Luxury renters finding deals
Concessions offered for Class A apartments, while rents are rising for less-pricey units
In the overbuilt local market, renters not only can upgrade to luxury apartments — often with a few months free — but also snag signing bonuses.
Local renters not only can upgrade to luxury digs — often with a few months thrown in free — but also snag signing bonuses such as Apple watches, flat-screen televisions and even cruises.
The concessions are a byproduct of the region’s overbuilt apartment market. Economists have warned of this looming glut, particularly among highend units, since falling oil prices began taking their toll on the area’s job and population growth.
A midyear report seems to validate those concerns. The overall occupancy rate for residential rentals in April was 90.1 percent, the economic analysis by the Greater Houston Partnership found. The report predicts the local rate will fall to the mid-80s as developers put another 21,000 units on the market this year and 4,000 in 2017. It says renters hold the cards when occupancy rates fall below 90 percent.
This new construction tends to be highend, or Class A, a category that makes up 23
percent of the market. The current occupancy rate for apartments in this category is 79 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 partnership report says. “Apartment owners and developers are more likely to see crude oil hit $70 a barrel before Houston returns to a landlord’s market.”
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. Developers rallied to meet the need and expected to garner high rents, as some areas were experiencing double-digit growth.
At the rental market’s August 2014 peak, the occupancy rate for Class A apartments was 84 percent. Now there is an obvious divide. Among Class A apartments that have been in operation for 13 months or more, the occupancy rate is 91 percent, but those open 13 months or less have a 23.2 percent rate.
Class B and C units
Meanwhile, rents have continued to increase over the past two years for slightly lower-end Class B and C properties. The Greater Houston Partnership analysis found that of the 24,000 units current in “lease up,” only 500 are Class B. Economists have said this trend may affect long-term affordability, despite the availability of incentives for renters.
Class A rents averaged $1,459 per month in April. With two months free rent, a fairly stan- dard 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 Galleria areas, for example — have seen the sharpest rent declines over the past six months. Meanwhile, some neighborhoods with more low-end or slightly older apartments — Sharpstown, Alief and Westwood — are seeing rental rates continue to tick up at rates of about 5 percent year over year.
In Greenspoint, rates are still rising at 8.2 percent, nearly three times the rate considered healthy.
Bruce McClenny, president of Houston-based Apartment Data Services, said the area is seeing huge discounting in the upper end. But he also sees rents going up in less popular areas where older units are being refurbished.
Despite these disparities, McClenny said, renters in Houston are gaining an advantage over landlords they haven’t had since the recession of 2008 and 2009.
By April, the torrid pace of building had finally slowed. 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 Houston’s Department of Public Works. Permits for multifamily buildings dropped 63 percent.
Buying versus renting
Still, a recent national report on buying versus renting warns that “noticeable property price declines” are potentially in store for Houston as it copes with energy industry declines.
“A perfect storm seems to be developing in Houston,” real estate economist Ken Johnson said in a statement. “I expect a lot of folks in Houston to be on the safe side and opt for renting over ownership.”
Houston’s score on the Beracha, Hardin & Johnson Buy vs. Rent Index, produced by Florida Atlantic University and Florida International University faculty, “plummeted significantly” toward buy territory. A report on the findings says such a scenario has foreshadowed price declines in the past.
The national index measures the relationship between building equity through buying real estate versus renting a comparable property and investing in stocks or bonds.