FEATURE ARTICLE, JANUARY 2006

WELCOME TO HOUSTON, Y'ALL
Evacuees from New Orleans are having a tremendous impact on Houston's apartment market.
Kathryn Koepke

Compared with the rest of Texas, Houston has received the lion's share of New Orleans evacuees. The mass influx of people has had a tremendous impact on Houston, particularly the apartment market. The Houston apartment market has benefited greatly from the influx of evacuees, but it certainly came with a great deal of work and patience on the part of apartment owners, managers, government officials and volunteers. Even without knowing for certain whether they would receive rent payments, the apartment community reached out to evacuees to move them from shelters into apartments. Many private apartment owners expedited the process of signing leases and made exceptions to normal lease terms in order to provide housing for evacuees. A suspension of some income restrictions and the transient housing requirements allowed owners of tax-credit properties to provide shelter to those left homeless. The city of Houston's voucher program provided 12 months of rent with utilities in area apartments. Despite the uncertainty of reimbursement from the Federal Emergency Management Agency (FEMA) for the program, nearly 30,000 leases are expected to be signed.

The Houston apartment market began posting consistent occupancy gains after April 2005, showing signs of recovery after years of overbuilding and sluggish job growth depressed occupancy to a low of 86.86 percent. The market was expected to continue recovering when the demand for housing by New Orleans evacuees created a surge in absorption and occupancy levels in September. By the end of September, data from O'Connor & Associates shows that 16,933 units were absorbed, nearly 10 times the absorption rate recorded in August, and occupancy jumped more than three points to 90.62 percent from August to September. The initial rush for apartments was not sustained in October and November. While absorption was strong and occupancy levels rose in October and November, the increases were far more muted than the spike seen in September. The jump in occupancy in September was strong enough to basically eliminate rent concessions throughout the Houston area. Without multiple months of free rent, renting an apartment in Houston has gotten considerably more expensive.

With 7,000 hotel rooms still occupied by New Orleans evacuees, we are likely to see many more evacuees move into apartments. FEMA recently announced it will cease payments for evacuees staying in hotels by January 7 and that all evacuees must be moved to apartments. State officials contend that the deadline is unreasonable and that they need more time to move the remaining 34,000 people in statewide hotels into apartments. FEMA has also set a March 1 deadline to cease direct rent reimbursement to local governments, causing quite an uproar in Houston since FEMA originally approved Houston's 12-month voucher program. While FEMA claims individual assistance programs are available to the voucher holders, the city is banking on the likelihood that FEMA does not wish to create a situation where it is essentially sending tens of thousands of people on the streets again.

The impact of New Orleans evacuees on the Houston apartment market remains fluid. Even as people are moved out of hotels and into apartments, scores more are returning to New Orleans once they find their homes were not as damaged as they initially thought. These two factors are balancing one another, and the net effect on the apartment market will be little change during the next several months, similar to the modest increases we saw in October and November.

What Will Happen

While many uncertainties remain, it is anticipated that apartment occupancies are likely to remain elevated through 2006, though absorption will subside to more natural levels for the Houston area. Because Houston was overbuilt before September and the costs of construction are soaring, developers will think twice before they throw together a quick deal to cash in on the Houston apartment market. High energy prices will not create a boom in Houston's economy, and like the rest of the country, high heating bills will hurt consumer spending. The Houston area was experiencing moderate growth before the hurricane and will likely continue on a similar trend after the initial effects of the influx of evacuees have been absorbed.

Who Will Stay

Families with children will likely remain in Houston through the end of the school year before returning home, if they return at all. While the Houston Independent School District is not widely regarded as elite, many other Houston-area school districts have excellent reputations and may be a reason some households will choose to remain in Houston permanently. According to a survey conducted by O'Connor & Associates, 15,764 student evacuees were enrolled in Houston-area school districts in October. By the end of November, this number increased to 19,013. Other reports in the media have estimated student evacuee enrollment around 21,000 including private schools. Additionally, an estimated 2,000 evacuee college students were enrolled in Houston-area colleges and universities, most of which are expected to return to New Orleans.

The pride and spirit of the New Orleans people makes predicting the number that will return or stay in Houston a difficult task. Results of a survey conducted by United Way and the Downtown District (the UW/DD survey) indicate that 50 percent of the evacuee households in Houston plan to remain in Houston permanently, equating to 50,000 to 60,000 people. This percentage is higher than the 40 percent found in a previous study conducted by The Washington Post/Kaiser Family Foundation. A major local apartment owner estimates 60 percent to 70 percent of New Orleans evacuees will remain in Houston based on his conversations with hundreds of evacuees. O'Connor & Associates estimates the number of evacuees planning to remain in Houston to be in the 50,000 to 60,000 range. Even at the risk of elevated apartment vacancy locally, the Houston apartment community joins the nation in looking forward to a rebuilt New Orleans. The evacuees have a tremendous sense of pride in New Orleans, in their neighborhoods, and in their desire to rebuild their lives in the city they still call home. Certainly, many will stay, but even more will return home.

Kathryn Koepke is a senior market analyst for O'Connor & Associates in Houston.

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