Home REAL ESTATE What’s Behind Houston’s 2023 Multifamily Rent Growth?
REAL ESTATE

What’s Behind Houston’s 2023 Multifamily Rent Growth?

Multifamily rent growth

Great things are afoot in the Houston multifamily market: Multifamily rents topped out at $1,264 per month in Q1 2023 after showing nearly 22% growth since 2020. Sales volumes reached $10 billion last year, and Houston has over 90,000 additional units under development. A recent report from the Chamber of Commerce found that Houston is now the #1 city in the nation for home construction and development.

So what explains this surge in multifamily growth? Several factors do, ranging from a booming economy to Houston’s historically lax zoning policies. Here, we’ll discuss what’s behind this impressive multifamily rent growth and what it signals for the larger Houston multifamily housing market.

#1 – Rising Population

Houston added nearly 124,000 residents between 2021 and 2022, and the city expects to maintain its fast growth for the foreseeable future. Harris County alone added more than 45,000 residents between 2020 and 2022 to reach a total population of 4.78 million.

Texas is now the second most-populated state in the country, second only to California and ahead of Florida. The fastest-growing neighborhoods in Houston include Pearl, Sugarland, Fulshear, and the Woodlands.

These recent population surges have caused multifamily demand to skyrocket, resulting in rents jumping from $1,248 in Q2 2022 to $1,264 in Q1 2023. Houston’s population will continue to grow, driven by job opportunities, low living costs, and lifestyle considerations.

#2 – High Job Growth

Houston also has an extremely strong job market, with recent growth in services, healthcare, tech, gas, and mining sectors. Houston’s job market added about 29,612 jobs in the first three months of 2023 alone, registering a 3.6% YoY increase. Houston’s job growth is below all-time highs in 2021 but has normalized at well above 2020 levels.

As more people flock to Houston for jobs, household formation picks up and more people look for permanent housing.

#3 – Inflation

In addition to the city’s rising population and high job growth, inflation has most certainly played a part in this story. Although it has moderated in the past few months, housing markets are still adjusting to inflation rates as high as 9% the previous year. As housing has become more expensive to maintain, landlords have had to raise rents to compensate.

Additionally, high interest rates have caused Houston multifamily construction costs to rise. Nevertheless, construction pace has managed to mostly keep up with apartment demand and may have even outpaced it in some areas, leading to a slight deceleration in rental gains.

What’s Next for Houston’s Multifamily Market?

The Houston multifamily market certainly smashed some all-time records in the past few years: The low-interest rate environment in Houston drove incredible sales in 2020 and 2021, with 2022 barely following behind.

So what’s next for the Houston multifamily housing market? Let’s take a look at a few predictions for the rest of 2023.

#1 — Multifamily Will Relax

Despite the incredible rental growth performance between 2020 and 2023, Houston’s rental growth market is currently showing signs of slowing down, with rent growth slowing month-to-month since January. Pricing and sales volumes have also plunged since reaching all-time highs in 2021.

Additionally, apartment construction has moderated in the past few quarters and is down about 22,000 units since Q4 2022. Some slowdown was inevitable—after all, that kind of record-breaking performance just isn’t sustainable in the long term.

If rental growth relaxes, landlords can expect tenants to have a bit more bargaining power and buyers may have more leverage. Nevertheless, average rent growth remains high and development will continue to expand outward from the city.

#2 — Employment Growth Will Stay Strong

Although there are signs of multifamily supply outpacing demand, Houston’s employment growth will continue pushing rents higher into 2023 and beyond. Businesses have been flocking to the state thanks to its relatively low land costs, large labor pool, and business-friendly policies.

Several major companies, such as Hewlett Packard, Chevron, and Amazon have relocated their main and regional headquarters in Houston, bringing a ton of tech, service, manufacturing, and healthcare jobs.

Houston is also a number-one destination for remote workers who have flexibility in their living arrangements. The low cost of living and relaxing atmosphere of Texas attracts transplants from other states who are looking for something different.

#3 — More People Will Opt to Rent

The cost of single-family homes has risen concurrently with multifamily rental growth and rising construction costs, reaching $342,000 in June 2023 according to data from Redfin. Rising single-family housing costs will price some of the population out of home ownership, so they will opt for renting instead.

Indeed, current data already reflects this trend. According to a 2022 RentCafe report, Houston was one of only two American cities in which six zip codes had become majority renters in the past decade. The only city ahead of Houston was Philadelphia, which had seven zip codes switch to majority renters.

As more Houston residents opt to rent, multifamily demand will increase as it typically offers a more affordable alternative to single-family housing rentals.

#4 — Class A Properties Will Continue to Dominate

Class A multifamily accommodations will continue to dominate the market as more renters leave for quality residential units. According to recent data, Class A buildings were the only type of multifamily to have positive absorption this quarter at 2,283 units.

The city currently has a number of luxury multifamily projects under construction, including:

  • 300 Class A units in Houston’s central business district at 2404 Navigation Blvd;
  • 250 units near Northside on N. Main St; and,
  • 325 multifamily units in addition to 75,000 square footage of office space at 2219 Canal St.

Class A properties also generate the highest rents, with an average of $1,754 as of Q1 2023—a 9.8% jump from last quarter. Class A properties have lower occupancy rates, but that is due to high product delivery volumes.

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