With 20,000 units opening this year, landlords cutting rent
By Erin Mulvaney January 29, 2016
New apartment buildings that once promised not-so-humble lodging for high-income energy workers are emerging as a symbol of oil-boom excess.Low oil prices and a droopy employment picture threaten to leave some of the newest towers and balconied boxes with empty floors. With far fewer jobs being created than when many of these upscale projects were launched, landlords are cutting rent, waiving months of payment and offering hefty referral bonuses to lure new residents.
"It could be as bad as the office situation in the 1980s: Lots of vacancies, lots of space that goes to waste and a lot of developers saying, 'What was I thinking?' " local economist Patrick Jankowski warned earlier this week. Apartment Data Services, which tracks rental trends across the region, has come to the same conclusion. "Overbuilt," it declares in its 2016 forecast. "Too much supply for demand."
Even one relentlessly upbeat CEO admits he has put a downtown apartment project on hold to wait for a market recovery."It won't be as bad as people think," said Ric Campo of Camden, which has residential projects across the city. "But now, it's going to be a tenant's market." Clark Mott has watched the transformation from his posh pad in the Upper Kirby area. After landing his first job with an oil and gas firm a year ago, he felt confident enough to sign a lease for $1,400 a month for a one-bedroom apartment that was close to work and inside Loop 610.
Now, hawkers on the street below spin oversized advertising signs to draw people in. Mott says his apartment complex is offering concessions to new renters and $1,500 referral checks to those already there."There are a lot of empty apartments these days around the complex," Mott said.
The concessions are likely to grow more generous.
"We're getting to where two months free isn't enough," Jankowski said.In a worst-case scenario, he added, floors of some of the newly opened and generally more expensive complexes and high-rises will sit vacant, reminiscent of the officer-tower shells during the severe economic downturn of the 1980s.
Job growth largely propelled the apartment construction boom of the last several years, but Jankowski said the days of creating 90,000 to 100,000 jobs a year will not return for a while. The region is forecast to add about 22,000 jobs in 2016; at the same time, more than 29,000 units in 102 properties are under construction.
About 20,000 of those units will open this year.
In the recent good times - before crude prices tumbled to around $30 per barrel from above $100 - the region was able to absorb 10,000 to 12,000 multifamily units a year, but Jankowski said that slower job growth likely will cut that rate. And once oil prices tick back up, he said, the companies will pay down an estimated $200 billion in debt that accumulated during the boom before adding jobs.
Addressing apartment developers recently, Stacy Hunt, a Houston-based partner with Greystar, called today's rental market "a whole different environment." He, too, remained optimistic about riding out this current downturn. "We'll catch our breath between now and probably summer of 2017," Hunt said. "Until then, you will see some rents effectively that are lower than what the developer projected."
More high-end units
Hunt said Charleston, S.C.-based Greystar, which has several apartment projects coming online in Houston, does not predict mass foreclosures. He said apartment builders have more equity than they did in previous decades, and the quality of construction and a trend toward renting over homebuying in Houston still favor developers. Austin Kroschel and Hayley Dippon feel like they are better off renting for now. They recently signed a lease for a new place before they tie the knot next month. The couple was pleased to see that rent for the complex on West Dallas Street dropped nearly $300 from when they were looking last spring.
During their search, they found leasing offices offering free months, waiving application fees and offering such incentives as free trash pickup. The couple came in under their projected budget with $1,350 a month for a one-bedroom apartment.
The oil boom had a clear impact on the types of apartments being built in Houston. The market now is skewed toward the high-end, or Class A, products, said Bruce McClenny of Houston-based Apartment Data Services. He said the higher end stock is overbuilt and expects rent occupancy across the area to fall to 89 percent this year after a lengthy period of steady increase. Also, he said, top-end apartments traditionally account for about 17 percent of the market here. Now, it's closer to 24 percent. These newly built units average $1,400 a month. The overall rental price in the Houston region is $996. Since March 2012, at least 6,240 units have been knocked down or are still slated for demolition, according to data from the apartment data collection service. Most of those apartments were on the lower end and had cheaper rents than the new construction replacing them.
'Let's not overreact'
Jankowski said he senses some denial among bullish developers. "There's always this belief that people with deep pockets are going to be willing to spend lots of money on apartments and houses and nice things," he said. "I think it's a little wishful." On Friday morning, Campo, the Camden CEO, told investors and media in a conference call about earnings that losses in energy jobs here will be partially offset by gains in health care, education, hospitality and government. Still, he acknowledged it will be a slow year for Houston, the company's second largest market, and that the city "has too many apartments coming online" given that slower growth. "While we expect Houston to be our slowest market in the near term, the market will hold up better than people expect," Campo said. "Low oil prices are good for America and especially our residents." Cyrus Bahrami with Alliance Residential said construction has slowed, too. He said his company closed seven deals in 2014 but only one deal last year. He expects one deal this year. "The music has stopped on the development side," Bahrami said. "Let's not overreact. We have a lot of opportunity to take advantage of the situation."
Marvy Finger of Finger Cos., who opened luxury downtown tower One Park Place just as the last national recession got underway, predicts he'll have to drop rents at new projects in downtown and Montrose by roughly 9 percent. But he's not giving up on those areas. Finger said he has ridden out rough years before and learned from the 1980s bust to build only in desirable areas. Take One Park Place, for example. During the last recession, he offered up to three months' free rent to lure tenants. But the tower has had roughly 97 percent occupancy, with rents from $2,800 to $8,000 per month, the past several years.