When the Houston market was last featured in the Market Spotlight series back in November of 2021, the multifamily pandemic recovery that began in late 2020 was still flowing along. In the intervening months, the picture has changed some at the national level. Though rent growth remains well above normal with average effective rent for new leases up 5% in just the first five months of the year, apartment demand has cooled substantially from 2021. Houston has largely resembled these national shifts so far in 2022, but with some differences as well.
As a reminder, all numbers refer to conventional properties of at least 50 units.
New Supply and Net Absorption
About 5,200 new units have been delivered across the Houston market through the first five months of the year. This level of new supply was considerably lower than in the same portion of both 2020 and 2021 but was more than in 2018 or 2019. One-third of the 42 ALN submarkets for the area have seen new deliveries to some extent. The Richmond – Rosenberg region has led the way so far with almost 700 new units, followed by the Heights and the IAH Airport – Humble submarkets which have each added more than 500 new units.
While new deliveries were down nearly 30% from the same period in 2021, net absorbed units dropped by almost 80%. Only around 3,400 net units were absorbed from January through May across the Greater Houston market. This total was less than half of that from 2019 and even fell short of 2018 when the effects of Hurricane Harvey were still being felt. The net effect of the associated decline to both new supply and apartment demand was a 0.3% decline in average occupancy to just below 92% to end May.
The decline in demand was most pronounced in the Class B and Class C sectors. Class B suffered a decline of more than 85% compared to last year with less than 800 net absorbed units so far in 2022. For Class C, about 3,300 net absorbed units through May of last year was followed up in the same period this year by a net loss of more than 700 leased units. The 70% decrease in Class D net absorption was not quite as large as the almost 80% reduction at the market level, but Class A proved the most resilient with a drop of ‘only’ about 30%.
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Average Effective Rent and Lease Concessions
Unlike at the national level, where average effective rent growth has been above 1% each month for the last three consecutive months, the Houston market has not seen monthly rent growth above 1% since September of 2021. Even so, average effective rent has increased by 4% through May of this year for new leases thanks to monthly gains just below 1%. The average unit closed May leasing for about $1,280 per month.
Three submarkets to the north of the urban core have led the way for rent growth so far this year: Kingwood – Far Northeast, Copperfield – Bear Creek, and The Woodlands – Far North. Each area has added at least 8.5% to average effective rent in the period.
Lease concession availability for the market ended May with about 20% of conventional properties offering a discount for new leases. This marked a 6% decline from the start of the year and was the lowest level of availability for any May of the last five years. The average concession value finished the month at three weeks off an annual lease – also down from the start of the year and the lowest for any May going back more than five years.
In that apartment demand has cooled and rent growth remains elevated relative to the long-term average, Houston has resembled multifamily performance nationally so far this year. However, the decline in demand has been even more pronounced than at the national level while rent growth has not been quite to the same pace.
Multifamily is a highly seasonal industry, with the second and third quarters traditionally being the strongest portion of the calendar. It is still early in that period for 2022, but with headwinds growing in the broader economy and not much of a bounce in apartment demand to speak of so far, it may not be long until rent growth begins to lose steam.
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