The Effects of Texas's Multifamily Development
Explore the evolving landscape of Texas's multifamily market, uncovering the strategic implications of construction trends and their ripple effects on investment opportunities.
- Recent Texas Apartment Construction Trends
- The Peak and Subsequent Decline
- Contextualizing the Construction Slowdown
- Implications for Rent Growth and Demand
- The Temporal Impact on Rent Growth
- Absorption and Renter Demand
- What’s Going to Happen Next?
- Rent Growth in Spring 2024
- Return to Above Normal Rent Growth in 2025
- Impact on Leasing
- The Flood of New Completions
- Focus on Luxury Properties
- Conclusion
- Get Financing
In Texas, a dynamic shift is occurring in the multifamily construction landscape. After years of rapid development, apartment construction starts in the Lone Star State's major metros of San Antonio, Houston, Dallas, and Austin, are experiencing a marked decline.
What does this mean for investors, for renters, and for the future of Texas housing?
Based on a recent report from Institutional Property Advisors and my own research, this article examines recent trends, the implications for rent and demand, and what we can anticipate in the coming years. Join me as we navigate the intricate web of Texan multifamily investments in a time of pretty significant change.
Recent Texas Apartment Construction Trends
In recent years, Texas has emerged as a hotspot for multifamily construction. The state, known for its vast landscapes and booming cities, has seen developers flocking to its major metros, seeking to capitalize on significant demand for apartments. With affordable costs of living, job growth, and a surge in migration and corporate relocations, Texas became a magnet for both developers and renters alike.
However, as we moved into 2023, a noticeable shift took place. By the second quarter, there was a pronounced decline in the start of new multifamily construction projects. This downturn signaled not just a momentary lapse but could, perhaps, indicate a more profound change in the Texan housing landscape.
The Peak and Subsequent Decline
The previous years, especially 2021 and the early months of 2022, witnessed a remarkable surge in multifamily construction in Texas. Developers, recognizing the golden opportunity presented by escalating rents and a favorable economic climate, wasted no time breaking ground on new projects. Texas city skylines were dotted with cranes, a testament to the building frenzy.
Yet, in the second quarter of 2023, this momentum dwindled. Construction starts plunged, hinting at a potential saturation point or, perhaps more likely, the influence of external economic factors that made new projects less appealing.
Contextualizing the Construction Slowdown
Of course, Texas hasn’t been alone in this trend. On a national scale, there's been a similar drop in enthusiasm for launching large-scale apartment projects.
One prime suspect for this nationwide hesitancy? Rising interest rates.
As borrowing costs soared, developers found themselves grappling with increased financial constraints, making new projects less economically viable as rent growth decelerated.
Looking deeper into the Texan context, the boom period of 2021 and early 2022 was catalyzed by skyrocketing rents. With interest rates still at historic lows during this timeframe, developers found the environment ripe for new constructions. But in the spring of 2022, the Federal Reserve began taking action. The federal funds rate, which hovered between 0.00% to 0.25% at the start of 2022, leaped to a staggering range of 5.25% to 5.50% by July 2023. This sharp hike, coupled with a slowing rate of rent growth, dampened the previously fervent construction spirit.
Implications for Rent Growth and Demand
The multifamily housing markets in Texas are beholden to supply and demand dynamics, just like any other. As construction trends shift, they carry with them a ripple effect that touches rent prices, occupancy rates, and the broader housing economy.
With the recent slowdown in multifamily construction, several pressing questions arise: How will rents react? What does this mean for the Texan who is looking to rent, and for the investor looking for returns?
The Temporal Impact on Rent Growth
The influx of new apartment constructions in the preceding years naturally exerted a downward pressure on rent growth. With more units available, competition intensified, leading to concessions and more negotiable rents. For renters, this was a brief respite from the skyrocketing rent prices of the past. However, for investors and property owners, it meant thinner profit margins, thanks to growing costs (for example, skyrocketing insurance rates).
Yet, this suppression of rent growth, driven by the surge in supply, won’t last forever. As construction starts have waned, the future will likely see a reduced volume of new apartments entering the market.
This reduction in upcoming supply, taken alongside steady or increasing demand, is poised to relieve the downward pressure on rents. In essence, the scales of supply and demand are recalibrating, and the market is gearing up for a potential resurgence in rent growth.
Absorption and Renter Demand
Following the pandemic, there was a massive return of individuals to the rental market. The pandemic had seen many move back home or opt for alternative living arrangements, especially amidst job losses and economic uncertainties. But as the world began its journey towards normalcy, a significant portion of these individuals found their way back to the rental market, further amplifying demand.
