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Houston, Bay Area Apartments Show Signs of Life

Metrics Point to Potential Stabilization

By Dave Sorter | Tuesday, November 15, 2016

We have written a lot recently about the significant market declines in Houston and the San Francisco Bay Area, and while these areas still recorded negative effective rent growth in October, Axiometrics’ apartment data may be signaling some strengthening in these markets’ futures.

While Houston apartments’ rent-growth rate declined for the 16th straight month in October, to -3.2%, Class A rent growth increased in October for the second straight month – from -7.0% to -6.4% -- while Class B and C rent growth declined to -2.6% and 0.4%, respectively.

Class A trends have tended to foreshadow these trends for the national and individual markets. Houston’s Class A performance started to moderate before the market as a whole, as evidenced by the fact that Class A rent growth was 0.7% in December 2014, while Classes B and C were at 6.9% and 9.1%, respectively that month.

Turning to occupancy, Class A has remained relatively steady at just below 93.0% since last December. Meanwhile, Class C occupancy has declined significantly since May of this year to 91.2% in October, and Class B occupancy has moderated to with 10 basis points (bps) of Class A after spending much of the year 100 bps higher. The decline in Class C occupancy may be attributable to:

  • The drop in rents may make Class B apartments more affordable, causing renters to upgrade.
  • Class A and B renters may be better prepared to ride out the tough economic times, while Class C renters may be quicker to move back with their parents or couple up with roommates.

Since landlords at new Class A properties are offering up to two months’ free rent to attract new residents, Class A occupancy will likely begin to outperform the other two classes as the market turns.

And rent growth could increase with the occupancy stabilization – lease-up properties that roll back concessions from two months to 1½ months automatically see 4% rent growth. This trend is similar to that of the market’s recovery from the recession in 2010 and 2011.

Of course, construction of Houston apartments is still going strong, according to the apartment data, especially in the urban core, so job growth will have to increase its forward momentum before the market truly reverses. Some 20,100 jobs were added in Houston for the 12 months ending in September, the highest gain since November 2015.

The decline in rent growth for Bay Area apartments was halted in October, as rent growth was -2.7% in both San Francisco and San Jose, higher than September’s -3.1% and -3.4%, respectively. That broke a 13-month streak of decreased rent growth in San Francisco and a 14-month slide in San Jose. Oakland, on the other hand, had a slight decline from -0.7% to -0.9% in October.

Whether this signals a reversal of fortune by the Bay remains to be seen. But even though job growth has been strong, it is starting to pick up from the reduced levels of earlier this year.

Dave Sorter

Dave Sorter

Journalist

Dave Sorter is an award-winning journalist who spent 30 years as a newspaper reporter and editor before joining Axiometrics. He oversees all Axio blogs and newsletters and serves as senior editor of all Axio publications.

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