Houston's Multi-family market is robust, but rents continue to fall

With the local labor market improving, Houston's multifamily market is as healthy as it’s been since mid-2016. After a whirlwind of volatility in recent years, sparked by both the local economic downturn and Hurricane Harvey, the market has been on a path to improvement in 2018. The asking rents, however, continue to fall.

In the aftermath of one of the most devastating storms in U.S. history, asking rents grew at a torrid pace in Houston. In total, asking rents grew by about 2.2 percent alone in the 90-day period of 2017's third quarter. 

For a frame of reference, asking rents typically grow by less than the 2.2 percent-rate over the course of an entire calendar year in Houston, let alone over the course of a three-month period. Now, as we enter the home stretch of the 2018 calendar year, it is important to examine the impact of such massive gains in a short period of time.

Improvements within the local labor market have fueled an uptick in apartment demand over the past 18 months. In particular, Houston has registered consecutive months of 100,000 jobs added on a trailing 12-month basis this year for the first time since the shale boom. Although some of those jobs are certainly construction related, and not necessarily the high-paying upstream jobs from earlier in this cycle, it has been a welcomed sign and a step in the right direction. In fact, in a 12-month time frame ending this September, Houston added nearly 129,000 jobs. While this was an impressive output, construction jobs still led the way, with oil and gas posting a net negative number.

The resurgence of job growth has resulted in impressive results within the multifamily sector this year. Net absorption has more than doubled the rate of net supply additions, and vacancies have compressed as a result. Excluding last year, when demand was inflated due to Harvey, if this trend of demand outpacing supply holds true through the end of the year, it would be the first since 2013 to do so.

Given such a rosy economic and multifamily fundamentals picture, asking rents would have to continue growing consistently this year, right? Sort of.

Tracking back to over one year, over the course of the 90-day period of the 2017 third quarter, asking rents grew at the highest rate of any single quarter in Houston since the late 1980s. The displacement of thousands of residents sent demand soaring, and as a result, the multifamily market was in a healthy position for the first time in over a year. 

At the turn of the year, many wondered just how long asking rents could continue to grow in a market that had several thousands of temporary renters potentially inflating market positivity. But as job gains continued to rise in the first half of 2018, any departures of temporary renters from multifamily units were typically offset by job gains, and rents continued to grow through the end of June.

But when combining the massive gains in the second half of 2017 and the normalized gains in the first half of 2018, the result was an unnaturally high average asking rent throughout the Houston metro. In turn, asking rents have steadily declined in Houston since the beginning of July. When looking at just a 90-day period of growth, and not four-quarter trailing growth, asking rents declined in the third quarter of this year. It was the first quarter of losses since the fourth quarter of 2016. This decline has not been due to deteriorating fundamentals. Rather, it has been a Harvey correction taking place.

Looking forward, if this trend continues, there is a possibility that Houston posts a rent decline number this year for the first time since 2016. Given how much of an impact that seasonality has on Houston, landlords have historically had a tough time raising rents at all in the second half of the year. Combine this with an already retreating rate, and reversing the trend may be difficult over the final ten weeks of 2018.

With information and data published by Mike Cobb -