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Houston Multifamily Vacancy Rate Dips Into Single-Digits

CoStar Market Insights: Improving Fundamentals Have Paved the Way for Vacancy Compression in 2018
July 9, 2018
The Houston multifamily market continues to make strides in a positive direction. For the first time in two years, the market’s vacancy rate has dipped into single digits, at 9.9 percent.

Multifamily fundamentals have been particularly volatile this cycle and have now started to settle back into a state of normalcy.

The area entered this cycle in 2010 with an 11 percent vacancy rate. However, several consecutive quarters of positive net absorption, coupled with minimal deliveries, led to rapid vacancy compression. At the same time, population growth, job growth, and rising oil prices resulted in strong underwriting fundamentals and developers from around the country hopped on the train of success in Houston.

After reaching its cyclical-low vacancy rate of 6.9 percent in the second quarter of 2014, the supply wave took hold. In total, more than 55,500 units came on line from 2014 to 2016. At the same time, oil prices began to fall and job growth slowed. Oil prices dipped from $105/barrel in mid-2014, to $25/barrel in early 2016 and the previously strong demand from earlier in the cycle had essentially been erased.

Several quarters of minimal, and even negative, demand and above-average supply additions resulted in vacancy expansion again.

The market’s rate topped 11 percent in early 2017 and concessions were rampant. However, a slowly-improving economy and rising oil prices resulted in an improving market, even prior to Hurricane Harvey.

Hurricane Harvey’s impact on the Houston multifamily market has been well documented. It is estimated that it sent the metropolitan area forward about 18 months in the span of one month.

But now, as we approach 11 months post-storm, many of the uncertainties have started to be answered in the first half of 2018. The potential mass exodus of renters from their multifamily dwellings has thus far been nonexistent. Rather, it’s been more of a slow trickle, which has been more favorable for fundamentals.

In fact, Houston currently ranks fourth nationally in terms of four-quarter trailing net absorption, at 11,800 units. This only trailed New York (21,900 units), Dallas-Fort Worth (18,000 units) and Washington, D.C. (11,850 units). Additionally, Houston’s pipeline has slowed drastically and deliveries over the past four quarters in Houston have been well below the totals in the aforementioned markets. In the first half of 2018, demand more than doubled supply, outpacing deliveries by about 3,300 units.

So where does this leave Houston multifamily for the second half of 2018?

Owners and property managers are likely waiting intently for late-August/early-September to gauge the impact of one-year leases from Harvey. While the Harvey departures have mostly been minimal thus far, as these leases start to roll over, will residents flock back to their homes?

While there are many unknowns, one thing is for certain: Houston multifamily fundamentals have improved over the past four quarters, and when eliminating Harvey demand, improvements were equally impressive in the first half of 2018. Along with that, oil prices have finally broke into the $70 per barrel mark for the first time since late 2014, reviving positive feelings surrounding the Houston multifamily market.

CoStar Market Insights provides a snapshot of recent real estate trends. The CoStar Market Analytics team monitors commercial and multifamily real estate across 390 metro areas, with a granular understanding of the projects, players and economic trends that move these markets.

Learn how CoStar Market Analytics can add to your market knowledge, helping to minimize risk and maximize returns.
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