Multifamily Constructions Continues to Boom in Texas Markets

Demand for apartment buildings has driven multifamily construction in Texas as the state continues to welcome new residents, many of whom are priced out of the home purchase market by rapidly rising mortgage rates.

“Multifamily real estate in Texas has been on a roll, and we believe that roll will continue for years to come,” said John Tuohy, SWBC InvestmentHUB blog. “Families and businesses continue to be drawn to the state due to its abundant energy, including renewables, business-friendly state and local governments, and state of the art and affordable state university and college system.”

Apartment Buildings Under Construction at Record Highs

eXp Commercial reported in January that rent price growth won’t likely hit the 2022 highs and that although multifamily housing construction has slowed down, the number of apartment buildings under construction is at record highs.

The National Association of Builders in its Multifamily Housing Market report published Jan. 31, 2023, said currently 943,000 apartments are under construction nationally, up 24.9 percent compared to a year ago (755,000).

Three areas in Texas, among the top 10 multifamily markets, all registered increases in permits issued including:

• Dallas-Fort Worth-Arlington

• Houston-The Woodlands-Sugarland

• Austin-Round Rock

“The Texas apartment market has been a supply and demand beast for the past two years,” reported Kim O’Brien for RealPage. “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 percent.”

RealPage market analytics show that while new supply volumes of apartments have been incredibly high in the Lone Star State, the 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 percent more occupied units today than at the start of 2020,” wrote O’Brien.

Multifamily Housing Starts Overcome Economic Hurdles

The apartment construction boom has continued in Texas despite economic hurdles including inflation pushing up material costs, supply chain woes, and labor shortages.

“Apartment developers are still getting their deals done, despite experiencing serious headwinds from cost increases and supply-chain issues. Occupancy remains a solid 95 percent. And, as rents continue to climb somewhat slower, they are still almost 15 percent over pre-pandemic levels,” Colliers’ Jörg Mast, a multifamily broker with more than 20 years of experience, told D magazine.

Brandon J. Call reported in D magazine that any slowdown in apartment building in Texas will not be a massive drop-off as “apartment living shows few signs of slowing, rents and occupancy remain high in Dallas-Fort Worth” with year-over-year rent growth at 12.3 percent, beating the state average of 8.3 percent and the national average of 7.5 percent.

The multifamily construction outlook is especially rosy compared to other building sectors.

“Retail real estate remains at a crossroads, while the future of office space remains similarly debatable. But local multifamily investments continue to perform well, according to the latest from Moody’s Analytics. And although multifamily owners and investors aren’t immune to cost increases and interest rate woes, they can more easily adjust rents in real time to account for market changes,” Call wrote.

Factors Leading to the Texas Apartment Demand

O’Brien in the RealPage analysis says that several factors have fueled notable apartment demand volumes in Texas.

“This state has benefited from sizable domestic migration, and corporate relocations have led to some of the fastest growing economies as well, which is especially true in Austin and the Dallas/Fort Worth Metroplex. Economic and population growth coupled with favorable demographics have set the stage for demand tailwinds in the Lone Star State,” concluded O’Brien.

Tuohy reports that as opposed to a “boom-bust” cycle that usually arises in major expansions, lending institutions are requiring as much as 50 percent capital down from developers, thus reducing the risk of too much leverage in the market.

“Companies both in the U.S. and Europe will pick up the pace to relocate to Texas, especially in Europe as energy dependence on Russia has brought terrible problems,” wrote Tuohy.

While energy, including renewable energy with projects such as the wind farm slated off the Galveston coast that will be larger than the city of Houston and the potential to produce enough energy to power 2.3 million homes, other economic projects are fueling Texas apartment demand such as the semiconductor plant planned for Sherman.

“Texas Instruments is investing $30 billion into a new semiconductor wafer plant in Sherman, Texas — a city just about an hour’s drive north of Dallas. The first phase of the massive project is scheduled to be completed in 2025. It is estimated that Sherman’s population will double from 40,000 to 80,000. As for multifamily, 12,000 apartment units are also scheduled to be built,” reported Tuohy.

Houston Led Nation in Apartment Construction to Start 2022

Dallas-Fort Worth and Austin were not the hottest apartment construction markets to start 2022 as Houston led not only Texas but the nation, in apartment construction during the first six months last year.

“Houston residents might be noticing more and more apartments under construction in locales like Midtown, Montrose, Spring Branch, and the Heights,” wrote Adam Zuvanich for Houston Public Media. “According to a blog that tracks apartment trends across the United States, more units were built in the city during the first half of this year than in any other place in the country.”

Houston ranked first nationally with 4,746 apartments constructed during the first six months of 2022, according to data released by RentCafe.com. Houston was projected to complete 17,759 new units in 2022, ranking fifth nationally, and third behind Dallas and Austin.

"Companies like Hewlett Packard, NRG Energy, Roboze and Exxon Mobil Corp. continue to expand or relocate here, which continues to attract renters in search of good job opportunities in the city," RentCafe wrote in its report. "Consequently, Houston is working to meet the growing demand for housing."

Apartment construction growth is strong in Houston neighborhoods near downtown as well as in areas such as Katy and Conroe.

"I'm not sure why we lead the nation when we're just doing kind of what we've always done," Bruce McClenny, senior director of ApartmentData.com, a Houston-based market research firm told Houston Public Media. "Houston's a massive area that needs a lot of units."