The Houston apartment market is experiencing a notable inflection point, showing significant signs of weakening under the weight of a suddenly sluggish economy and a surge of new apartments. Rent growth is slowing materially, vacant units are taking longer to backfill, fewer renters are renewing their leases and income levels for new renters are falling, according to an MPF Research analysis of actual rent roll data from RealPage, Inc.
While property surveys and internet listings suggest the Houston apartment market is holding up well in spite of the sluggish local economy, lease-transaction data pulled from actual rent rolls utilizing RealPage software paint a very different picture.
Looking at rent roll data for November 2015 and January 2016, the number of lease applications dropped 3.5% compared to the same period a year earlier. Over the same period, the number of lease renewals declined by 4.9%, which triggered a drop in resident retention rates. In turn, occupancy fell 0.7 points.
Additionally, the loss of high-paying energy jobs has led to a drop in income levels among new residents. New renters in 2015 reported incomes 4.2% below those in 2014. As a result, rent growth for new leases has completely disappeared. New lease trade-out (a measure of what a new renter pays compared to the previous renter of the same apartment unit) came in at -0.7% in December and 0.1% in January.
The bottom line: Since August 2015, total lease revenue in Houston is down 0.6%.
By comparison, most market surveys – whether from phone calls to individual properties or internet listings – continue to show solid year-over-year rent growth levels, with only moderate easing from the cycle’s peaks. This discrepancy reflects that effective rent growth is a lagging indicator, and operators are likely not achieving desired rent levels – even with concessions. Traditional surveys capture only effective rents, which is the sticker-price rents on available units, minus concessions. However, traditional surveys do not capture whether a new resident agreed to actually pay that effective rent.
Houston has been the hot-button market of late, with the apartment industry nervously awaiting an inflection point, which ended up coming much later than many expected. On the heels of plummeting oil prices, job growth in Houston slowed dramatically in 2015 and is expected to remain limited in 2016.
The impact to the apartment sector has been primarily isolated to the urban core and the Energy Corridor – where energy firms comprise a huge chunk of the employment base and where new apartment development is near record levels. By comparison, most suburban submarkets continue to show strong fundamentals – especially in the eastern portion of the metro near the ports.
MPF Research’s long-term forecast assumes continued weakness in Houston through the first half of 2017. After that point, assuming some improvement in the energy sector, the market could be positioned for a quick rebound due to an expected plunge in new supply. Few new projects are breaking ground, which means little new supply will be arriving in late 2017 and in 2018.