Apartment Completions Are Booming, But So Are Rents

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(Photo courtesy Wikimedia Commons)

There may be a lot of apartments being built in Texas, but that’s not necessarily translating to more affordable rents, one economist said at a recent conference on affordable housing held at the Federal Reserve Bank of Dallas.

Greg Willett, chief economist at RealPage, told the group assembled that the same affordable housing issues that have begun to block families from purchasing homes have begun to crop up in the rental sector as well.

“We are starting to see the same affordability challenges in rental housing,” he said, adding that this issue is occurring despite a boom in apartment completions across the country.

“There’s a rental housing building boom nationally and across some — but not all — key markets in Texas,” he said. “Nationally, apartment deliveries hit a three-decade high in 2017 and completions will remain elevated in 2018.”

Willett said that he predicts another year or two of “pretty aggressive” construction in the multifamily rental market, which is “a lot of product to have online.”

And Texas, he said, is a big player in the U.S. apartment market. Eleven Texas metro markets are among the nation’s 150 biggest markets by apartment inventory. They account for 12 percent of the top 150 markets stock.

Texas’ top five markets when it comes to growth are Austin (26.3 percent), Midland-Odessa (25.3 percent), San Antonio (23.9 percent), Dallas (19.2 percent), and Houston (16.4 percent).

“Key Texas markets have contributed 18 percent of the top 150’s deliveries in this economic cycle, and contain 15 percent of the product under construction,” Willett said.

Interestingly, Willett said, Fort Worth’s multifamily growth is “restrained,” factoring for only about 9 percent growth.

“Houston and DFW each have added more product during this cycle than exists in total for all but 50 or so U.S. metros,” he said.

 

In short, he said, “there are lots of apartments in Texas.”

And those apartments have occupants, mostly. “U.S. overall occupancy remains healthy, even with lots of new product moving through initial lease-up,” Willett said. Current occupancy rates nationally hover around 95 percent.

The building boom in Texas does trend to occupancy rates that are a little below that, but Willett said that doesn’t mean there is an issue — mostly.

“The one place in Texas where there actually is a vacancy issue is College Station,” he said. “They built more student housing units in College Station than anywhere else in Texas.”

Only the Midland-Odessa market continues to trend higher than the national average for occupancy rates. Dallas and Fort Worth hover slightly below the national average — by mere percentage points.

But rental rates are also increasing. “We are experiencing an unprecedented run-up in national apartment rents,” Willett said. “Most Texas markets have also experienced sizeable apartment rent bumps this cycle.”

Since 2010, Dallas, Austin, and Fort Worth have had slightly more than 30 percent rental growth.

“DFW dropped from the national leaderboard for rent growth, and Austin is declining slightly,” he said.

In fact, rents have grown more slowly in most metro markets in Texas, with the exception of Midland-Odessa, which continues to be hot.

The most expensive rents in the state of Texas are in Midland,” Willett said. But even those rents trail the national average.

“Even the most expensive Texas apartment markets register rents below the national average,” he said.

College Station-Bryan, El Paso, McAllen-Brownsville, and Lubbock experienced negative rental rate growth.

Lower than the national average rents doesn’t necessarily mean that there is not an affordability issue in the area, however.

“Rent growth is beginning to trail wage growth in quite a few locations,” Willett said. In fact, a 2017 report by the National Low Income Housing Coalition showed that to be able to afford a two-bedroom apartment in Texas, you would need to make a bare minimum of $18.8 an hour.

The average renter wage is $17.89. The NLIHC estimates that someone making minimum wage would need to work 101 hours a week to afford a two-bedroom apartment, and 82 hours a week for a one bedroom.

In Dallas, a minimum-wage worker would need 2.7 full-time jobs to make rent on a two-bedroom apartment. In Fort Worth-Arlington, you’d need to work 2.6 full-time jobs.

Compounding this issue is the type of apartments being completed. “Most of this cycle’s completions are luxury communities,” Willett said. “Today’s typical suburban project is a mid-rise building with garage parking, rather than a low-rise development with surface parking.”

Urban core projects account for a bigger share of the total building than in the past,” he said. “Urban land costs drive up the rents, and high‐rise construction pushes the numbers even higher.”

The rent premium for a Class A development over Class B product is also up this cycle. In Dallas, luxury renters pay a premium of 30 percent, and in Fort Worth, 34 percent. Both of those are lower than the national average of 38 percent. Austin and Houston have higher premium percentages at 53 percent and 45 percent, respectively.

“U.S. rent-to-income ratios are inversely correlated to apartment product class,” Willett explained. “Those who opt for Class A apartments rarely face affordability constraints — affordability gets somewhat more challenging when moving to those lower end product segments.”

“Certainly it’s always been true that those living in luxury spend lower shares of income on rent,” he added. “It’s probably more pronounced now as it’s gotten more challenging in the bottom end of the market.”

That bottom income threshold, Willetts said, is about $30,000. “Households that are earning less than that don’t show up in conventional market rate product, so they must be living somewhere outside of that market.”

So where will the multifamily growth happen next?

According to RealPage’s analysis, the rent growth will happen in what it calls the “workforce housing neighborhoods.” Statistically, you can already see that growth happening as rents begin to stagnate in more upscale-heavy markets like Frisco and Las Colinas, and drop in areas like Oak Lawn. However, in areas where there is more workforce housing, like Mesquite, Northeast Dallas, South Irving and Northwest Dallas, rents are increasing by as much as nearly 6 percent.