What's Next for Houston Multifamily?
The city's multifamily sector has a lot of challenges ahead of it. But for those who know where to look, opportunities await.
Multifamily investors have had a great run in Texas — and many still are.
The Dallas-Fort Worth area, for example, has benefited from an amazing population influx and corporate relocations. And that’s something that will likely keep happening, driving sustained demand for rental units.
Austin, though now facing some challenges with its huge development pipeline, is still thriving, thanks to continued population and economic growth, as well.
But let’s talk about Houston.
Houston is often thought of as a hot-or-cold market. For good reason: The energy sector plays an oversized role in the metro’s economy. When energy (mostly oil) companies are doing well, increased employment and income levels trickle down to the rental economy, boosting demand for housing and, consequently, higher rents.
While oil prices are a bit above the five-year average as I write this, Houston seems to be cooling off.
Why?
It’s about a lot more than just oil prices.
I’ll begin with a quick overview of where I expect Houston to move this year, and what that means for multifamily investors. Later, I’ll break down some of the metro’s latest indicators, based on recent market reports.
Houston’s 2024 Outlook
I’d be rather cautious about any new investment in Houston. If you look at occupancy trends intersected with rent changes, the market is a tough sell — especially in the luxury or upper-scale subsector.
Workforce housing is undersupplied, it’s true, and the massive development pipeline will do very little to address the shortage in the near term. For those investors looking to tap into value-add opportunities, be aware of the challenges you’ll face when your refurbished 1980s-built property goes toe-to-toe with a new Class A delivery that’s struggling to lease up.
That’s not to say value-add investments don’t have a chance — but I would estimate repositioning a Class C community as a Class B will yield a better short-term return than a B-to-A upgrade.
As for new development opportunities, it seems like a good time to pump the brakes. Inventory expanded by about 2% last year, and there were close to 40,000 units under construction. There are some submarkets where new
If you’ve got an investment in Houston, you’re no doubt feeling some pain as a result of soaring insurance premiums (among other costs). Resist the urge to raise rents beyond what the market — and your property — is dictating, or you could face serious occupancy issues that could be difficult to recover from.
Rent Growth in Houston
Rents in Houston increased by 0.7% year-over-year through December, according to Yardi Matrix’s latest national multifamily report. While this is beyond the national average of 0.3% during the same period, it’s still a far cry from the huge gains of the last couple years.
It’s highly unlikely for rent growth to accelerate anytime soon — and I’d be shocked if it picked up much in 2024 at all. The reason for this is simple: the huge amount of supply under construction across the metro.
As more units are added, absorption won’t be able to keep up — and occupancy will slide as a result, placing downward pressure on rent growth. Note that I fully expect these units to be absorbed in due time, but there will undoubtedly be an initial shock that will be felt across the market, though far more acutely in the luxury sector.
Multifamily Property Values in Houston
In 2023, multifamily transactions closed at (roughly) $110,000 per unit, marking a huge drop from around $150,000 in 2022. Don’t take this to mean that property values dropped that much, of course — transaction volume shifted heavily to favor Class B and C multifamily assets last year as investors looked to take advantage of value-add plays.
Still, values are likely to be holding steady — maybe dropping slightly — in the near term. If you bought an asset in 2021 and have been holding onto it without making significant improvements, you shouldn’t expect to see a huge return just yet.
Trouble on the Horizon
One area that could impact investors in Houston is the risk many lenders are associating with properties in the metro. A recent report from Trepp shows that Houston’s “criticized” loan rate is the highest it’s been in a decade.
There are a few reasons for increased difficulties around debt service in Houston. Beyond occupancy and stagnant rent growth in much of the market, rising costs play an oversized role, particularly regarding insurance costs.
In the past year, multifamily premiums have risen at a rapid rate — in some cases by more than 200% in a single year. While this isn’t exclusively a Houston problem, risks surrounding hurricane damage ensure that this is likely a longer-term problem.
Hidden Opportunities
You might now have an impression of the difficulties in navigating Houston’s multifamily market today. But while it’s true there are major challenges, there are also serious opportunities for investors.
For investors hesitant about pursuing distressed assets (for good reason), Houston may bring about something a bit more palatable. As loans come due at often far higher rates than anticipated a few years ago, expect a number of properties to hit the market in an effort to cover upcoming balloon payments.
It’s difficult to say if this will be any kind of “wave” of sell offs, but an uptick seems likely among properties with floating-rate debt and no clear path to refinancing early — like those with CMBS loans.
Remember that, despite rising costs across the board, one real way to turn an investment profitable is by securing competitive financing for your asset. While many lenders may hesitate to do business in Houston, there are many banks, credit unions, and others waiting for the right deal. Throw your details into the form below, and we’ll shop your opportunity to thousands of lenders until we find the right terms for you.