retail, healthcare, schools, hotels and restaurants to produce a flat, slightly negative job growth of minus 2,500 jobs in 2015 and minus 2,200 jobs in 2016. The bad news was that this local economic downturn zapped apartment demand at a time when apartment developers were in high gear delivering over 41,000 apartment units. Houston, once again, had become noticeably counter-cyclical to the rest of the country as well as the major metros of Texas. Investors began to avoid Houston and place their money elsewhere which greatly reduced transaction volume and dried-up interest for any future development.
Realty News Report: How did the turnaround occur?
Bruce McClenny: 2017 began with a better economic outlook as Houston hosted Super Bowl LI which generated a net impact of $347 million for the local economy according to Rockport Analytics. Houston received two other economic stimuli in 2017, but these came as surprises — the baseball exploits of the Astros and Hurricane Harvey. From the home games of the play-offs and the World Series, economic spending of $20 to $30 million was circulated through the economy, according to Patrick Jankowski of the Greater Houston Partnership. Harvey spread $97 billion worth of damage across the metro according to Moody Analytics. Despite the damage, storm events produced enormous amounts of apartment leasing from homeowners whose homes are damaged beyond being able to live there. From September through the end of the year, Harvey propelled overall rents by $27 per month and occupancy by 1.7 percentage points. In areas where the most single family home damaged occurred, rent and occupancy increases were most pronounced. In the Energy Corridor, rent rose by $84 per month and occupancy gained 5.0 percentage points. In the Katy area, rent moved by $69 per month and occupancy spiked by 3.4 percentage points.
Harvey produced abnormal conditions for market growth that will take most of 2018 to work through. Homeowners will be moving back into their repaired homes and properties will be challenged to renew leases at the elevated rates. Harvey also advanced the economic cycle by at least one year. The over-supply situation which was expected to linger quickly ended. At the beginning of 2018, the development pipeline had around 15,000 proposed units, now there are around 26,000 units proposed. Developers are scrambling to get going again.
2018 is a transition year from Harvey and still lingering supply issues in the Energy Corridor and Downtown. 2019 will be a good year for apartment owners as solid job growth produces absorption of at least 14,000 units that outpaces deliveries of around 9,000 to 10,000 units. Rent growth should be around 3.5 to 4 percent.
Realty News Report: So rental rates and occupancy has increased in 2018?
Bruce McClenny: Because Harvey produced such an abnormal bump at the end of 2017, expectations are that a flat performance would be a great performance in 2018. Occupancy started the year at 89.4 percent and got as high as 90.1 percent at mid-year. As of the end of October, occupancy had settled at 89.9 percent. Fourth quarters are notoriously flat to negative and the October absorption kept with tradition by registering a negative 731 units. So, occupancy will most likely fall some more from its 89.9 percent perch by year-end. Harvey could be still at work as fourth quarter absorption for 2017 was plus 9,851 units. Many questions remain, such as how many of those leases last year were for twelve months and how many of those leases have already moved out? Overall Effective Rent started the year at $1,010, got as high as $1,032 per month and as of the end of October rests at $1,025. Rent, just as occupancy, may slide a little more by year-end, but should remain higher than it started.
Realty News Report: In recent years, developers have built a significant amount of high-rise apartment towers. Why is this occurring?
Bruce McClenny: One reason is that the very high cost of land has forced developers to decrease the footprint and to increase the density of units for a project in the urban core. Another reason comes from Baby Boom generation downsizing, avoiding taxes, upkeep and repairs. This generation is best suited to handle the high rents of these projects.