Houston is the only Texas metro with growing multifamily rents at the moment. But seeing its apartment market as in the clear would require rose-colored glasses.

Houston’s multifamily rental rate has grown 1.2% in the last year, according to a July report from MRI ApartmentData, a market insights product from MRI Software. This brings the average apartment price in the city to $1,279 per month.

The growth is in contrast to the rest of Texas, where multifamily rents are starting to fall, and to a national trend that saw year-over-year drops averaging 1.8% as of this month.

Zooming out, however, this won’t put Houston’s multifamily market ahead of other cities anytime soon. Houston is playing some short-term catch-up, but good times are unlikely to keep rolling as the same headwinds impacting other markets blow in.

Sun Belt markets like Phoenix and Tampa, Jacksonville and Orlando, Florida, all enjoyed rent growth of more than 30% from the start of 2020 through the end of 2022, according to MRI ApartmentData. In Texas, Dallas-Fort Worth’s average rent grew 26.9% and Austin’s grew 24.5%.

Houston trailed at 18.5% growth over that period. 

“Houston was the runt of the rent growth litter for the years coming out of the pandemic when the economy reopened,” Bruce McClenny, industry principal for MRI ApartmentData, said in a statement to Bisnow.

While Houston still had strong job growth and in-migration, it wasn’t as popular as Florida and Arizona or cities like Atlanta, Nashville, Tennessee, or Charlotte and Raleigh-Durham, North Carolina, he said. Within Texas, DFW and Austin were the “darling destinations,” McClenny said.

Now, Houston’s rent has grown 1.2% in a year, the only Sun Belt city among 11 others tracked by MRI ApartmentData to do so. Tampa remained flat, and Austin and Phoenix-Tucson dropped more than 4%.

McClenny said that this year, “those markets that were some of the hottest are now the coolest.”

Renters are behaving as they traditionally do under threat of recession, he said — moving in with relatives, finding roommates and turning to shadow rentals, including mom-and-pop single-family units.

But while Houston appears to be holding its own, it is more that it never rose as high and hasn’t fallen as fast as other cities.

“Houston has done a reversal from last to first, but this is a dubious honor,” McClenny said. “It’s the old adage that the highest fliers have the most to fall.”

Courtesy of MRI ApartmentData

Houston’s lower rents and slower growth have led to less development interest than other peer cities, said Todd Marix, senior managing director of investment sales at Berkadia’s Houston office. 

“Houston’s rents just didn’t do enough to offset the rise in construction costs,” he said.

A lack of development investment helps explain why rents are rising in Houston and falling elsewhere, Marix said. In Houston, apartments under construction relative to all stock is about 2%, he said. 

That trails DFW’s 5% and Austin’s whopping 16%, he said. Austin will have difficulty absorbing all of that new stock, meaning many landlords will have to offer concessions to new residents — like one to three months free — and rents will soften, Marix said.

Even though Houston won’t have as much to absorb, the roughly 39,000 units in the pipeline have the potential to put an even greater dent in the metro’s historically low multifamily occupancy rates, Bisnow previously reported. Houston’s occupancy sat at 89.6% this month, according to the MRI ApartmentData report. 

In other Sun Belt markets, occupancy is closer to 95%, Marix said, adding Houston has long had an issue with oversupply.

“Houston’s kind of famous for overbuilding as the market is constricting,” Marix said.

Additional trouble could be ahead for apartment owners that utilized floating-rate debt, and it is likely to be more prevalent for workforce or Class-C housing owners, Marix said. 

“That’s usually the first shoe to fall within a deteriorating situation,” he said. “These buildings are older, they require more capital expenditure.”

Houston-based Applesway Investment Group saw a $229M portfolio of multifamily properties foreclosed on in April. Applesway’s inability to cover loans on four Houston apartment properties led to them being resold at auction the same month.

It is also unlikely that anyone budgeted for the way interest rates rose last year, Marix said.

“The speed in which it changed was incredible and caught a lot of people off guard,” he said. 

If an owner bought late in the cycle when valuations were high, utilized floating-rate debt and had a high loan-to-value ratio, the only options are to sell, refinance in an unfavorable lending environment or hand over the keys to a lender, he said. 

“I mean, nobody’s going to overcome that particular set of circumstances,” Marix said.

And while Houston’s multifamily rents are growing, albeit by small margins, they are not keeping pace with operating costs, namely taxes and insurance, he said. 

“If you’re on a floating-rate debt, your debt service has gone up,” Marix said. “The water is just getting hotter.”