HOUSTON – Hurricane Harvey has upended Houston’s multifamily market. Just as the sector was recovering from years of overbuilding, the city incurred Harvey’s’ wrath. Harvey, which first made landfall in Texas as a Category 4 hurricane on Aug. 26 and then stalled over the Texas coast, broke all records to become the wettest tropical cyclone in the contiguous United States. Real estate research firm CoStar estimates that some 72,000 apartment units and 20 million square feet of office space were affected by the epic floodwaters. How will Harvey affect the multifamily sector? To find out, Realty News Report talked with Teresa Lowery, Senior Managing Director, multifamily, in the Houston office of Colliers International. Teresa, who has more than $4 billion in multifamily sales in her real estate career, was ranked among the firm’s Top 5 as a production broker and honored as one of the top 10 percent of all Colliers brokers across the U.S., Canada and Latin America in 2015.
Realty News Report: Hurricane Harvey delivered a hard blow to the Houston multifamily sector. How would you summarize the status of the market now that we are in a recovery mode?
Teresa Guidotti Lowery: Whether or not Hurricane Harvey delivered a hard blow to the Houston apartment market depends on which side of the table you are sitting on — renter or owner. Houston’s multifamily sector was already well into a recovery mode cycle prior to Hurricane Harvey. On August 21, 2017 – four days prior to Hurricane Harvey’s landfall – Realty News Report published an article that the Houston area economy added 54,200 new jobs over the last year, one of the strongest job growth reports since job growth tailed off in 2015, according to the Texas Workforce Commission. The report covered the 12-month period ending July 31, 2017. Taking into consideration that 50 percent of Houston’s population is “renters by choice,” job growth at this level quickly translates into stronger occupancy and absorption figures. According to Apartment Data Services, Houston’s overall apartment occupancy was 89.1% as of August 2017, with Class B and C occupancy at 91.2%. At the same time multifamily new construction was way down, creating a positive market performance of 11,499 new units added to the market and 14,437 units absorbed. This is the first time in five years that Houston realized positive multifamily absorption. The city was on track for a balance between supply and demand and discussion shifted to what apartment owners could expect from the flat rental rate growth of the previous 18 months. Hurricane Harvey tipped the scales. Houston is no longer a renter’s market. Multifamily owners hold all of the cards in more ways than one. The big “secret” among multifamily ownership is that an insurance claim creates a windfall opportunity. If you are among the multifamily owners with flood damage and were well protected with coverage, those Insurance proceeds will rapidly ramp-up your “value-add” property improvement program on some else’s dime. On the other side, renters can expect to see a real tightening of the market, with fewer units available to select from. High demand and lower vacancy empowers the owner to implement rental rate increases. Residents could find themselves with no alternatives.
Realty News Report: Information is still coming in. There are a number of estimates about the number of units that have been damaged or destroyed. What’s your assessment?
Teresa Guidotti Lowery: I have spoken with multifamily owners who have zero damage and multifamily property management firms whose portfolios experienced flood damage to 40 percent of the assets. Areas surrounding the west quadrant, northwest quadrant and northeast quadrants, including Kingwood, appear to have incurred flood damage to ground floor units. According to Bruce McClenney, President, Apartments Data Services, an early survey sent to Houston Apartment Association members received 241 individual property responses. Of that number 43 reported some level of damage to units for a total of 1,700 damaged units. Keep in mind we have 2,725 individual apartment communities that make-up the Greater Houston area and only 241 have responded thus far. I expect we will eventually learn that 2-3 percent of the 638,601 overall unit inventory has been damaged, or a total of approximately 13,000 to 19,000 units. Based on 89.1 percent overall occupancy, Houston had an available apartment inventory of approximately 70,246 units. Removing the damaged unit count reduces the inventory down to approximately 51,000 available units. Houston already has reported 30,000 displaced residents and an influx of temporary residents in the thousands, made up of construction workers needed to rebuild homes and businesses, aid workers and insurance adjusters. It is expected that 51,000 units will be filled-up in record time.
Realty News Report: Obviously, with the many single-family and multifamily homes damaged, the vacant units in the Houston market will be absorbed quickly. Will this evacuee rental surge occur even in the new Class A properties?
Teresa Guidotti Lowery: Absolutely. Class A will benefit. One example: Colliers International Houston has three office locations in Houston –Galleria, The Woodlands and Sugar Land). Of our 100 Houston-area employees, 20% reported flood damage or loss of a vehicle. These are among the large number of white-collar workers who will seek to relocate to the newer Class A communities. In several cases, people I know have decided to demolish their flood-damaged home and completely rebuilt brand new. The process of rebuilding could take 12 to 18 months. The timing will be closely tied to the builder’s ability to have ample construction workers and materials. During this period of time, displaced residents will remain a part of the Houston rental community. I have spoken with a developer whose 90 percent occupied Class A multifamily property in Katy, jumped to 100 percent occupancy overnight. Another anomaly is the overnight migration from the suburbs to the urban-core, the area with the highest concentration of Class A projects. The western neighborhoods that remain under water have caused transportation issues and long commutes. Incoming and outgoing commutes that would normally take 30 minutes, now take two hours. The rebuilding of outlining neighborhoods could take one to two years. Displaced homeowners are choosing to live closer to their jobs, within those areas that have the highest concentration of Class A properties.
Realty News Report: As of this time, it’s unclear if Federal Emergency Management Agency (FEMA) will initiate an apartment voucher program. How would that work?
Teresa Guidotti Lowery: Anyone who has been displaced as a result of flood damage to their home, whether an apartment or single-family residential home, can submit FEMA paperwork for relief. FEMA’s Transitional Sheltering Assistance (TSA) aid is offering two months of expedited rental assistance, which provides up to $2,000 per month. Thus far, 190,683 individual assistance applications have been approved. According to the FEMA web site — which is updated every 24 hours – some $73.4 million in housing assistance has been approved, but not necessarily distributed.
Realty News Report: A FEMA apartment voucher program could be very beneficial to the market at this time, correct?
Teresa Guidotti Lowery: The need for temporary housing as a result of Hurricane Harvey damage is going to be very beneficial to the Houston apartment market, regardless of whether or not a widespread FEMA apartment voucher program is extended beyond the present two-month period. The more affluent neighborhoods to the west, southwest and northeast – Memorial, Katy, Sugarland and Kingwood — are occupied by a well-educated workforce where the medium annual income per household exceeds $100,000. It is unlikely that these displaced homeowners will qualify for apartment voucher assistance. They may receive assistance from other available resources and monies will go towards paying market rental rates while rebuilding. Voucher or no voucher, multifamily owners will see an immediate jump in revenue stream as a result of the long term and widespread impact of Hurricane Harvey.
Realty News Report: What about two years or three years out? What do you see happening in the Houston apartment market in 2019 or 2020?
Teresa Guidotti Lowery: I predict that we will see relatively low levels of new multifamily construction for a number of reasons. Houston has endured three major floods since 2015 and lenders will have concerns related to future flood risk and rising insurance premiums. With demand higher than expected supply, I think we will see sustained annual rental rate growth around the 4.5 percent level — about 2 percent higher than the current national average rental rate growth of 2.5 percent. According to Apartment Data Services, the city has 2,725 individual apartment communities, of which 2,000 are Class B and C. As these communities continue to age, there will be a growing need for renovations and improvements on existing apartment buildings. I expect the boost in occupancy, revenue stream and insurance claim proceeds brought on by Hurricane Harvey will enable these owners to improve and modernized their multifamily assets, which will ultimately be a good thing for Houston apartment residents.