In the apartment construction industry one simple premise often guides developers: increased job growth creates a demand for new housing which in turn leads to new construction.
The Greater Houston region created 23,300 jobs in 2015 and projections for 2016 show 21,900 jobs will be added, according to Patrick Jankowski, senior vice president of research for the Greater Houston Partnership.
As a comparison, from 2011-14 an average of more than 89,000 jobs were added per year, said Bruce McClenny, president and CEO of Apartment Data Services LLC.
However, despite the significant decline in job creation, apartment developers have an estimated 30,000 new units under construction in the Greater Houston region—2,600 in the Katy area.
“We have—what looks like—a three-year supply [of apartments] without the job growth to sustain the market,” Jankowski said. “There are going to be too many units coming online for the job growth we’re going to have.”
Jankowski said despite the job diversification in Houston, which helps offset lost jobs in the oil and gas industry, there still are not enough new jobs to sustain the boon in apartment construction.
“The apartment industry has overbuilt.,” Jankowski said. “They recognized the market signals too late. No one should start a new apartment complex for another year.”
In and around Katy, apartment complex construction continues as new communities are being built in several areas.
McClenny said in 2015, there were 4,100 new apartment units built in the Katy-Cinco Ranch-Waterside market area. This year, there are an additional 10 new complexes with more than 2,600 apartment units under construction, which will open by December, he said.
Apartment complexes are divided into two classes: stable—in operation more than 13 months—and lease-up—in operation less than 13 months. Of the 80 apartment complexes in the Katy-Cinco Ranch-Waterside market area, 14 complexes are classified as lease-up.
“More is coming at the least opportune time,” McClenny said. “[The market] is overbuilt. The demand based on job growth is choked up. They have as many properties in lease-up as ever.”
Lance LaCour, president and CEO of the Katy Area Economic Development Council, said the continued construction of new apartment complexes has not timed well with the decline in job creation.
“It’s almost an over supply situation,” LaCour said. “I think a lot of people think that it’s over built.”
Although there are more than 2,600 new apartment units set to open this year and there is a slowdown in job growth, not all companies are holding back on building or planning for new complexes.
Doug Bergen, vice president of Sueba USA Corporation, said his company is planning to build two new four-story buildings with an estimated 300 luxury loft units in each complex in the new Boardwalk District project near Katy Mills.
“We think Houston is a great market,” Bergen said. “We’re very bullish on the west side of Houston and the Katy area.”
The apartment industry may struggle for a year or two, Bergen said.
“Maybe we have a slowdown for the next 12 to 18 months,” he said. “Right now we’re seeing a cycle with a lot of supply. Over a period of time, things get back to normal.”
With many new complexes on the horizon and less demand for those vacant apartments —the Katy area had only an 80 percent occupancy rate in January 2016—many developers may resort to different tactics to attract renters, Jankowski said.
Jankowski said complexes seeking to attract renters will likely offer concessions, such as one to two months free rent for a 12-month lease and not having to pay a security deposit.
“You should really be able to get a good deal on an apartment in the next two years,” Jankowski said. “When [a potential renter] walks into the rental office, they just need to say, ‘what kind of deal can you give me?’ If they say nothing, I’d advise them to turn around and walk out.”
Cyrus Bahrami, a managing partner with Alliance Residential Houston, spoke at the Houston Apartment Association’s annual luncheon Jan. 26 and said despite the new complexes, developers could take advantage of the situation.
“Let’s not overreact,” he said. “I like our chances with the number of milennials flowing to Houston.”
Bahrami said concessions for new renters are often higher in areas with a large supply of apartment units like the Katy area.
“We were offering concessions like one month free rent,” Bahrami said. “Now, we’re moving to two months of free rent.”
Bahrami said despite the slowdown in the economy and job growth, the millennial generation has a desire to live in apartments, not single-family homes.
“I think the American dream has been pushed out for my generation,” Bahrami, 35, said. “Milennials are a big part of this—they’re apartment-driven.”
Daniel Fein, vice president of development for Martin Fein Interests Ltd.—the company that owns The Grand at LaCenterra complex—said job losses in the energy sector and a slowdown in job creation have affected the industry.
“Certainly what’s going on with the energy sector, that is affecting us,” he said. “It’s kind of one of those wait and see time periods.”
The winter months are normally a slower time period for apartment rentals, Fein said. The market’s peak season is in the spring and summer.
“We’re waiting to see how the spring goes,” he said. “If the market doesn’t respond as expected, we may have to look at concessions.”
The company has not offered blanket concessions to new renters at its LaCenterra location, but concessions are being offered at several complexes the firm owns in Spring and inside Loop 610 in Houston, Fein said.
Potential renters who are looking for an apartment at LaCenterra may be offered concessions on an individual basis.
“[Concessions] kind of varies on certain kinds of units,” Fein said. “Our project in LaCenterra is a different kind of [apartment] product.”
Darla Tinnerman, the Katy regional property manager for Greystar Real Estate Partners, said the main issue in Katy is the new supply of apartments.
“It’s a heavily saturated submarket, especially [around] the Westpark Tollway,” Tinnerman said.
The apartment industry uses a formula to determine how many units are needed in a particular area, Tinnerman said.
“We estimate it takes three to four jobs to fill one apartment,” she said. “The job growth is not there.”
Of the estimated 2,600 new units opening in Katy this year, many are near Greystar properties.
“There is a lot of supply and less demand,” Tinnerman said. “There are not enough people for what’s on the market.”
Greystar owns six apartment complexes, and the company is offering up to two months free rent for certain properties.
“We’re all in the same boat,” she said. “[We are] Trying to keep the residents we have and back-fill [apartments belonging to] those who move out.”