We checked in on the Houston market back in May, and the multifamily rebound that was in full force then has not slowed much in the intervening time. At the national level, apartment demand continues to set records and rent growth is well into double digits. With this backdrop in mind, let’s revisit the Houston multifamily market.
As always, numbers will refer to conventional properties of at least 50 units.
New Supply and Net Absorption
The new construction pipeline has been active this year, delivering more new units through October than in any year of the past five except for 2020. More than 14,000 new units have been introduced across the market, with 60% of the 42 ALN submarkets for the area seeing some level of new supply. Four regions have had at least 1,000 new units introduced this year, led by the roughly 2,400 new units in the Midtown – Montrose – Museum District submarket. Other active areas include Greater Katy – Cinco Ranch and Spring, each with more than 1,100 new units. Conroe – Montgomery was the other submarket to add at least 1,000 units through October, with approximately 1,050 new units.
The eye-popping metric for Houston has been in apartment demand. Net absorption of nearly 35,000 units through October was more than the last three years combined for the same portion of the calendar. The surge in demand has been observed across the price classes. Class A net absorption was almost triple that of the same 10-month span of 2020, and Class C net absorption has been more than double. It is important to remember that the recovery in demand actually began last year, so 2020 net absorption fell only slightly short of 2019 and was well above that from 2018. This year, the Class D space has seen the largest increase in demand compared to 2020. After a net gain of only around 250 leased units in 2020 through October, Class D properties have leased more than 4,500 net units that were previously unoccupied so far this year.
At the market level, the active new construction pipeline and historic demand have combined for an average occupancy gain of 4% up to 92% overall. This was not only the highest level for any October in more than five years but was only the second time in that period that average occupancy was 90% or better.
Average Effective Rent and Lease Concessions
As would be expected given everything already mentioned, rent growth so far this year has also been well beyond anything seen in recent history. 2017 was the last time average effective rent growth had topped even 2% by this time of the year, and through October of 2021, average effective rent growth stood at 12%. In what is an indication of the broad-based nature of the positive results, properties that entered the year already stabilized have managed a gain of just over 10%, not far off from the market as a whole. At the price class level, only the Class D subset, with an increase of 3.6%, did not close October in double digit territory. Class B, with an increase at the average of 16%, led the way followed closely by Class A at just over 15%.
A major piece of the rent growth story has been the movement in lease concessions. A 40% decline in discount availability from the start of the year brought the percentage of conventional properties offering a new lease concession package to 25% to end October. That marked the lowest level of availability for this time of year since the end of October 2017 when 24% of properties were offering a discount. An 18% decrease in the average concession value brought the average to the lowest point of any October in the last five years at just over three weeks off an annual lease.
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Unlike in some other markets around the country, both the availability and average value of lease concessions fell across the price classes. The largest decreases in availability were in the Class B and Class C subsets, though Class A managed a reduction of 41%. In terms of the average discount value, the 31% drop for Class A properties was the largest. Class D properties, with a 3% decline, marked the smallest retreat in the average concession value.
Nationally, both apartment demand and rent growth have cooled off in recent months from their peaks earlier in the year. The same has held true for Greater Houston. In a highly seasonal industry such as multifamily, this is not unexpected or unusual. What has been unusual is the level of apartment demand seen this year, and its effects can be seen across the other performance metrics.
The broad-based nature of the rebound this year is notable, and is evidenced by how stabilized properties have performed, by the results across the price classes, and by results at the submarket level. This bodes well for the future and is obviously preferable to a situation where one segment or area is skewing the market-level numbers up.
Much uncertainty remains in the broader economy as we look toward 2022, and the stratospheric rent growth of 2021 is likely not only to exacerbate affordability issues but also increase political scrutiny on the industry for that reason – this is already being seen in some markets around the country. Even so, after a rough 2020, this year is shaping up to be one for the history books.
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