Houston Offers Leasing Incentives More Frequently

HOUSTON—While the percentage of US units offering rental concessions is at some of its lowest levels in nearly two decades, some markets–mostly the country’s big construction centers–are offering concessions at notably higher rates, according to a study by RealPage. After peaking at 65.8% in fourth quarter 2009, the percentage of stabilized apartments in the US offering concessions has been on a steady downward trajectory.

As of second quarter 2019, concessions were available in only 14.1% of apartments, one of the lowest rates the market has recorded since mid-2002. Concession rates fell below the 20% mark in second quarter 2017 and have remained beneath that threshold since that time, says the study.

Some markets, however, are still commonly awarding concessions in a sizable portion of stock. These big concession markets have been some of the nation’s most prolific supply centers during the current economic cycle. Also, while it’s relatively rare for concessions to be offered in class-B or -C units, the markets with the most discounts overall logged inflated concession rates in these lower-tier product lines.

Among the markets bucking the nationwide trend, three were in Texas. Houston and San Antonio are two markets that typically offer sizable concessions and in second quarter, these were the only two markets among the nation’s largest 50 where discounts were offered for about one-third of all stabilized product. These were also the two lowest occupancy performers among the nation’s major markets.

As of second quarter, Houston operators were offering concessions on 35.3% of stabilized product. This was the biggest volume of discounts among the nation’s 50 largest markets. While hefty nationwide, the concession rate in Houston is well below the decade average for the market. In fact, the ratio of units with discounts got as high as 80% in 2010 before coming down in the past few years. The lowest amount of concessions offered here in the past 10 years was slightly more than 20% in 2015.

Houston’s large sample of class-B and -C units logged sizable concession rates in the second quarter. In Houston’s large class-B stock, discounts were offered on 33.8% of units. Meanwhile, class-C stock recorded concessions in a whopping 41.1% of product.

Among the nation’s largest apartment markets, Houston recorded a weak occupancy showing in second quarter at 93.6% and the lowest rent growth pace, with prices remaining essentially flat year-over-year. Still, occupancy remains well ahead of Houston’s decade average and the market has seen demand bounce back recently, making up for lost ground when temporary occupants displaced by Hurricane Harvey returned to more permanent housing.

“Houston’s apartment leasing environment is among the most competitive across the country,” Greg Willett, RealPage chief economist, tells GlobeSt.com. “Occupancy of 94.3% is the weakest among the country’s large metros. Likewise, annual rent growth of 1% is the weakest. Those less-than-ideal market fundamentals encourage rent discounts. Looking to the big picture, Houston is a market where operators just generally tend to offer leasing incentives more frequently than in other locations. Concessions never burn off completely in this location. Thus, over time, renters are trained to always expect a period of free rent when signing a new lease. Some simply won’t lease when the product isn’t ‘on sale’.”

Also impacting performance, Houston has recorded no shortage of new supply. During the current economic cycle, slightly more than 109,000 units were delivered, increasing the sizable existing base by 18.1%, well ahead of the national average.

In fact, only Dallas delivered more total product in the past nine years. Additionally, apartment construction volumes are set to keep rising in Houston, providing even more competition in the near term. About 31% of class-A units offered concessions in mid-2019.

“Building activity is ramping up again in Houston. Today’s ongoing construction of roughly 26,000 units more than doubles the volume from a year ago,” Willett tells GlobeSt.com. “With so many properties moving through initial lease-up in the next couple of years, discounting will be steep in new completions, and better-quality developments with stabilized occupancy likely will have to also offer concessions to hold onto residents.”

In San Antonio, concessions were offered at 30.4% of the stabilized product. While steep nationwide, this was the softest ratio the market has seen since 2002. Like Houston, San Antonio logged discounts in 33.7% of the sizable class-B stock. However, relatively fewer class-C units (25.4%) offered concessions than class-A units (28%).

While occupancy in San Antonio was one of the weakest rates in the nation at 94%, this was slightly ahead of the decade average for the market. However, where San Antonio varies from the Houston performance is in rent growth. Prices in Alamo City were up 3.5% year-over-year, a few ticks ahead of the national average. However, when looking at the cycle overall, both Houston and San Antonio had climbing rents of nearly 27% since the beginning of 2010.

Among the top 50 markets, San Antonio’s apartment inventory base has increased at one of the fastest rates during the cycle. The market recorded delivery for slightly more than 46,000 units since 2010, increasing the existing base by a sizable 27.8%. As of second quarter, only five other markets recorded more aggressive cycle inventory increases: Charlotte, Austin, Nashville, Raleigh/Durham and Salt Lake City.

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