[PREDICTION] What The Houston Multifamily Market Could Look Like in 2023
Where to invest in multifamily real estate? Looking to know everything about the Houston Multifamily Market in 2023? If so, this blog will show you everything you need to know. Let’s start off with the big picture:
Economy. The Houston unemployment rate continues to make drastic improvements. Employment rates have surpassed the pre-pandemic highs we saw in April 2022. Houston added an additional 32,400 jobs during the first quarter of 2022, with the city adding an additional 188,400 non-farm jobs since September 2021 — a 6.1% increase year-on-year (YoY.)
This has contributed to a new job growth rate of 2.3% since January 2023. According to Oxford Economics, Houston is now ranked in the top 20 of the 50 largest metros in the US. Houston is poised to become an economic powerhouse, with the region accounting for 27.8% of Texas’ GDP.
Not only that, the Houston unemployment rate continues to decrease, dropping to 3.9% in December 2022.
When compared to Dallas and Austin, the vast majority of out of state employees migrating to Texas are choosing Houston. Why? Houston has the second lowest living costs among the most populous U.S. metro areas.
Houston also remains deeply connected to the oil and gas industry, making up 29% of all wages paid in the Houston area from 2011-2020. These high wages are attractive to out of state employees, with anecdotal evidence suggesting a large supply of high paying jobs in Houston.
What does this mean for Multifamily property? This new ranking by Oxford Economics displays Houston’s dominance in the nation as a highly desirable city for families and businesses alike to migrate. Employment opportunities are continuing to expand, further adding to the desirability of Houston. Increasing migration to the Houston region is resulting in a sharp need for more apartments.
According to Macrotrends, the current metro area population of Houston in 2023 is 6,707,000. This is a 1.58% increase from 2022, and is expected to increase to 7,569,000 by 2037.
Source: Macrotrends. This figure includes Harris County and the neighboring cities to form the Houston Metro Area.
Why is Houston receiving an influx of interstate migration? Families and businesses are drawn to Texas due to its abundant energy and business-friendly laws. Texas’ state of the art (and affordable) university and college system is also a key selling point for many families. Texas has benefited from corporate relocations and sizable domestic migration — most notably from California.
What does this mean for multifamily property? The supply of apartments in Houston has continued to grow, but demand has been outstripping supply. According to Realpage Analytics:
“The existing unit count in the state of Texas has grown by 140,000 new apartments over the past two years, which increased the state’s existing inventory base roughly 6%. While new supply volumes have been incredibly high, however, Texas demand is even better. Remarkable levels of absorption in the state resulted in total demand of roughly 190,000 units in the past two years. That works out to about 8% more occupied units today than at the start of 2020.”
Source: RealPage, Inc
With a robust economy, strong levels of population growth, and high levels of demand, multifamily property is predicted to remain a valuable asset for years to come.
Corporate migration to Texas from both the US and abroad is expected to accelerate. This is true, especially in Europe, as their dependence on Russia for energy has crippled many corporations. It’s not just oil powering the attractiveness of Texas either. U.S. News reports:
“In the first quarter of 2022, Texas led all states in overall renewable energy production, accounting for over 14% of the country’s totals, due in large part to the state’s prolific wind energy program.
Texas produced nearly a quarter of the nation’s wind energy, a percentage that is likely to grow after President Joe Biden announced his plan to expand offshore wind infrastructure for the first time into the Gulf of Mexico.
The plan includes a wind farm larger than the city of Houston off the coast of Galveston, Texas, with the potential to power as many as 2.3 million homes.”
Houston multifamily rents are still on the rise as of November 2022. According to CBRE, the average rental rate has increased from $1,248 per month, to $1,261 per month. Rental rates have been increasing rapidly since around early 2021, and still up 8% from the previous year (ApartmentData.com.)
Occupancy rates have remained relatively flat, dropping insignificantly from 91% to 90.7% in September and October respectively. While this does represent a slight decline, multifamily still remains a strong asset. As less people are owning homes, more renters are flooding the Houston market. This will keep Houston multifamily occupancy rates circa 90% for the foreseeable future.
What does this mean for you? Multifamily is a secure asset, especially when compared to other forms of commercial real estate, such as retail or office. It’s simple, but true: people always need a home to live in.
Capitalization Rates (Cap Rates) / Yields
According to Colliers Research, median cap rates have decreased from 4.7% to 4.6% since July 2022 for the Houston market. The overall Texas median cap rate decreased from 4.5% to 4.3%, and US median cap rates remained at 4.6% (as of Q3 2022.)
