Texas Apartment Markets Rebounding

Three recent reports on major metro area apartment markets in Texas by real estate investment specialist Marcus & Millichap point to better times for apartments because of a relatively buoyant Texas economy.

By Dees Stribling, Contributing Editor

Three recent reports on major metro-area apartment markets in Texas by real estate investment specialist Marcus & Millichap point to better times for apartments in the Lone Star State, perhaps even more so than most of the rest of the country because of a relatively buoyant Texas economy. Demand for apartments nationwide has been bolstered by households migrating from houses they can no longer afford, but in the case of Texas, demand for multifamily rental units is also being spurred by a touch of old-fashioned economic growth and job creation.

According to the National Bureau of Economic Research, the Texas unemployment rate has been at or below the national rate for 45 consecutive months as of October 2010. Thus far, Texas has weathered the national real estate crunch without significant damage to property values, adds the Texas Comptroller of Public Accounts. Residential sales and construction activity dropped to pre-2007 levels during the trough of the Great Recession, but have begun to shows signs of recovery in 2010, and as of September, the Texas foreclosure rate was one in every 752 mortgages, considerably better than, for example, Nevada’s one in 69 or Florida’s one in 148.

As for multifamily housing, the number of multifamily building permits issued in Texas rose from 1,603 in September 2009 to 1,867 in September 2010, though during the last year supply has been constrained. During the 12 months ending in September 2010, 16,422 permits were issued, 23 percent less than the same period a year earlier.

In Houston, notes Marcus & Millichap’s 4Q report on that market, an apartment recovery is well under way, with most desirable submarkets having already posted noteworthy increases in occupancy due to concessions offered to attract renters from secondary areas. Over the next several months, however, owners in these primary locations—near major employment centers such as the CBD, Energy Corridor and Texas Medical Center—will withdraw leasing incentives as job growth increases demand for apartments in those places.

The marketwide vacancy rate in Houston will continue to march lower, averaging 11.1 percent in 4Q10, an annual decline of 120 basis points. As conditions tighten, asking rents will climb 2.5 percent to $765 per month by the end of 2010, while effective rents push up to $698 per month, a gain of 3.6 percent. Last year, asking rents declined 3 percent, and effective rents fell 5.7 percent.

In the Dallas-Ft. Worth apartment market, absorption has lately increased to the highest rate reported in 10 years, according to Marcus & Millichap. “Combined with a significant decline in construction, this has prompted a decline in vacancy and allowed for modest rent gains,” the report says. A similar dynamic has occurred in metro Dallas, as in metro Houston, regarding apartment dwellers trading up during 2009 and 2010 during a period of concessions from class A properties, but, like in Houston, that’s coming to an end.

Driven by the resumption of job creation, reduced construction and young adults re-establishing their households, vacancy in the Dallas/Fort Worth apartment market will end 2010 at 7.5 percent, down 220 basis points from the end of 2009. Asking rents will have increased 2 percent by the end of this year to $780 per month, while effective rents will have risen at a slightly faster clip of 2.2 percent as concessions begin to burn off.

In Austin, it’s like the recession never happened, in some ways. Net absorption in the apartment market has been positive in every quarter since 2006, Marcus & Millichap reports. “As population and job growth start to accelerate renter demand, conditions will continue to tighten through the end of next year,” it says. “Payrolls will expand by nearly 6 percent in 2010 and 2011, and 40,000 new households will be created.”

Austin apartment market vacancies will finish the year at 7.6 percent, down 250 basis points from year-end 2009. Rent gains also resumed in 2010. By the end of the year, asking rents will have grown to $865 per month, and effective rents will have reached $780 per month, annual improvements of 2.5 percent and 3.1 percent, respectively. Asking and effective rents retreated 3 percent and 3.4 percent in 2009, respectively.

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