Houston becoming a 'renter's market' with apartment glut

Morgan Group has started building on its latest Pearl-branded apartment complex at Washington Avenue and T.C. Jester. The five-story building will have 322 units ranging from 652 square feet to 1,443 square feet. less Morgan Group has started building on its latest Pearl-branded apartment complex at Washington Avenue and T.C. Jester. The five-story building will have 322 units ranging from 652 square feet to 1,443 square ... more Photo: ONLINE_YES Photo: ONLINE_YES Image 1 of / 65 Caption Close Houston becoming a 'renter's market' with apartment glut 1 / 65 Back to Gallery

Houston is likely becoming a renter's market as new luxury apartments high continue to come on line while job and population growth are slower than when the ground was broken on tens of thousands of units.

A midyear report seems to validate concerns forecast by economists earlier this year that Houston's apartment market was overbuilt. The total occupancy in April was 90.1 percent, according to an analysis from the Greater Houston Partnership. The analysis says that conventional wisdom holds that renters hold the cards in a market with occupancy rate below 90 percent. The rate is expected to fall into the mid-80s.

Developers are expected to deliver 21,000 apartment units this year and 4,000 next year, skewed toward the high end. Concessions of up to three months free rent are already being offered. Other concessions include gift cards, Apple watches, flat-screen televisions, seven-day cruises and move-in allowances.

From 2010 to the end of 2014, the region created roughly 95,000 jobs per year and there was a need for more apartment projects to help house the rapid growth. Developers rallied to meet the need and expected to garner high rents, as the rate was increasing in some areas in double digits.

Class A apartments, representing the upper end of the market, have a 79.5 percent occupancy rate. The number of properties that have been in operation for 13 months or more have a 91 percent occupancy rate, but those open 13 months of less have a 23.2 percent rate. At the market's peak in August 2014, the occupancy rate for Class A apartments was 84 percent.

For slightly lower-end products in Houston, rents have continued to grow over the past two years. However, the market is skewed toward the high-end, as new product is typically Class A. The Greater Houston Partnership analysis found that of the 24,000 units current in "lease up," only 500 are Class B. Even with incentives and rate reductions, economists have said this trend may affect long-term affordability.

Class A rents averaged $1,459 per month in April. With two months free rent, a fairly standard incentive these days, that works out to $14,590 per year to live in a Class A apartment. Class B rents averaged $948 per month in April.

Some of the hottest markets -- the Heights, Montrose and the Galleria -- have seen the sharpest rent declines over the past six months. Now, some of the overlooked neighborhoods with more low end or slightly older apartments, such as Sharpstown, Alief and Westwood, are seeing rental rates continue to tick up. In Greenspoint, rates are still rising at nearly 9 percent, three times the healthy growth rate.

Building is slowing down, which may be a relief to the overbuilt market. Only 1,400 units were permitted in the first quarter. Building permits in Houston were down 26 percent in April from the previous year, according to the latest data from the city of Houston Department of Public Works. Permits for multi-family buildings alone dropped 63 percent.

"The stark truth is that Houston doesn't need any more Class A apartment communities, not until the market absorbs 45,000 vacant Class A units on the ground and in the pipeline," the GHP report states. "Apartment owners and developers are more likely to see crude oil hit $70 a barrel before Houston returns to a landlord's market."

Here are a list of submarkets and how their rental rates dropped or rose from April 2015 to April of this year, based on data from Houston-based Apartment Data Services: