We Need to Talk About Houston

Chris Curry

Houston may be the energy capital of the world, but it’s no longer only that—and this has implications for the city’s multifamily real estate sector. A diversifying economy, combined with a declining new supply pipeline, are challenging some of the underlying assumptions that have long shaped Houston’s multifamily investment dynamics for the better. While recent headwinds like higher interest rates, rising insurance premiums and property taxes continue to create uncertainty and temper deal activity, Houston’s multifamily fundamentals remain on solid ground, with several factors contributing to an even stronger outlook next year and beyond.

A diversifying economy

Houston’s strengths—including its thriving medical center, more than two dozen Fortune 500 company headquarters, and busy port—all position it favorably for ongoing job and population growth.

Furthermore, Houston ranks No. 1 for projected population growth between 2023-2027, expecting to add more than 378,000 people in the next four years, according to Moody’s.

The Houston metro area had the second-highest numeric increase in population between 2021 and 2022, behind Dallas. This robust growth represented the highest surge for the metro since 2016 and contributed heavily to economic prosperity and employment gains going into the first half of 2023. Furthermore, Houston ranks first for projected population growth between 2023-2027, expecting to add more than 378,000 people in the next four years, according to Moody’s.

The continued diversification of Houston’s economy marks another important shift. The market is now less volatile and subject to the swings of the gas and oil market, according to the Houston Business Journal. That’s evident in some of the industries that grew over the past year.

Employers added 96,200 jobs over the past 12 months ending in July 2023, which represented a 3 percent gain in total nonfarm labor and ranked 4th among U.S. metros. During this period, private education and health care outranked all industries with 6.6 percent job growth, followed by trade, transportation and utilities (4.3 percent), and financial activities (4.0 percent). Houston also led the nation in exports in 2022, shipping more than $191.8 billion in goods and commodities abroad. The recent $1 billion first phase of expansion of the Houston Ship Channel further cemented the metro’s position as the nation’s busiest waterway. Further illustrating the diversity of the economy, ExxonMobil completed the relocation of its global headquarters to Houston from Dallas, giving the city its 26th Fortune 500 headquarters. The Texas Medical Center, already the world’s largest, has more than 3 million square feet and $3 billion in new development underway, including two large-scale, mixed-use developments—Helix Park and Levit Green—that will add tens of thousands of new jobs upon completion, according to Berkadia.

Affordability and rent growth

Houston continues to be incredibly affordable relative to the rest of the U.S. Average effective rent in the metro at the end of Q2 2023 was $1,358—33 percent lower than the national average. Houston’s relative affordability stems, in part, from the fact that it didn’t experience a rent price runup during 2020-2022 to the same extent as other markets, like nearby Austin and Dallas. So, while many other Sun Belt markets are now facing negative rent growth in a more normalized market, Houston is the only market that posted positive rent growth above 1 percent in the past 12 months. Rents in Houston posted a 1.8 percent increase year over year as of the end of August, and have advanced more than 3 percent in the past six months (Source: MRI Apartment Data). Furthermore, Houston’s short-term rent growth outlook is also improving, with several sources continually revising their rent growth projections upward – anticipating 3 percent rent growth by end of 2023.

Source: MRI Apartment Data

Better supply-demand balance

Houston is infamous for overbuilding, but it’s also been key to the market’s affordability.  Strong pipelines of new apartment deliveries have historically put downward pressure on rent—but that’s beginning to shift. Rising construction costs are hampering new development, and the pipeline is beginning to thin out. The metro has just 22,000 units under construction right now, which represents only about 3 percent percent of total inventory—another sign of a healthy market. By contrast, Austin has 43,000 units in the pipeline representing 14 percent of total inventory, according to MRI Apartment Data.

Houston is one of the Top 10 U.S. markets for apartment absorption, with 6,695 net units absorbed year-to-date, according to YardiMatrix data.

As the apartment pipeline thins, and higher construction costs and a tight capital markets environment prevent new supply from getting built, we anticipate moderate rent growth in Houston for the next year —and then stronger, healthier rent growth in 2025 and beyond.

Multifamily trading resuming

Despite solid apartment fundamentals, deal flow in 2023 was anemic due, in large part, to the current high-interest rate environment and capital markets volatility. Despite these challenges, transaction activity is expected to increase as more data on pricing and cap rates becomes available. The second half of 2023 will likely see some trading resume, although deal volume will remain well below normal. A wave of deals is anticipated over the next few years driven by owners’ need to sell rather than a desire to do so. Borrowers with floating-rate debt may be forced to sell, and rising insurance and tax rates, could also spur some sales in 2023 and beyond.

That said, the outlook for Houston’s multifamily real estate market is generally positive, with factors such as affordability, population growth, and diverse economic sectors working in its favor. Although the market may face challenges related to rising costs and interest rates, the stability of Houston’s job market and its potential for continued growth make it an attractive investment destination for investors seeking opportunities in the Sunbelt region.

Chris Curry is senior managing director of Investment Sales at Berkadia‘s Houston office.