Last modified on September 12th, 2016
By Alexis Hammond

Texas has enjoyed strong rental growth for the past few years. Even so, as Axiometrics reported earlier in the year, the rate of rental growth has been much stronger in northern metro areas than in southern ones. Of the southern cities, Houston’s problem with occupancy rates and rental growth may result from overbuilding and an emphasis on building high-end units at the expense of more affordable housing. To understand what’s happening with the rental market in Houston, it might help to take a closer look at this issue.

A Complex Houston Rental Market

The Houston Chronicle reported an average yearly rental rate growth of four percent. That rate dropped by almost 1.5 percent in the most recently reported quarter of 2016. A formerly hot rental market was anticipated. This was fueled by the predicted growth in new jobs, particularly in the energy industry. Hiring in this industry is soft right now. This has weakened the housing market.

The good news is that the city expects to add 22,000 new jobs in 2016. The problem is that close to 30,000 new units contained within over 100 new properties are currently being constructed in the city. Out of these, at least 19 percent are intended for high-income renters. Those luxury apartments make up the majority of new construction in desirable neighborhoods near downtown.

A potential oversupply of rental units might seem like good news for renters, at least. The situation is more complex. Many of these new units are high-priced apartments, like $1,800 a month apartments in complexes like the Amli River Oaks. These are urban, upscale apartments in desirable neighborhoods. Because of the value of the real estate and offered amenities, property owners have only a limited ability to reduce rates.

In fact, the oversupply of luxury apartments may have contributed to the scarcity of affordable rentals. The Chronicle also mentioned that over 6,000 units have already been knocked down or are scheduled for demolition. These older and cheaper units were to be replaced by more expensive housing.

People with higher incomes may benefit from decreases in rent or other concessions that landlords might offer. Renters with more modest incomes still won’t find the rents affordable and may have trouble locating cheaper rentals in many parts of the city. While landlords may struggle with occupancy rates in neighborhoods that are typically considered the most desirable, middle-class renters may have to satisfy themselves with longer commutes.

The number of units downtown in Houston are expected to double by next year. The downtown market also has the highest average rental rates in the entire city. It doesn’t matter how much trendy and convenient urban apartments are if job growth doesn’t support the increase in inventory.

Opportunities for Houston Rental Property Growth in 2016

Some urban areas, like the Heights, are expected to remain strong rental growth areas. Otherwise, property owners and investors might think twice about committing to more high-end construction until the energy industry picks up again. Prudent landlords may want to check occupancy rates after this current round of construction before beginning more projects. Of course, in a sprawling city like Houston, location is everything. Right now, the potential glut of expensive apartments mostly impacts the inner city.

There are still some growth opportunities in Houston. Owners with older properties may want to consider rehabilitating them in a way that offers a more affordable, middle-class solution. Even without all of the amenities of a high-end apartment, cheaper rents are bound to help boost occupancy rates. Landlords may be able to balance lower rates and concessions against the luxury of being very selective about rental criteria and not having to cater to the wealthiest renters.

Are you a property manager in Houston?

If you live in the Houston area, come meet with AppFolian experts for a free lunch and learn event at The Grotto Ristorante in Houston, Texas. Meet with current AppFolio users and talk to us about how we can help modernize your property management business and address these current trends.

Register here.

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