Compounding this demand was (and still is, to a point) the skyrocketing price of single-family homes. As home prices soared to unprecedented levels, the dream of homeownership became increasingly elusive for many Texans. This trend has nudged a larger segment of the population towards renting, either out of necessity or as a strategic choice to wait out the housing price frenzy. For the multifamily housing sector, this meant a bolstered renter base, potentially driving up occupancy rates and, in turn, rents.
What’s Going to Happen Next?
Now that we understand what’s happened and what’s going on right now, it begs the question: What lies ahead? As we've looked at the ups and downs of construction trends and their effects on rent and demand, let’s consider what the future might hold for multifamily markets in Texas.
Rent Growth in Spring 2024
Spring, traditionally a robust leasing season, could signal the start of a distinct shift come 2024. I expect rent growth to turn around — at least a bit. While construction starts may be on the decline, there’s still a huge amount of inventory under construction, after all, some of which will still be wrapping up come next year. It will be hard for Austin's rent growth, in particular, to move far into positive territory.
That said, the reduction in new units coming online will likely be significant. As the multifamily properties that began construction during the boom phase reach completion, there will be fewer new projects in the pipeline to replace them. This anticipated scarcity, especially against the backdrop of rejuvenated renter demand, sets the stage for landlords and property owners to potentially command higher rents.
Still, I expect rent growth to remain at least somewhat moderate — likely falling in line with the U.S. average for that time.
Return to Above Normal Rent Growth in 2025
Moving further into the future, early 2025 is projected to herald a return to rent growth rates that surpass long-term norms. The reasons for this are multi-faceted. The lag effect of reduced construction starts in 2023 will continue to manifest as fewer new apartments become available. Coupled with the potential for sustained renter demand, the environment is ripe for above-norm rent growth.
However, these predictions don't exist in a vacuum. External economic factors can play a pivotal role in shaping outcomes. A sudden recession or unexpected job losses would undoubtedly dampen renter demand, putting a brake on rent growth. On the optimistic side, current employment trends remain positive with low unemployment, suggesting a stable economic outlook.
The role of interest rates cannot be understated. A potential drop in interest rates could introduce a dual dynamic, though the Fed doesn’t expect to reduce rates anytime soon.
On one hand, more affordable borrowing would spur some developers back into action, catalyzing more construction. Simultaneously, lower rates would make homeownership more attainable for many, reducing the pool of potential renters.
Regardless of how the economy shifts in the short term, though, long term we’ll almost certainly land in a good place. After all, apartment buildings are recession-resistant investments. People always need a place to live.
Impact on Leasing
The Texas apartment scene is about to get a lot more crowded. With a bunch of new apartments set to hit the market soon, things are gearing up to be pretty competitive.
The Flood of New Completions
A bunch of new apartments wrapping up construction means more options for renters. On the surface, that's great for them — more choices, potentially better deals.
But for landlords and property managers? It's game time. They're going to have to step up their game, offer better amenities, maybe some discounts, or even throw in a free month of rent to attract tenants. With more options available, renters can afford to be picky, and that will shape the competition.
Focus on Luxury Properties
Now, to the fancier side of things. Luxury apartments are popping up in specific areas, and they're coming in hot.
The report from Institutional Property Advisors gives the figures: Statewide, there are 13 submarkets that have more than 3,000 units under construction. One (Allen-McKinney in the Dallas-Fort Worth metro) has more than 10,000 underway.
That’s a whole lot of units, and it will make things particularly challenging for investors and developers focused on the luxury rental market. I’d expect we’ll see rents flatten in this segment — especially in these submarkets — before most wider impacts are felt.
Conclusion
The multifamily housing scene in Texas is undergoing some serious shifts. But like any change, it brings with it a mix of challenges and opportunities. For current apartment building investors, the landscape might seem intimidating at first glance: rising competition, an influx of luxury properties, and an uncertain future for rent growth. But here's the thing: Change often disguises opportunity.
If you're an investor thinking of exiting, it's worth considering a few key takeaways. First, the slowdown in new constructions means that, a few years down the line, there'll be fewer new competitors. Those existing properties? They're going to be even more valuable when demand continues to outpace supply.
Next, the surge in luxury properties might look like a challenge now, but it's also a sign of a maturing market. As Texas cities grow and evolve, there's a clear demand for upscale living, signaling a robust, diverse tenant base in the future.
Finally, remember that market dynamics are always in flux. Today's challenges might be tomorrow's advantages. If you're considering an exit, make sure it's a strategic move, not a reactive one. With the right perspective, today's multifamily investors could find themselves in a prime position to reap the benefits of Texas's ever-evolving apartment landscape.