Comment of the Day: Is This a Houston Apartment Building Bubble?

COMMENT OF THE DAY: IS THIS A HOUSTON APARTMENT BUILDING BUBBLE? “. . . it certainly does seem like they are overbuilding. Only time will tell if that’s the case. If it is, it’s going to be a replay of 1982-3. The developers who got in the game early will have sold their complexes and moved on to the next hot market. The guys left holding complexes when the market crashes will lose their shirts. There won’t be a bailout. But a bunch of complexes will fall into bankruptcy. Rents will crash. Real estate values and tax revenue will plummet. Any semblance of maintenance, security, and tenant screening will fly out the window. Oh, and there might be a few half finished complexes that just sit there for a few years gathering graffiti and vagrants.” [ZAW, commenting on The Luxury Trackside Apartments Coming to Briar Hollow]

26 Comment

  • Agreed, we ARE in an apartment building bubble. Where are all these high earners coming from and where are they working??

  • That can certainly happen to any metro. However, this very armchair economist (and weekend armchair Texans coach) thinks the “fundamentals” are good for now. We keep adding more people (it didn’t slow down when the downturn hit Texas)and it’s not going to slow down as we add more jobs. O&G and healthcare have been adding well paying jobs that can justify the min $1000/month for a 1br inside the loop for new apartments. It’s certainly a delicate balance from the overall picture, adding enough units that prices don’t soar but not enough to cause them to plummet.

  • Just because a lot of apartments are being built inside the loop does not mean it’s a bubble. Houston is already the 4th largest city and is adding more residents every day who are coming here for jobs–not to “make it” in the big city a la NYC and LA. These people have money to spend. Add to that the fact that most young people filling those jobs don’t want to live anywhere but inside the loop, regardless of whether their job is inside the loop or not. Rent has skyrocketed in Houston because of insufficient supply. Many young people, especially those who are single, are also buying their first home later in life. IMHO, all of this leads to very ripe conditions for the increase we’ve seen in “luxury” inner loop rentals.

  • Not exactly. The older marginal middle class complexes will become low income, and the nice new complexes will become the new middle class locations (with mortgage-holding banks bailed out again by friends in DC).

    Generous Section 8 benefits to millions of amnestied illegals will help stir the pot.

  • Bubble? There is no bubble. All the building you see is actually what prevents a bubble in the first place.

    All the new construction you see is what happens when politicians get out of the way and let supply rise to meet demand. The fact of the matter is that supply has not met demand over the past few years. That’s why prices are rising.

    Houston is growing. Employers are hiring. People are moving to Houston from other cities. People who can afford it want to live inside the Loop.

    Without all this new construction, rents would be rising faster and further. That’s how a bubble inflates.

    In the mid-1980’s, one out every seven jobs in Houston vanished into thin air. I don’t see that happening again… but you never know.

  • I left my inner loop apartment in 2010. I was paying @900, give or take, depending on how you calculte the various incentives. It was 728 sq ft in a complex built in the late 90s that had undergone some very half-hearted renovations here and there. Same units are now renting for $1460 with no incentives. There is very real and immediate demand for multifamily inside the loop right now. Nothing got built during the market crash, even though Houston kept growing. Single family is appreciating rapidly inside the loop and pricing many into the rental market. Add to that the piles of people who come to Houston on a temporary work assignment who are given a generous housing stipend and do not want to deal with buying/selling a house. This is a fundamentally demand driven market. Money is still tight compared to previous bubble markets. Lastly, the multifamily products being built right now are fundamentally different than those built during the market crash. We are not seeing any sprawling complexes of garden style apartments with 700-1000 units per development built on very cheap land. What is coming on the market is generally 250-350 units built on very expensive land. Things just aren’t moving fast enough to really get people caught in a big bubble. Like all markets, there will come a day when supply catches up to demand. But that day is a ways off. And when it comes, it will be a soft landing.

  • It would take a spectacular crash on the order of the one in the 1980s to lead to the scenario described in the quote. Not impossible but definitely a “long tail” event.

    More likely that rents in the newest places stabilize or dip slightly once we get several thousand units completed. It’s not like they’ll go from $1.50/sq.ft. to $0.90/sq.ft. though; they will remain appropriate for the professional class that lives in “Class A” level properties.

