A month or so after Hurricane Harvey, Houston’s apartment occupancy and rents are trending upward once more. However, pricing is not spiking, partly reflecting that the metro’s major owners and operators of apartment product recognize the importance of assisting displaced households as the rebuilding process begins.
Metro Houston’s overall occupancy rate in the September performance survey comes in at 93.0%, up 82 basis points (bps) from the August result of 92.2%. These findings suggest the operable apartment stock is as much as 98% to 99% full, as RealPage’s count of apartments temporarily offline points to a figure that could reach up to 43,000 units.
Among properties in initial lease-up, average monthly leasing per property surged to 25 units in September, the strongest performance posted by projects moving through initial leasing since mid-2015. Furthermore, the total number of just over 2,500 units leased in properties still building their initial resident bases in September is the biggest total monthly figure achieved throughout this economic cycle.
September’s effective rents for new leases jumped 1.5% over August pricing. The increase pushed Houston’s annual rent change, which had been running in negative territory, to just over the breakeven point. September 2017 rents top September 2016 rates by 0.2%.
Quite a few of Houston’s largest apartment operators report to RealPage that they froze their rents at pre-Hurricane Harvey levels for most of the month of September, or they placed caps on movement to hold increases to just a few dollars. Shifting into October, they tend to be returning to standard pricing practices, so a better indication of how quickly rents are likely to rise could come over the next few weeks.
Operators, further, are reporting to RealPage that they are paying close attention to lease term as households displaced by the flooding move into new accommodations. While operators want to provide the best solutions for individual households, they also must be careful not to schedule too many additional leases expiring in a short time frame.
Houston’s biggest turnaround in apartment market performance registers in the Class A product sector. That’s not surprising, as Class A results previously were held back by the big blocks of new supply that have been coming to market. Annual rent change for top-tier product moved to 0.7% as of September, compared to levels of -1.5% in August and -7.2% September 2016. Class A community occupancy jumped to 94.7% in September, up from 93.1% in August and 92.7% in September 2016.
Class B projects register September rents that match year-earlier results, a big improvement from 2.1% annual rent cuts recorded a month prior. Occupancy is up to 93.4%, versus the 92.7% reading from August.
Class C properties do not show any momentum in pricing power or occupancy.
Obviously, numerous questions about Houston’s apartment market outlook remain. For example, how much short-term damage has the local economy incurred, and will rebuilding lead to the surge in job growth anticipated over the next few months? Where will the expected influx of construction workers come from, and where will those workers be housed? How quickly can properties now under construction make it across the finish line? Does the damage done by Hurricane Harvey change the way Houston is perceived by capital providers, translating to some hesitancy to bankroll the next round of new supply? Will recent experiences lead to more development regulation for future building?
Market performance information highlighted here was collected in the last half of September, giving owners and operators time to assess the extent of damage to their communities and to move toward somewhat more normalized operations. Some operators reported that the number of units now offline exceeded initial estimates, as further inspection revealed additional apartments needing repairs. Product availability actually increased slightly late in the month, as vacant units that had been reserved for the owner/operators’ employees or for bulk corporate leases were not fully needed in some cases, resulting in those units being put back into the block of product offered to the general populace.
A month or so after Hurricane Harvey, Houston’s apartment occupancy and rents are trending upward once more. However, pricing is not spiking, partly reflecting that the metro’s major owners and operators of apartment product recognize the importance of assisting displaced households as the rebuilding process begins.
Metro Houston’s overall occupancy rate in the September performance survey comes in at 93.0%, up 82 basis points (bps) from the August result of 92.2%. These findings suggest the operable apartment stock is as much as 98% to 99% full, as RealPage’s count of apartments temporarily offline points to a figure that could reach up to 43,000 units.
The rent-growth decline was nowhere near steep enough to affect this year’s overall trend of steadiness. The rate has remained in a 41-bps range since November 2016.
Occupancy also is remaining steady at or very close to the 95.0% mark. September’s occupancy rate of 94.9% was only 6 bps lower than August’s 95.0% and 20 bps below the 95.1% of September 2016.
YTD Rent Growth Can Help Set Expectations
Viewing year-to date (YTD) rent growth at the national level over the past few years reveals some interesting trends. The following graph shows year-to-date rent growth for each month over the past eight years (2017 included).
The most immediate trend this graph shows is the build-up of rent growth throughout the year. In essence, this graph shows us the seasonality of rent growth and confirms that the spring and summer months are generally the strongest for rent growth.
