Houston’s Apartment Market Recovers Some Lost Ground

Houston apartment demand saw a big performance bump following Hurricane Harvey as displaced residents turned to apartments for alternative housing. One year later, the market is largely sustaining that momentum, thanks in large part to robust job production and a slowdown in new apartment completions.

Houston recently surpassed New York as the nation’s job growth leader, adding 110,200 jobs in the year-ending October, according to the Bureau of Labor Statistics. These new positions increased the existing workforce by 3.7%, well over the 1.9% expansion in the U.S. overall.

Recent job growth in Houston reflects a strong rebound from what this market was registering just a few years ago, after oil prices collapsed in mid-2104, as discussed in the latest RealPage Asset Optimization webcast. Houston – the Energy Capital of the World – has historically followed trends in the energy sector, with a large concentration of corporate oil employment, oil refineries and shipping facilities. This market started to show signs of economic improvement in early 2017.

Despite the temporary slump, Houston has been one of the nation’s top metros for job production during the current economic cycle. Since the beginning of 2010, Houston has added 573,100 jobs on net, expanding the total employment base by 22.5%. The only two metros to see higher gains during the past eight years were Dallas-Fort Worth, which added about 795,000 jobs during that time frame (for growth of 27.2%), and New York, the #1 employment market with a gain of 975,400 positions (for milder economic expansion of 16%).

A recovering economic base inspired strong absorption for over 15,000 units in the year-ending September. That was one of the best market-level figures seen across the U.S., trailing the results in only Dallas and New York. While that sounds promising, it should be noted that the past year’s demand progress in Houston was almost entirely achieved during the final quarter of 2017, when single-family homeowners were forced into the apartment market after the damage of Hurricane Harvey.

Occupancy in Houston also rebounded, climbing 120 basis points (bps) in the year-ending 3rd quarter, the second strongest increase in the U.S., surpassed only by Pittsburgh (150 bps). However, it should be noted that – as with demand – all that occupancy growth occurred in the final three months of 2017, when Hurricane Harvey forced residents into the apartment market. Occupancy has held steady throughout the first nine months of 2018.

As of September, occupancy was at 93.8%. This is a performance metric in Houston that doesn’t measure up to a nation-leading status. In fact, while registering ahead of Houston’s long-term average, the metro’s 3rd quarter occupancy reading was relatively soft on a national scale. Among the largest 50 metros, Houston tied with San Antonio as the weakest occupancy market in the U.S. as of September.

Across product lines, occupancy is virtually identical, at 93.8% in Houston’s Class A and B stock and at 93.9% in the Class C units. The Class C product has made the most improvement, however, climbing a sizable 790 bps in the past eight years. This is a pattern showing up across much of the nation.

Also allowing the market to regain momentum, supply volumes have come down from the record levels Houston was seeing just over a year ago. As of the 3rd quarter 2018, annual new completions were down to roughly 10,000 units, after trending downward for five quarters in a row. At its peak, annual completions in Houston reached nearly 23,000 units in mid-2017, before starting that downward trend. While lower than recent averages for Houston, this was still one of the biggest volumes nationwide, trailing only Dallas, New York, Washington, DC and Denver.

Houston also ranks among national leaders for apartment deliveries during the current economic cycle. New supply in Houston has added up to almost 105,000 units since early 2010. Again, the market followed Dallas-Fort Worth, where just over 132,000 units were delivered.

With relatively few vacancies in the market, rent growth in Houston is once again above the national average. While not among the nation’s top 10 rent growth leaders for the year-ending September, Houston was the first Texas market to enter the mix, at #12, with a price hike of 3.6%. This performance – just ahead of the U.S. norm of 3% – is a sharp turnaround from the annual rent cuts that got as steep as 2.3% at the end of 2016.

Among product segments, Houston’s class A and B stock recorded year-over-year rent growth near the 4% mark, while Class C price increases were softer at 2.4%, suggesting owners and operators have been cautious about pushing rents for the lower-income households facing the most rigid affordability challenges.

During the current economic cycle, apartment rents in Houston have climbed a total of about 26%. While substantial, that pace trails the national average of 32%. Average effective rents in Houston are now at about $1,104, well below the U.S. norm of $1,352. Additionally, Houston boasts some of the cheapest rents among the large Texas markets, beating only San Antonio, where prices average $958. Even the much smaller Midland/Odessa – another energy-reliant economy – is commanding better rates at $1,573.