  • how about we start referencing numbers and stats when talking about things such as bubbles and financing rather than continuously building straw men and blowing them around.

  • This town is overflowing with money. You can’t even get into a nice restaurant on the weekends. Everyone is hiring like mad, giving huge bonuses and fantastic raises. You hear employers advertising that they are hiring every morning on the radio.
    There are plenty of people making the money to afford a $2500 a month apartment.

  • The responses to the comment of the day could all just have easily been written in Houston in July of 1982. I doubt that we will see anything approaching the downturn that Houston went through in 1983-1988, but Happy Days are never here forever.

  • GoogleMaster, I couldn’t drive past that building without wondering when someone was going to tear it down and build something new and fancy—those days are upon us, apparently. They’d do well to add another story to it, honestly.

  • Numbers that would be helpful in deciding it is a bubble.

    How many housing units have been built

    during this “bubble” compared to the total number of housing units today.
    during the oil bubble compared to the total number of housing units then.

    If oil had stayed high back then, would there have been a real estate bubble.

  • We’ve added over 100,000 jobs in the last 12 months; a large share of those are quite well-paying. That translates to somewhere in the vicinity of 100,000 households associated with those jobs, a large share of which are thus earning good wages. A large share of those households are arriving from elsewhere, and probably at least half will rent a home for some period of time upon arrival. The west side of the urban core has become the preferred place for many of those households to rent while they get to know Houston.

    I obviously didn’t do a full run of numbers with this logic, but when you think about it this way, adding multiple thousands of quality rental units in a preferred area of town doesn’t seem so bubble-ish, in concept.

  • ZAW, I know that your perspective is tainted from living in Sharpstown, squarely downwind from the plume of the 80’s oil and S&L busts, but you need to chill out.

    The ratio of new supply relative to the total population (and remember, it’s not just about growth because the people that live here move around too) is a fraction of what it had been in the 1980’s.

    Moreover, the new supply is heavily concentrated in the urban core, a submarket that is highly desirable for a litany of obvious reasons. It has worked out that way because capital markets are still very tight with new construction (even if it may not look like it in certain neighborhoods) and are only willing to lend on properties with a “story”. They want irreplaceable urban sites that are highly insulated by employment and lifestyle amenities. With the occasional exception of the Energy Corridor and The Woodlands, the “story” does not exist. The lenders also are requiring stricter underwriting on new deals than they used to before 2008. You can’t just project 5% rent increases every year for the life of the project…anymore.

    And as Local Planner pointed out, it would take an economic downturn of monumental proportion to undercut the local economy in a way that would be proportionate to the 1980’s, probably some kind of epic double- or triple-whammy to reproduce what had happened then.


    Bernard: I appreciate the policy implications of your analysis, but classical economics only works in the long term and inevitably leads to cycles of boom and bust. Bubbles can happen from intervention, but they will happen on their own as well.


    If there’s a risk from all the new construction, I’d suggest that it is more likely to be about 30 or 40 years out as the notion of “luxury” evolves and these complexes (and many thousands of fee simple townhomes) show their age in unison. It won’t be anything like the “Sharpstown Taint”. The outcomes will be far more dynamic and multifaceted, and I can only imagine the debates that will be had regarding policy solutions…or perhaps their constitutionality.

    It’ll be interesting to watch. From afar.

  • All it would take to replay the 80s would be for the currently inflated price of oil to drop down to $10-$20 per barrel.

  • I think the demand is supported in these highly sought after inner core neighborhoods. It just seems like there are so many new people in Houston looking for a nice housing with good schools and walking distance to some lifestyle amenities.

    I own a duplex close to Rice Village and I have my pick of Rice Professors, Doctors, or geologists anytime that I throw up a for rent sign. I can easily count 20 cars driving up and down our street every Sat and Sun morning looking for any chance to rent, buy, or beg for any future knowledge of a house/duplex that may be coming available any time soon.


  • way too much everything was built in Houston in the 80s, there are websites that show how much of x was built during which 5 year period, and Houston added a lot of everything. Then oil dropped from $40/bbl to $12/bbl.
    Will this happen again? who knows. Hopefully, if it does, the oil companies are diversified enough. While we have diversified, we’re still very much driven by these companies.

