News Article

The Texas apartment markets, which were expected to rank among the country’s big movers in performance during 2006, aren’t registering the gains that had been anticipated. The demand momentum posted in 2005 has fizzled, leaving occupancy rates largely flat since the end of last year and the pace of rent growth lackluster. This sluggish recovery is occurring despite the fact that job production is healthy and continuing to accelerate at the same time that new apartment deliveries generally are holding at reasonably manageable levels.

The state’s new jobs are yielding plenty of additional housing demand, but apartments just aren’t capturing much of it. New renters for the most part simply are replacing residents leaving through the back door to make home purchases. In contrast to the flat home production figures seen for the nation as a whole, single-family additions in the Lone Star State continue to soar. Austin saw the annual pace of new single-family home approvals soar 29 percent during the year-ending May. The year-over-year increase was at 19 percent in San Antonio and 12 to 13 percent in both Houston and the Dallas/Fort Worth region. While home sales remain impressive, unsold inventories are mounting, spurring builders to get very aggressive in offering purchase incentives that weren’t on the table just a few months ago.

 Texas Single-Family Home Construction Surges

	Annual Permits May 2006	Annual Growth
Houston	53.4k	13%
Dallas/Fort Worth	50.8k	12%
Austin	18.8k	29%
San Antonio	15.2k	19%
91 Largest US Markets	998.8k	0%

Dallas/Fort Worth
The Dallas/Fort Worth region registered demand for about 6,100 apartments during the first half of 2006, but absorption during the normally robust 2nd quarter leasing period was held to a mere 440 units. Deliveries through June of 2006 totaled 3,849 units, including a block of 2,362 apartments in properties that finished construction during 2nd quarter. June’s occupancy rate registered at 92.7 percent, up a moderate 0.8 points from the figure seen at the end of 2005. Thus, the area will be hard pressed to post an occupancy jump in calendar 2006 that’s even half the increase of almost 3 points seen in 2005. Furthermore, operators still aren’t able to muster any pricing power. Effective rents inched up less than 1 percent during the year-ending June, measuring change on a same-store basis.

Houston
Houston’s 2nd quarter apartment demand total was limited to 810 units, yielding an absorption rate of 1,290 units for the first half of 2006. Modest demand there reflects more than just strong competition from the single-family sector. Top-end apartment communities are giving back the big occupancy bump that occurred right after Hurricane Katrina, as the displaced households who initially opted for top-tier apartments in Houston now tend to be seeking other housing alternatives within the metro or have been able to return to New Orleans. Hurricane evacuees who ended up in Houston’s Class B and C apartments mostly seem to be staying put for now, though occupancy did slide a tiny bit in older communities between March and June. Houston’s deliveries totaled 768 units specifically in 2nd quarter and 3,719 units during the first half of 2006. Thus, June occupancy of 93.9 percent was essentially unchanged from the December 2005 figure of 93.8 percent. Annual rent growth as of June stood at 3.3 percent, not a bad performance but still a letdown from the 5.2 percent annual growth recorded as of 1st quarter 2006.

Austin
Austin’s overall performance in the apartment sector has been salvaged by the fact that there’s almost no new supply coming on stream. Completions during the first half of 2006 were held to only 742 units, including 582 apartments in properties finished during the April-June time frame. Thus, occupancy didn’t suffer when demand faltered to about 250 units in 2nd quarter and just under 3,000 units in the initial six months of 2006. At 95.1 percent, June occupancy proved 0.3 points ahead of the December 2005 figure. Effective rent growth registered at 3.4 percent during the year-ending June, regaining some steam after rates flattened completely in early 2006 but still below the annual growth pace of 4 percent seen in the middle of 2005.

San Antonio
In contrast to the very optimistic outlooks established for the rest of the state coming into 2006, San Antonio was a market anticipated to struggle. Lowering expectations, the market’s apartment completion pace in 2006 should be about double the historically typical volume. Deliveries seen through the first half of the year registered around 2,500 units, including a block of 1,300+ apartments finished during 2nd quarter. While San Antonio’s overall performance to date in 2006 hasn’t exactly set the world on fire, the market has avoided the pronounced slump that looked possible at the start of the year. Apartment absorption in January-June was recorded at nearly 5,000 units, but the bad news is that fewer than 1,000 of these units were absorbed during 2nd quarter. At 94.1 percent, then, June occupancy proved about in line with the late 2005 reading of 94 percent. A competitive leasing environment has taken San Antonio’s effective rent growth pace down to a level of just 0.4 percent.