Houston's Inner Loop multifamily construction boom faces COVID-19 headwinds

Regent Square, a mixed-use project near Allen Parkway, is one of dozens of projects in the pipeline inside the Loop. (Matt Dulin/Community Impact Newspaper)
Regent Square, a mixed-use project near Allen Parkway, is one of dozens of projects in the pipeline inside the Loop. (Matt Dulin/Community Impact Newspaper)

Regent Square, a mixed-use project near Allen Parkway, is one of dozens of projects in the pipeline inside the Loop. (Matt Dulin/Community Impact Newspaper)

With widespread economic uncertainty and historic unemployment shaking nearly every industry, at least one sector has kept going: multifamily construction.

“When COVID hit, it was a lot of, ‘Oh, my goodness, what’s actually going to happen here?’ ... But once these projects get under construction, it’s been in the works for years, and at that point, there’s no sense in stopping it,” said Christy Rodriguez, director of multifamily housing for Judwin Realty Group and an officer with the Houston Apartment Association.

The construction industry was deemed an essential service by Gov. Greg Abbott in his March executive order, allowing almost 23 projects worth well over $1.8 billion in the Heights-River Oaks-Montrose area to continue.

The catch: Most of these are Class A properties—priced for the high end of the market and banking on tenant salaries of $75,000 or more to make rent—and they are all slated to open in a post-COVID-19 economy that is officially in a recession and in an oil slump.

Another area of concern will be evictions, as the extra $600 a week in unemployment benefits set out by the CARES Act will run out in July.

“It’s not a good place to be,” said Bruce McClenny of ApartmentData.com, an industry data firm. “Filling 21,000 new units in 12 months like you see in a big wave of construction in Houston is a challenge even for the best economies.”

Essential, for now

While having a blessing from Abbott allowing construction sites to stay active, worker safety remained paramount, said Jerry Nevlud, president of the Houston chapter of Associated General Contractors.

“It’s been a tough time to try to balance that and [at] the same time to be safe and allow people to work. It’s been a difficult couple of months,” Nevlud said.

So far, no significant “hot spots” have popped up at job sites, he said. The group’s state-level officials were able to quickly craft guidelines for social distancing, personal protective equipment and other measures, setting an industry standard before it was required, he said.

“Time will tell if what we did is working, but we’re proud of it. ... We can’t take the foot off the gas. We have to continue to monitor our people and work safely,” he said.

Depending on the stage of construction, workers may be completely outdoors or enclosed in an interior build-out, and a job site can have from two to over 100 workers on-site, which poses different challenges for fighting the spread of coronavirus.

“Working to flatline that curve is still key. We can’t get complacent,” Nevlud said.

Not every state has been as friendly to construction as Texas. An April survey by the Associated General Contractors’ national office found 40% of U.S. firms are facing layoffs due to delayed or canceled projects.

“Owners are not only halting many current construction projects but are canceling a growing number of projects that have not yet started,” AGC Chief Economist Ken Simonson said in the report.

It is a foregone conclusion that local projects that did not secure financing before COVID-19 will not break ground soon, which could lead to a construction contraction in the months to come, Rodriguez said.

“We are seeing activity and construction ramping back up as the economy comes back, ... but the reality is some of the proposed number of projects might fall out due to financing,” she said.

Market pressures

Urban Genesis, a developer based in Montrose, was slated to open Avondale Highline, its first ground-up project in Houston, in the first week of July. It also has three other projects under construction in the Heights and Washington Avenue corridor.

Principal Matt Shafiezadeh said the firm is not worried about leasing up the new property, as it focuses on aiming for below-market prices.

“We build for the ‘missing middle,’” he said. “We will naturally be affected by a downturn, but we believe the pool we’re accommodating is wider, so we’re not going to be as impacted as badly. So we’re moving forward.”

Design choices, such as building smaller communities with platform parking and foregoing pools, gyms and other amenities, allow for cost efficiencies and rent rates that are $200-$400 cheaper than comparable units, he said.

With most multifamily properties aiming for luxury-level price points, they may be forced to offer concessions or discounts in the form of free rent and waived fees. In May, over 60% of Class A properties were offering discounts, according to ApartmentData.com, driving rents down at a time when they are usually on an upswing.

“We’re seeing two or three months free, especially on new construction. You’re just trying to get them occupied,” Rodriguez said. “The other factor is with interest rates so low, you have renters now thinking this might be a good time to buy a home.”

New units hitting the market will increase supply and competition for what could be a smaller number of eligible renters. In the Heights-River Oaks-Montrose area, over 4,600 units hit the market in the past year, and another 7,000 are under construction.

Across the Houston Metro area, new properties that opened in the past 12 months were only about 25% occupied as of May, and overall occupancy rates dropped below 89%.

“It’s not as strong as they want it to be, and we need to keep an eye on it,” McClenny said.

Preventing a crisis

While the industry plows ahead with more development, Houston and Harris County leaders formed the Housing Stability Task Force to look at measures to stem a wave of possible evictions as the effects of widespread job losses take hold and unemployment benefits revert back to pre-pandemic levels.

“Evictions were a serious issue before the COVID-19 pandemic, and they will continue to be of great concern throughout the course of the economic downtown,” said Texas Rep. Armando Walle, D-Houston, the Harris County recovery czar.

Complicating the issue is the fact that while the Texas Supreme Court has allowed eviction cases to proceed as of May 26, under the CARES Act, any property with a federally backed mortgage or that is receiving federal aid cannot issue evictions until Aug. 24.

“Right now, if they’re filing evictions, they have to also file a sworn statement affirming they are not covered under the federal ban. ... But in reality, they may have no idea. They are signing it, and they have no idea what it means to have a federally backed mortgage,” said Nick Whitaker, an attorney for the nonprofit Lone Star Legal Aid. “Try figuring it out. It’s our job to find these things, and it’s not easy.”

Eviction cases are heard by Justice of the Peace courts, which have been given discretion on when to begin hearing cases. Some are working to clear the backlog, while others are holding off, Whitaker said.

At the end of the day, landlords need rent to be paid to provide housing.

“No one wants to evict if they can avoid it,” Rodriguez said. “The key to helping avoid evictions is finding ways to help people pay their rent.”
By Matt Dulin
Matt joined Community Impact Newspaper in January 2018 and is the City Editor for Houston's Inner Loop editions.


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