  • Oil is a global commodity.

    The big difference between the 80’s and the present day is that most of the “communist” countries are now on market-driven economies. Then consider the developmental progress that’s been made everywhere else in the world. Shit, even Sub-Saharan Africa is (by and large) emerging onto the global stage and is primed to consume…more energy.

    Maybe the conspiracy theorists are right and there’s a technology that is being suppressed by “The Powers That Be” that can provide energy from water or air or whatever at minimal or no cost, AND maybe it could get loose. I sincerely doubt it. That would be a problem (for Houston).

    Maybe the government will negotiate a series of treaties between both developed and developing nations to try to “save the planet”. I doubt that that will happen, but it’s possible. That would likely be a problem for Houston, and if it did happen then there’s a decent chance that they’d screw it up somehow and destroy the planet by accident in the process of reverse-terraforming it.

    So yeah…I think Houston will be A-okay for the foreseeable future. I might be wrong, but I don’t think so, and in some scenarios (including many I haven’t covered) it doesn’t matter because everybody dies anyway.


    There will be peaks and valleys, but we’re talking about ones that are on the order of 2001-03 or 2009-10, but not 1983-1990.

  • According to a story posted by the Chronicle today, about half the jobs in Houston are connected to oil and gas. There are probably hundreds of small companies who have some subsidiary association with that industry. I know a guy who works for a company whose primary focus is manufacturing a corrosion-resistant coating that is sprayed on machine parts for oil and gas rigs. That’s literally all they do. Then figure the multitude of businesses, from restaurants to bars to mechanics and real estate, that would go belly-up if we had another 80’s-style downturn. I say we celebrate these good times and be mindful that “pride goes before a fall”…

  • We aren’t in a bubble yet. Houston has added between 85K and 100K jobs per year the last few years, and are projected to add 75K jobs this year too. Most of those jobs are white collar, high paying jobs in Upstream energy sector. When you have properties in the Woodlands getting (not asking) $1.92 PSF, you are in good shape. There are 16K units under construction in Houston, and believe it or not, that is below the historical high in 2008 of 21K units. Note that the last 3 years we have had an average of 15K units absorbed per year! We also have already absorbed 7.5K units in 2013…With Houston’s job growth, and absorption like that, you cannot say we are in a bubble.

  • “So yeah…I think Houston will be A-okay for the foreseeable future…”

    Yea, that’s what they told us back in ’83 at the wellhead service company I worked for.

  • I am confident that oil will stay at leaast over $70 bbl since the govt has printed so much money and oil/gold are a dollar play. I am confident that this house/apartment boom is also fueled by freshly printed money. This is called inflation, not growth. I notice food has gotten very expensive, especially beef.

  • Johnny P, Niche, and all the other nay -Sayers. I really hope you’re right, and there is no bubble. The thought that areas Inside the Loop might suffer the same fate as places like Alief, is almost too much to bear. And it’s compounded for me personally, since I’m in the building industry.
    But I can’t help but see parallels in the volume of multifamily construction that’s going on now, versus the late 1970s and early 1980s. If you had asked me 2 years ago I would have said hands down, “it makes ll the sense in the world to build more apartments Inside the Loop”. Now I’m really starting to wonder.
    It also doesn’t help that, whenever we’re headed for a major correction in anything, it seems like there are industry experts issuing well crafted arguments about why this time is different. Of course that’s an uneducated take on it, but it’s something I noticed when the tech bubble burst, and again in the mortgage meltdown.
    Again, I really hope you all are right. I hope this isn’t a bubble or, at least, we’re in for a soft landing. But it’s nagging at me.

  • In a hypothetical dream world, I’d probably delay the start of new apartments inside the loop by a couple years. There is oversupply and a correction coming, I think. But Houston does that a couple times each decade, it seems like. It’s not a big deal unless there’s a collapse of demand.

    And again, the volumes of construction in the 70’s and 80’s were simply ungodly, both in absolute and proportionate terms. Times are good, but they aren’t scary good.

  • I’d say the apartment boom in houston will eventually level off but due to population increase and strong economy I suspect the occupancy of these places will eventually fill out with some patience.
    Being said there may be some bargains on the downside for able investors and flippable prior to these fancy new buildings needing major maintenance…