Where readers may find this graph most useful in the near term, however, is in setting expectations into next year. While almost all years represented in the graph show downward movement between the August/September peak and the final December point, that movement is larger in some years than others.
Let’s quickly take a look at some data in tabular form. The following table includes four key metrics. Those include:
The peak rent growth for each of the past eight years, including 2017.
The corresponding month for peak rent growth.
December’s year-to-date rent growth in each of those years.
The peak rent growth level minus December’s YTD rate in each year
| Year | Peak Rate | Month of Peak | Dec. Rate | Peak minus Dec. |
| 2010 | 5.1% | September | 4.5% | -0.6% |
| 2011 | 5.2% | September | 4.0% | -1.1% |
| 2012 | 4.7% | September | 3.7% | -1.0% |
| 2013 | 4.2% | August | 2.8% | -1.4% |
| 2014 | 5.5% | August | 4.9% | -0.5% |
| 2015 | 5.7% | September | 4.4% | -1.3% |
| 2016 | 4.3% | August | 2.6% | -1.8% |
| 2017 | 4.1% | July | ?? | ?? |
| Cycle Avg. (’10 – ’16) | 4.9% | September | 3.8% | -1.0% |
Extrapolating the trend from recent years, we can expect 2017 rent growth to have peaked in July, the earliest this cycle.
Notice that 2016’s December rate was a mere 2.6%, only rivaled in lethargy by 2013. This sluggish momentum in the second half of the year means 2017 is already fighting an uphill battle in terms of rent growth.
Those curious to see a less-cluttered visual comparing recent performance to performance this cycle can consult the following graph, which averages year-to-date rent growth for each month within the past eight years.
Year-to-date performance as of September was 104 basis points (bps) below the September cycle average of 4.7%.
What does this all mean in terms of national performance?
Although it is fair to think rent growth may be slower coming out of the gate in the early part of 2018 than it has in most other years this cycle, it does not mean 2018 should be immediately written off.
Axiometrics, a RealPage company, forecasts an average of 3.4% annual effective rent growth for 2018, as the market absorbs the extensive supply delivered in 2017 and the early part of 2018. But as long as job growth holds up to the level Axiometrics economists believe, demand in 2018 will help drive solid rent growth – especially in the back half of the year.
As a parting thought, it is important to remember that individual market performance oftentimes differs from the 30,000-foot view of national performance.
Below is a selection of markets in which 2017 YTD performance exceeds or is just slightly below their respective cycle averages.
After a sluggish start early in the cycle, Las Vegas has strung together a few years of very solild performance which has continued into 2017.
San Diego has been remarkably consistent in recent years, and 2017 is likely to end the year above the national average yet again. Relatively low new supply and stable job growth are the two primary reasons the southern California city continues to consistently chug along.
Las Vegas and San Diego are exceptions to the general trend. The vast majority of markets are more likely look similar to Washington, D.C. which is running roughly 130 bps below its cycle average
A handful of markets have not fared quite as well in 2017, although some of these are markets that may be expected to rebound in the short-term. For instance, a market such as Austin has struggled in recent years – a trend that’s continued into 2017. However, it appears supply in 2018 (based on Axiometrics-identified supply) is going to be lower than it was in 2017 which may set the stage for a potential rebound in the market.
Finally, some markets defy this conventional logic that rent growth slows down in the latter half of the year, such as Miami. The boost as a result of reverse seasonality of which Miami (and most South Florida markets) serves as a prime example.
Look Who’s Back in the Top 15
The top 3 of Sacramento, Las Vegas and Long Island stayed in place on the list of metros with the highest effective rent growth. But look farher down the chart, and you’ll see an old friend reappearing.
San Jose, formerly a top 5 stalwart that sustained a six-month run of negative effective rent growth from August 2016-January 2017, re-entered the list at No. 15 in September. The South Bay’s 3.2% rent growth marked a 135-bps increase from August’s 1.9% and a 664-bps leap from September 2016’s -3.4%, the low point of the market’s valley.
Elsewhere in the Bay Area, San Francisco bounced back into positive territory with a 143-bps rise from -0.3% in August to 1.1% in September, though the metro is still below the national rate. Oakland, meanwhile, remained steady at 1.6%.
Richmond and Jacksonville also made big leaps, moving into fourth and fifth position, respectively, from Nos. 8 and 10 in August. Indianpolis entered the list at No. 13, while Anaheim dropped off.
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