Multifamily developments are leaving Houston, but their departure could open the door for something else: more single-family homes.
Rising oil prices are still down relative to trends spanning the last half-decade despite 12 consecutive weeks of U.S crude inventory growth. And while for much of the country, eroding crude prices have upended mounting pressure on personal finances, Houston stands apart in its struggle to maintain an economy unevenly dependent on energy investment.
Since January, upwards of 50 multifamily developments in the Bayou City have been postponed indefinitely or aborted altogether, including The Hanover Company’s 30-story, 300-unit luxury tower planned for Upper Kirby and, most recently, Asset Plus Companies (the nation’s largest privately owned apartment and student housing developer) shifting its entire development strategy away from Houston.
In an interview with the Houston Business Journal, Asset Plus Chairman and CEO Michael McGrath said the company’s Houston hiatus could last as long as a year, if not more.
The Unrelenting Oil Slump
For May delivery, Brent crude was up $1.32 to $56.43 a barrel, while U.S. crude was trading at $49.10 a barrel – up $1.50. In our earlier reporting of oil prices and the impact they’re likely to have on Texas’ biggest metro, we remarked that, historically, Houston’s markets have faired best when oil prices fall between $55 and $90 a barrel. Derivation from that zone of proximal pricing, as its been recorded, results in damaging fluctuations to both job markets and home prices.
As we reported in a January article:
While home prices in oil-producing markets tend to follow the direction of oil prices, they do so with a lag. In early 1986, Houston, and the rest of the nation, felt the sting of the decade’s most prolific drop in oil price. However, it wasn’t until later that year that the Bayou City started struggling with its most serious job losses, and home prices didn’t start to suffer until the third quarter of 1987. According to Trulia, the pace at which 1980s oil-price movements were reflected in the time’s job market was roughly two quarters later, and nearly two years later for home prices.
Already, Houston energy companies are bleeding, slashing budgets and cutting workforces to supplement sustained and projected losses. Each week, it seems a different firm is announcing new layoffs or filing for bankruptcy. On March 31, local Sabine Oil & Gas Corp. revealed it was working to avoid default on a $1.7 billion loan, citing low oil and gas prices as a major reason for congested cash flows.
It’s unclear as to whether oil prices will stabilize above Houston’s $55 threshold, but in a February report from The Economist, it speculates that “in the long run,” oil producers are likely to restructure the market – of which signs are already apparent – “which could eventually lead to high cost producers going bust or marginal areas being abandoned.”
One Man’s Decline is Another’s Opportunity
As one of the nation’s hottest market, Houston is hardly in dire straights, as ample healthcare and construction spending have helped to bolster the faltering economy. But those boons don’t negate the immediate ramifications of low oil prices and falling energy investment, which has largely manifested itself in layoffs and stalled multifamily development.
“Development is really going to slow down, primarily in the multifamily and office sectors,” John Fenoglio, executive vice president of CBRE Houston’s debt and structured finance capital markets group, told the Journal, speaking on the city’s oil slump.
But it wasn’t all bad news.
“Money is readily available,” Fenoglio said. “It takes a little more talk, but people are still receptive.”
Going forward, the challenge for developers will be to determine what to do with the money they already have and the investments that trickle in as the economy strengthens. For Marvy Finger, president and CEO of the Finger Companies, the answer isn’t multifamily, which has been the hot ticket as of late, but rather single-family homes, the city’s old “bread and butter.”
Speaking with Houstonian magazine, Finger acknowledged the drop in multifamily projects, but hyped it less as a problem and more as an opportunity, suggesting that the city’s multifamily sector was already “overbuilt.”
Single-family inventory stands at a 2.7-months supply, according to the Greater Houston Partnership, compared to pre-crisis levels of 5.1 months and the current national level of 4.6 months. With dwindling multifamily development, builders have an opportunity to shore up deficiencies in a sector that has historically proved to be Houston’s strongest seller, which might also help balance prices approaching overvalued.