Houston apartments getting fuller — and slightly more expensive

Bolstered by strong job growth, Houston-area apartment rents and occupancy rates are on the rise and investors are taking note.

The local market absorbed more than 10,000 apartment units so far this year, nearly twice the 5,077 units completed in 2018, according to a midyear press briefing by commercial real estate firm CBRE. In 2018, the Houston market absorbed 8,528 units.

“We’ve absorbed more units halfway through the year than we did all of last year,” said Clint Duncan, senior vice president of CBRE’s Capital Markets Multifamily Group in Houston.

The supply of apartments under construction, which fell off when lenders shut their pocketbooks following the crash in oil prices, has ramped back up to nearly 20,000 units, according to ApartmentData.com. Houston’s job growth of 2.6 percent, nearly 80,000 jobs annually, is driving the demand.

“Katy is definitely leading the parade right now with 4,200 units under construction,” McClenny said.

Houston’s projected apartment deliveries of 13,000 this year and another 13,000 to 14,000 units next year are in line with long-term trends of 12,000 to 15,000 units per year, McClenny said.

The area occupancy rate rose 40 basis points to 90.2 percent in the second quarter, according to ApartmentData.com.

Investor opportunity

Investors are targeting Houston for both recently built Class A complexes and older properties where improvements can be made to boost the rents, said Tucker Knight, a senior managing director and head of Texas originations at real estate financial services firm Berkadia.

“We’re still seeing a vast amount of capital pursuing Houston despite minimal rent growth overall,” he said. “The capital flows are coming in and acquiring assets under the auspices that they can buy these assets at slightly depressed rents and ride those back to the market in the next 12 to 24 months.”

For example, an apartment built in 2015 with projected rents of $1.75 per square foot may have seen rates drop to $1.30 or $1.40 when the economy went south with the oil bust. The rates may have come back up to $1.50 or $1.55, but still have room to grow, Knight said.

Rents, which shot up by 4.5 percent in 2017 as a result of the surge in demand generated by Hurricane Harvey and another 1.2 percent in 2018, are holding on to gains and are poised to rise further, said Bruce McClenny, president of ApartmentData-.com . Looking at the first half of the year, the $23 rise in average monthly rents is in line with Houston’s normal range of 2 percent to 3 percent annual rent growth.

Effective rents for Class A properties are $1,530 per month, or $1.62 per square foot, according to ApartmentData.com.

Buy or build

Duncan, of CBRE, said investors are buying properties at or below replacement cost, looking for rent growth down the road. He expressed concern that rents aren’t growing fast enough to offset rising construction costs, making it harder to finance new construction.

“Deals are difficult to pencil, to make returns work no matter where it is,” said Duncan of CBRE.

Rents are projected to continue to rise across the four largest markets in Texas as the state’s job growth settles into a projected average rate of 2.5 percent, according to ApartmentData-.com .

In a sign of more people moving to Texas, Houston and Dallas landed in the Top 12 metro areas nationally for inbound apartment searches, according to Apartment List, an online apartment rental marketplace. Nearly 40 percent of the searches for apartments came from potential renters living outside of the markets.

The top searches for out-oftowners looking to rent apartments in Houston came from New York, followed by Dallas and San Antonio, according to Apartment List.

The Houston region’s most expensive apartment markets are downtown, with average rents of $1,966, Montrose/Museum/Midtown at $1,740, and Highland Village/Upper Kirby/West U at $1,726, according to ApartmentData.com . The least expensive are Sharpstown at $1,725, Greenspoint at $738 and University of Houston/Interstate 45 South at $746. katherine.feser@chron.com twitter.com/kfeser