Two years ago, the oil and gas industry was booming in the United States with the price of oil over $100 a barrel. Houston was the nation’s number one creator of energy-related jobs and home to half of the 52 Texas-based firms on the annual list of the biggest U.S. companies (source: Houston Chronicle). Only three of those companies were not in the primary business of energy. It was also home to the largest share of multifamily units among energy-dependent markets.
As of this writing, West Texas Intermediate (WTI) crude oil is around $37 a barrel. What has this dramatic drop done to Houston that has an economy closely tied to the energy sector? Intuitively, the weakening of the energy industry and the slowdown in the job market should have a huge impact on multifamily housing.
However, the impacts have yet to stop rent growth across the metro. Houston’s economy is fairly diversified despite the high concentration of energy-related jobs. As such, the overall strength in the U.S. economy helped the other sectors in Houston, like leisure and hospitality, education and health services, and retail trade, to offset the job losses in the energy-related sectors.
The broad apartment rental market has not yet been overwhelmed by the weakened oil industry. Vacancy rates last year remained flat for the first three quarters and ticked up only 10 basis points in the fourth quarter, according to REIS. Rent growth was lower than in 2014, but still higher than the historical average.
However, growth was not evenly distributed across Houston’s submarkets: areas on the west side of the market, where a large number of Class A multifamily units have been delivered in the past few years, experienced vacancy rate increases as much as 4.8 percentage points. The east side of the market, with lower supply and mostly Class B and C apartments, fared comparatively better.
Our full report (link below) considers a range of economic scenarios and forecasts the impact on Houston’s multifamily fundamentals. All scenarios project a slowdown in multifamily growth. Continued low oil prices would hinder growth over the next two years. If a U.S. recession were to happen, multifamily performance would deteriorate significantly. The likelihood of a recession is less probable, but even under this scenario Houston’s multifamily performance weakens, but will not reach the levels seen during the oil crisis of the early 1980s.
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