Source: Colliers Research
What do lower cap rates mean for Houston’s multifamily market?
Falling cap rates imply rising prices for a stream of income, which is an ideal scenario for multifamily investors. This means your property is worth more, and receives a higher total return on your investment. An ideal situation indeed.
Major New Developments / Infrastructure / Industries
Buffalo Bayou East. The Buffalo Bayou East plan is set to reimagine several miles of land along the bayou downstream from Downtown Houston. The masterplan was announced in 2019, and is now currently under construction. The $300 million project will expand to industrial and under-utilized sections of the city.
The plan is currently projected to be completed in 10 years. The Bayou will include miles of trails, remade parks, gardens, sports fields, affordable housing, a boardwalk, public entertainment complexes, and more. The first phases of the project will likely be completed within a couple years.
TMC Helix Park. For years, the Texas Medical Center (TMC) has been working to realize its vision for an innovative new life sciences campus. This vision seeks to bring together entrepreneurs, academia, and industry. This vision will become reality when the TMC3 Collaborative Building opens at the emerging TMC Helix Park this year.
TMC Helix Park will include 6 million square feet of developed space. This will include multiple commercial and research buildings — and a hotel/conference center. The precinct comprises five unique parks totalling 18 acres.
Camden Park. A main focus for projects in Houston has been ensuring more greenspace for residents. This includes new pocket parks in low-income neighborhoods, and the transformative Bayou Greenways Initiative connecting the city’s serpentine tributaries.
Westchase District residents will soon get their own new park, with all the modern amenities of other recent projects. Camden Park broke ground in late 2022, and is set to cost approximately $14 million. Camden Park will include an activity lawn with performance pavilion, playground, dog park, and a restaurant. Expected opening date is sometime in the latter half of 2024.
Here’s the down-low; Prices for multifamily properties in Houston are decreasing. Rental rates are predicted to significantly increase. And cap rates / yields are continuing to drop, making multifamily a highly sought after asset class.
Multifamily is an attractive proposition for investors seeking to hedge their bets against inflation. As inflation continues to escalate, rental rates will continue to rise. When compared to other forms of commercial real estate, like retail or office, multifamily is a secure vehicle to protect yourself against inflation.
Not only that, inflationary environments are often favorable for multifamily investments. Higher mortgage repayments increase the number of renters in the market, as they’re unable to purchase a home.
Here are some other benefits of investing in multifamily real estate:
1. When you own a commercial multifamily property, you don’t have to deal with tenants (and it can be 100% passive.)
When most people think of real estate, they think of being a landlord for a single family home.
But being a landlord isn’t a passive activity. It requires dealing with tenants, toilets, and occasionally taking out the trash. When you become an owner of a commercial multifamily property, you are buying a business that can run (without you dealing with the day to day.)
We utilize a property management company and onsite maintenance crew to address these issues and the asset management team.
2. Multifamily kicks out cash flow that beats the dividends from stocks.
3. Multifamily allows for forced appreciation.
We can improve the property and increase the net operating income (either by increasing the revenue or decreasing the expenses). This increases the value of the property, and at sale we’re able to see those gains from the work that was done.
This is how we’re able to achieve 15-20% returns annually (and is one of the best kept secrets in multifamily.)
4. It’s not directly tied to the value of the offset properties.
5. Because apartments have pricing power, we are able to pass the expenses onto the consumer (It’s also an inflation hedge.)
6. Utilize a tax deferral strategy that will help grow your wealth faster.
One of the big secrets is that our government gives us incentives to provide housing. They allow us to depreciate these assets as a write-off and take paper losses. This is one way the rich avoid paying taxes.
Investing in a multifamily project has many advantages as, on balance, real estate offers lower economic and inflationary risks than stocks.
Of course, the decision to invest in real estate or invest in stocks or bonds or other asset classes, which offer different risks and opportunities, is a choice which depends on an investor's risk tolerance, objectives, financial status and investment style.
Anna and Peter Tan
SuiteLifeMF has acquired, operated and invested in real estate for over 10+ years, investing in over 1500 doors and with over US$ 100 under management (900+ doors). The company also operates a property management company which handles a portfolio of single family homes. SuiteLifeMF maintains a disciplined approach to investing, which focuses on capital preservation and strong returns with a deep understanding of submarkets, economic and political situations.
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