Houston’s Multifamily Market: A Rising Star in the Lone Star State?

By Richard Sarkis, ceo, Reonomy Houston’s commercial real estate market may not be as flashy as its northern neighbors’, but...

By Richard Sarkis, ceo, Reonomy

Houston’s commercial real estate market may not be as flashy as its northern neighbors’, but Space City’s multifamily submarket has been an under-the-radar star in recent years.

Of the 20 finalists wrapped up in Amazon’s drawn-out HQ2 sweepstakes, only four sit west of the Mississippi River. Of this quartet, two — Austin and Dallas — straddle Interstate 35 in Texas. Unsurprisingly, the potential $5 billion, 50,000 job windfall that will follow the tech giant’s second headquarters has caught the attention of commercial real estate (CRE) investors in The Lone Star State, many of whom are preparing to pull the trigger on new deals should Amazon’s decision go Texas’ way.

And yet, despite all the attention they’ve received from media outlets and investors alike, there’s an argument to be made that the most intriguing CRE market in Texas is neither Austin nor Dallas, but Houston. Granted, the state’s most populous city isn’t currently flying quite as high as its higher-profile (in CRE terms) neighbors, but its multifamily submarket in particular has shown signs of the kind of modest but steady growth that can continue for years on end without hitting a wall.

Less Than Astronomical Growth

Despite a population nearly one-and-a-half times Dallas’ and nearly three-and-half times Austin’s, Houston’s multifamily market is the smallest of the three by a significant margin. In fact, according to Reonomy data, the total value of multifamily sales in Houston in 2017 (~$3.8 billion) was only slightly greater than the year-over-year growth in the total value of multifamily sales in Austin between 2016 and 2017 (~$3.5 billion).

That said, with the exception of 2016 (when the price of crude oil bottomed out around $30 a barrel and the total value of multifamily sales dipped by 23.4 percent YoY), the total value of multifamily sales in Houston has increased every year since 2012, and never by more than 47.6 percent YoY. Conversely, the multifamily submarkets in both Austin and Dallas have experienced fairly unpredictable fluctuations in the last half-decade.

In Austin, the total value of multifamily sales decreased by 49.7 percent from 2012 to 2013, only to skyrocket by 388.6 percent the following year. After a 60.6 percent drop between 2014 and 2015, the total value of multifamily sales in the state capital increased by around 90 percent YoY during each of the next two annual cycles.

Dallas’ multifamily submarket has seen similar fluctuations, with three cycles of YoY growth rates above 115 percent (2012-2013, 2014-2015, and 2015-2016) and two cycles of YoY contraction rates above 45 percent (2013-2014 and 2016-2017) over the last half-decade.

The average sales prices of multifamily assets in Houston, Austin, and Dallas have followed similar trajectories in recent years. In Houston, the average sales price has grown by between 6.7 percent and 28.3 percent YoY every year since 2012, again with the exception of 2015-2016 (during which the average sales price dropped by 19.7 percent). By contrast, Austin saw significant decreases in its average multifamily sales price from 2012-2013 and 2014-2015 (drops of 53.2 percent and 56.2 percent, respectively), in between which its average sales price jumped by 379.3 percent. Inversely, Dallas saw significant increases in its average sales price from 2012-2013 and 2014-2015 (jumps of 70.2 percent and 97.0 percent, respectively), in between which its average sales price dropped by 51.0 percent.

Houston, We’ve Got No Problem

In short, paired with its steady — and by no means insubstantial — growth over the last half-decade, the lack of volatility in Houston’s multifamily submarket makes it one of the most promising, if somewhat conservative, investment opportunities in Texas CRE. What’s more, a variety of indicators suggest that Houston’s multifamily submarket has the legs to continue growing for quite some time.

First and foremost, at 7.0 percent, Houston’s three-year population growth rate is significantly higher than either Dallas’ (2.7 percent) or Austin’s (2.6 percent), and its healthy job markets (YoY job growth of 79,200) should keep attracting new residents for the foreseeable future. What’s more, despite this robust population growth, multifamily occupancy rates stood at 89.9 percent at the end of the second quarter — the closest they’ve been to the 90 percent threshold since March 2016. This high occupancy rate is particularly impressive given that over 11,063 new units were delivered to market between June 2017 and June 2018.

Granted, the trajectory of Houston’s economy is inextricably linked to the fluctuations of the oil and gas market, but Space City CRE — and especially the multifamily submarket — has proven to be quite resilient over the last decade. For investors looking to see immediate returns, Austin or Dallas is probably a better (though far riskier) bet, but for those interested in a low risk, high long-term potential investment, Houston is looking like a rising star in Lone Star State commercial real estate.