TEXAS SNAPSHOTS, APRIL 2005

Houston Multifamily Market

Richard Zigler, director of research, O’Connor & Associates

Since single-family homes in the Houston market are among the most affordable in the country — typically cheaper than in most other large cities — multifamily development can be quite challenging. In effect, developers are targeting “renters by choice,” meaning that they must significantly improve the luxury amenities in their projects. In the Galleria and Inner Loop markets, granite countertops, stainless steel appliances and hardwood floors are becoming increasingly common. As land prices escalate in these prime locations, high-rise properties have also begun to take hold. Houston has had four high-rise apartment towers completed in the last year — after having virtually none in the preceding 15 years — with several more to come. Even in the suburban areas the bar has been raised. Developers have successfully introduced loft-style units in non-urban settings, and they are paying more attention to style and branding in an effort to distinguish communities from their many competitors.

The largest concentration of new development is in west Houston, the Inner Loop, Uptown/Galleria and along the major freeway corridors, although one would find it difficult to find any area of the city lacking new construction. Houston is notorious for congested traffic; therefore, proximity to freeways and easy access to employment centers remain high priority for residents. Construction of the light rail line, which connects downtown Houston to the Texas Medical Center, has generated a buzz of excitement in the area. Completed in 2003, this project is the first local endeavor toward transit-oriented development. In a city that remains almost exclusively navigable by automobile, this type of construction is a dramatic departure from the norm.

In the future, expect construction and development to continue upward in the Inner Loop area. Its prime location retains proximity to shopping, entertainment and employment, and this area has an extensive number of projects already open or scheduled to open soon. The area includes many areas attractive to prospective renters including the Midtown area, Allen Parkway Corridor, Greenway Plaza vicinity and Texas Medical Center.

New developers to the area include ZOM, Whiteco, Simmons Vedder, Catalina Development, Landmark Homes and Wood Partners. All of these companies have entered the Houston market within the last year.

In addition to increased construction and affordable single-family homes, historically low mortgage rates are pressuring occupancy levels in Houston’s apartment market. While older Class A projects are retaining strong occupancy levels as newer properties continue to develop, they also draw away from Class B and C properties, which have to compete with new developments. Therefore, as these old Class A communities are attracting Class B and C renters with rent concessions and creative move-in specials, the lower class properties are struggling. Occupancy rates are continually dropping; citywide they have fallen to almost 87 percent. In fact, 73 percent of Houston’s submarkets are posting occupancy rates lower than 90 percent, and Class B, C and D properties have posted heavy losses in occupancy over the past year. Unfortunately, these developments do not appear likely to buck these trends, with 14,000 units currently under construction.

Houston’s rental rates rose 1.4 percent to 79.5 cents per square foot over the last year; in fact, each class recorded gains. However, as Class A posted the most gain of 1 cent per square foot, the rental rate gains are illusory because concessions continue to chip away at nominal rate increases.

By 2006, construction activity is projected to slow, and eventually absorption should begin to outpace development. Although unlikely, if construction slows significantly, occupancy could recover by 2007.

Although many contend that Houston is overbuilt, new developers are not being unwise. Houston still remains attractive in the long-term sense because strong population growth continues; therefore, the city anticipates high levels of construction in the years to come. Certain projects still make sense, as today’s product is much more attractive to renters than the construction endeavors from the 1990s, and not just because they’re shiny and new. If you build a better mousetrap, you catch more mice.

 —  Richard Zigler, director of research, O’Connor & Associates

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