Houston, TX – 2023 Q3 - Multifamily Market Overview!

[Bill Rapp]

The Houston Metropolitan Statistical Area (MSA) has consistently ranked among the top MSAs in the country for population growth over the past 10 years, and this trend is expected to continue. The population growth has led to a strong demand for additional multifamily units. However, despite this growth, the number of newly constructed units has exceeded the rate of absorption for the past seven quarters, dating back to 2021. The current overall market vacancy rate is around 10%, which is higher than the 10-year historical average of 9.2%.

At the same time, rent growth has been slowing down over the past seven quarters and is currently at 1.5% for the trailing 12 months. This is significantly lower than the 7.0% annualized rent growth in 2021. The higher rate of deliveries (+/-20,000 units) compared to absorption (+/-6,000 units) over the past 12 months has put downward pressure on rent growth. We expect this trend to continue for the rest of 2023, but we anticipate a more balanced market in 2024. As a result, rent growth is expected to remain sluggish (1.5%) over the next 12 months and then gradually increase to a more normal range of 2.5% in late 2024 and 2025.

Although there was anticipation that the rapid increase in home prices and interest rates in 2022 would reduce the number of families transitioning from multifamily to single-family homes, the impact of this has been relatively limited so far. From an investment perspective, the rise in interest rates has created a significant gap between what buyers are willing to pay and what sellers are willing to sell for. Sellers are holding on to their properties in the hope that interest rates will decrease before their current loan terms expire.

Based on the discussion above, it is clear that rent growth over the next 12 months will not have a sufficient impact on property values to offset the current interest rate environment. As a result, there is minimal transaction volume as buyers are unable to meet seller expectations. This situation will continue until inflation decreases to the Federal Reserve's targeted rate of 2%.