HOUSTON—The Houston apartment market is experiencing a notable inflection point, showing significant signs of weakening under the weight of a suddenly sluggish economy and a surge of new apartments. Rent growth is slowing, vacant units are taking longer to backfill, fewer renters are renewing leases and income levels for new renters are falling, according to an MPF Research analysis of actual rent roll data from RealPage Inc.

While property surveys and Internet listings suggest the Houston apartment is holding up well in spite of the sluggish local economy, lease-transaction data pulled from rent rolls utilizing RealPage software paint a very different picture. Looking at rent roll data for November 2015 and January 2016, the number of lease applications dropped 3.5% compared to the same period a year earlier. During the same period, the number of lease renewals declined by 4.9%, which triggered a drop in resident retention rates. In turn, occupancy fell 0.7 points.

Additionally, the loss of high-paying energy jobs has led to a drop in income levels among new residents. New renters in 2015 reported incomes 4.2% below those in 2014. As a result, rent growth for new leases has completely disappeared. New lease trade-out (a measure of what a new renter pays compared to the previous renter of the same apartment unit) came in at -0.7% in December and 0.1% in January. The bottom line is since August 2015, total lease revenue in Houston is down 0.6%.

Jay Parsons, director of analytics and forecasts, MPF Research, tells GlobeSt.com: “The actual rent roll data shows real evidence that Houston's apartment market has finally hit that inflection point everyone has been watching for. Fewer renters are renewing their leases, vacant units are taking longer to backfill and leases are often getting signed below the rates you see listed online. Additionally, we saw that renters signing new leases in 2015 came in with incomes 4.2% below those of 2014–which reflects that Houston is no longer adding those high-paying energy jobs. While the economic slowdown tracing to Houston's exposure to the oil industry certainly plays a role, the real problem is that these energy jobs are concentrated in the same areas seeing record levels of new supply. It's the combination of those factors really hurting Houston's urban core and energy corridor. Developers have flooded these areas with new apartments to meet demand coming from energy workers, only to find that demand pool evaporating as projects complete. Houston's backers like to argue that Houston is today a diversified economy, and that is true in other parts of the metro area. For example, we continue to see very strong fundamentals on the east side of the metro–which has much less exposure to oil. In other words, this slowdown is not universal across Houston. It's really concentrated in certain submarkets, especially in the core and to the west, and in class-A properties more specifically.”

Indeed, the impact to the apartment sector has been limited to where energy firms comprise a huge chunk of the employment base and where new apartment development is near record levels. By comparison, most suburban submarkets continue to show strong fundamentals–especially in the eastern portion of the metro near the ports.

“We're still seeing strength in certain suburbs and in the class-B space more broadly,” Parsons said. “Vacancy is limited in those segments, and there's less direct exposure to the energy sector compared to the urban core and energy corridor. And new supply makes a big difference, too. Houston's core submarkets are getting hit hard by the double whammy of near-record supply levels arriving at the same time high-income energy jobs are disappearing. Developers banked on those jobs to help support this supply wave, and their absence means we'll see prolonged lease-ups and a very competitive leasing environment for a limited pool of class-A renters.”

MPF Research's long-term forecast assumes continued weakness in Houston through the first half of 2017. After that point, assuming some improvement in the energy sector, the market could be positioned for a quick rebound due to an expected plunge in new supply. Few new projects are breaking ground, which means little new supply will be arriving in late 2017 and in 2018.

“The apartment industry has been nervously awaiting a slowdown in Houston, and that slowdown has certainly arrived,” says Parsons.

HOUSTON—The Houston apartment market is experiencing a notable inflection point, showing significant signs of weakening under the weight of a suddenly sluggish economy and a surge of new apartments. Rent growth is slowing, vacant units are taking longer to backfill, fewer renters are renewing leases and income levels for new renters are falling, according to an MPF Research analysis of actual rent roll data from RealPage Inc.

While property surveys and Internet listings suggest the Houston apartment is holding up well in spite of the sluggish local economy, lease-transaction data pulled from rent rolls utilizing RealPage software paint a very different picture. Looking at rent roll data for November 2015 and January 2016, the number of lease applications dropped 3.5% compared to the same period a year earlier. During the same period, the number of lease renewals declined by 4.9%, which triggered a drop in resident retention rates. In turn, occupancy fell 0.7 points.

Additionally, the loss of high-paying energy jobs has led to a drop in income levels among new residents. New renters in 2015 reported incomes 4.2% below those in 2014. As a result, rent growth for new leases has completely disappeared. New lease trade-out (a measure of what a new renter pays compared to the previous renter of the same apartment unit) came in at -0.7% in December and 0.1% in January. The bottom line is since August 2015, total lease revenue in Houston is down 0.6%.

Jay Parsons, director of analytics and forecasts, MPF Research, tells GlobeSt.com: “The actual rent roll data shows real evidence that Houston's apartment market has finally hit that inflection point everyone has been watching for. Fewer renters are renewing their leases, vacant units are taking longer to backfill and leases are often getting signed below the rates you see listed online. Additionally, we saw that renters signing new leases in 2015 came in with incomes 4.2% below those of 2014–which reflects that Houston is no longer adding those high-paying energy jobs. While the economic slowdown tracing to Houston's exposure to the oil industry certainly plays a role, the real problem is that these energy jobs are concentrated in the same areas seeing record levels of new supply. It's the combination of those factors really hurting Houston's urban core and energy corridor. Developers have flooded these areas with new apartments to meet demand coming from energy workers, only to find that demand pool evaporating as projects complete. Houston's backers like to argue that Houston is today a diversified economy, and that is true in other parts of the metro area. For example, we continue to see very strong fundamentals on the east side of the metro–which has much less exposure to oil. In other words, this slowdown is not universal across Houston. It's really concentrated in certain submarkets, especially in the core and to the west, and in class-A properties more specifically.”

Indeed, the impact to the apartment sector has been limited to where energy firms comprise a huge chunk of the employment base and where new apartment development is near record levels. By comparison, most suburban submarkets continue to show strong fundamentals–especially in the eastern portion of the metro near the ports.

“We're still seeing strength in certain suburbs and in the class-B space more broadly,” Parsons said. “Vacancy is limited in those segments, and there's less direct exposure to the energy sector compared to the urban core and energy corridor. And new supply makes a big difference, too. Houston's core submarkets are getting hit hard by the double whammy of near-record supply levels arriving at the same time high-income energy jobs are disappearing. Developers banked on those jobs to help support this supply wave, and their absence means we'll see prolonged lease-ups and a very competitive leasing environment for a limited pool of class-A renters.”

MPF Research's long-term forecast assumes continued weakness in Houston through the first half of 2017. After that point, assuming some improvement in the energy sector, the market could be positioned for a quick rebound due to an expected plunge in new supply. Few new projects are breaking ground, which means little new supply will be arriving in late 2017 and in 2018.

“The apartment industry has been nervously awaiting a slowdown in Houston, and that slowdown has certainly arrived,” says Parsons.