It's A New Dawn

Reversal of Fortune 2021

We have turned the corner on another year and thank goodness! The phrase “hindsight is 20/20” no longer seems appropriate or useable. Who would ever want to look back on that year? But let’s, just briefly, to understand where we have been.

2020 was a year of unimaginable physical, emotional, mental and financial hardships. This year, with vaccinations and a growing mindset to reopen and reconnect begins to conjure up a theme that the song “Feeling Good” by Nina Simone fits. 2021 is a new dawn, a new day, a new world, a new life and I’m feeling good.

The economic lockdown and the social isolation of 2020 sent the Houston apartment market in a fundamental freefall. During 2020, overall rent declined by $9 (-1.0%), which was predominantly influenced by Class A’s $95 decline representing a -6.2% trend. Class B’s rent level fell by only $7, whereas Class C and Class D were able to overcome the impact of the economic lockdown and add to their rent levels by $8 and $1, respectively.

As the song “Feeling Good” suggests, 2021 is a new day and the Houston apartment market’s rent level is finding new life as the overall rent level improved by $15 during the first quarter. Class A is leading the rent renaissance having gained $35 in the first quarter, which is a great start on recovering the losses of 2020. Class B more than recovered its deficit of 2020 by adding $13 during the first quarter. Class C has the distinction of having the best rent performance over the last five quarters, adding $8 during the pandemic year and another $4 so far this year. Class D is absent and cannot hear the “Feeling Good” song that the other classes can, as rent has dropped by $6 during 2021.

Occupancy Under Pandemic Rules

Houston’s overall occupancy has been stuck in the 88% to 89% range since the beginning of 2020. The delivery of over 21,000 new construction units with an absorption of 11,500 units fosters a nogrowth occupancy scenario. You can see in the graph below how a pandemic with an economic lockdown timed at the height of the 2020 leasing season plummets Class A’s occupancy from 82.1% in March to 79% in June.

In March and April 2020, Houston suffered 361,400 lost jobs. These job losses spiked Houston’s unemployment rate to 14.3%. Pre-pandemic unemployment in February 2020 was 3.9%. Despite a demand beatdown and job growth numbers mired in negative territory for all of 2020, Class A began to climb out of June 2020’s bottom of 79%.

The Census Bureau just released metro population growth numbers for 2020 that begins to add more clarity as to how Houston was able to generate 11,466 units of absorption, which was the force driving Class A occupancy to 80.3% by year end. During the pandemic, there were anecdotal stories of people moving out of the large metro areas, such as New York, Los Angeles and Chicago to the Sun Belt metros of Phoenix, Dallas-Fort Worth and Atlanta. The Census Bureau report shows that Houston had in-migration of 44,347 people during 2020, which ranked third in most in-migration behind Phoenix (88,970) and Dallas-Fort Worth (74,920). These gains came at the courtesy of New York losing 170,637 people, Los Angeles losing 118,894 and Chicago losing 72,692.

Class A occupancy continued to improve to 82.6% during the first quarter of 2021 when 4,000 units were absorbed.

Can 2021 Keep Feeling Good?

This year is off to a great start, and the stage is set with fiscal stimulus, greater mobility and increasing vaccinations to drive an ever-improving outlook for Houston. Dr. Bill Gilmer with the Institute for Regional Forecasting at the University of Houston’s Bauer College of Business has re-jiggered his 2021 employment forecast for the Houston Metro Area to grow by a range from 4.2% to 6.6% or 125,800 to 196,500 jobs.

Gilmer expects a significant surge in job growth for sectors that were most impacted by social distancing, such as restaurants, bars, hotels, health care and air transportation. To support Gilmer’s rosier forecast, the Federal Reserve Bank of Dallas predicts that Texas employment will grow by 6.6% in 2021. The Federal Reserve Bank of Dallas did not break out their forecast by cities, but these two forecasts bode very well for H-Town!

There are still significant supply issues to deal with, as there are 21,000 new units in lease-up that are 35% occupied. In addtition, there will be approximately another 15,000 units delivered in 2021. However, supply issues seem less theatening when in-migration and job growth come together as described above.

Given this new day scenario for economic revival in 2021, my previous forecast for absorption and rent growth needs revision considering they were conceived under the assumpiton that job growth would only be 2% or 60,000 jobs.

Under Gilmer’s and the Federal Reserve Bank of Dallas’ job growth forecasts, Houston’s job growth will at least double from my original assumptions. Instead of 2% or 60,000 jobs, it’s conservatively 4% percent or 120,000 jobs. This new level of job growth could support 18,000 units of absorption, which is 2,000 units short of a 6 to 1 ratio. The 2,000 unit deficit in absorption is figured in due to the eviction moratorium expiring and creating an artificial surge in move-outs. With this type of supply/demand dynamic, overall occupancy climbs to 90.6% by year end. My original 2021 forecast for overall rent growth was 1.5%, now my “Feeling Good” forecast for rent growth is 3% to 4%.

Bruce McClenny is president of ApartmentData.com. For more details, call 281-759-2200, email bruce@apartmentdata.com, see Marketline on Page 75 and subscribe to his YouTube channel at https://www.youtube.com/channel/UCaPmY9AevdjCpqe4UeQU7xw/featured