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Houston and San Jose, Back from the Dead?

Bottom Markets in 2016 Could be Among Top in 2019

By Louis Rosenthal | Monday, March 6, 2017

 

Hop in the Axiometrics time machine and journey with us to the not-so-distant future. The year is 2019: Oprah and Elizabeth Warren are vying to be the Democratic Party’s nominee in the 2020 presidential election; the iPhone 10 battery holds charge for an entire day; and Houston and San Jose are two of the top-performing apartment markets in the country.

If that last one threw you for a spin, you’re not alone.

Among the top 50 metros, Houston’s and San Jose’s apartment markets were the lowest performers of 2016, and were two of only seven markets to have finished 2016 with negative rent growth, according to Axiometrics apartment market research.

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In the face of deteriorating market fundamentals in both metros, permitting activity fell sharply in late 2014 and mid-2015 for San Jose and Houston, respectively.

 

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San Jose reached peak multifamily permits 26 months ago, and 18 months have passed since Houston reached its cycle peak. By comparison, it’s been only nine months since Nashville reached its peak permitting levels, eight months for Dallas and four months for Washington, DC. Atlanta and Sacramento —two of the strongest markets in 2016 — have not yet reached peak multifamily permitting as of January.

As jobs are added to both metro areas in the next few years, the lack of multifamily permits at this point in time will yield relatively undersupplied metros, and individual properties will be better positioned to increase rents, apartment market research shows. Of course, the opposite is true for metros that haven’t quite yet reached their permitting peaks: oversupplied markets will lead to lower rent growth.

 

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This means that the top performing metros at the start of 2017 (such as Sacramento and Riverside) will find their position slipping as we approach the end of the decade, according to our housing market forecast. On the other hand, San Jose and Houston—the latter of which hasn’t yet reached its new supply deliveries peak—are expected to finish 2017 as the two lowest-performing metros in terms of rent growth (ranked Nos. 50 and 49, respectively). In 2018, however, San Jose is forecast to be the eighth strongest apartment market, and in 2019 it will be the second strongest apartment market. Likewise, Houston will move from being ranked 49 in 2017 to 15 in 2018, and 10 in 2019, according to Axiometrics’ forecast.

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The supply and demand fundamentals that drive apartment markets can change relatively quickly. Houston saw job-gain declines in oil and gas employment, while San Jose saw job gain declines in technology. All the while, developers were procuring multifamily permits unaware of the shifting levels of demand.  Now, with the pullback in building activity in both San Jose and Houston by the end of the decade, there is once again the possibility of undersupplied markets on the horizon.

In 2019, Oprah might not be a presidential contender, and the iPhone battery may not last a whole day; but it’s a good bet that Houston and San Jose will roar back to life on the back of a vastly improved supply and demand outlook.

Louis Rosenthal

Louis Rosenthal

Real Estate Analyst

Louis Rosenthal researches and analyzes current apartment trends in the United States and correlates them with economic indicators. He also studies the urban landscape and other metrics to develop in-depth reports and presentations for clients. Louis recently earned his Master of Science in Public Policy, focusing on housing, landuse patterns, real-estate dynamics and economic development. He combines that knowledge with his four years of practical experience in tax analysis, regression analysis and presentations to develop insightful analysis. An accomplished writer, Louis’ work has appeared on Forbes.com and Axiometrics’ blogs, among others.

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