According to the world’s largest real estate investment services firm, CBRE, Texas captured 14% of all U.S. multifamily investment in 2019. Last year, one in every six units purchased in the U.S. was located in the major Texas metros, representing over $24 billion in transaction volume. Backed by powerful demographic trends and historically dependable performance, the multifamily investment market is unlikely to yield its decadal momentum despite the economic disruptions caused by the coronavirus pandemic.
While the near-term outlook for the multifamily investment market may be clouded by economic uncertainty, we maintain our focus here to the long-term landscape of multifamily investment in Texas. Once the current uncertainty recedes, we expect the Texas unemployment rate to return to 3.4% by 2023, similar to the rates of 2017 and 2018. This healthy labor market is essential to the continually growing demand for multifamily. We also expect that the underlying factors driving domestic migration to Texas – the low cost-of-living, the relative ease of doing business, and the favorable climate – are not in jeopardy.
With these long-term fundamentals firmly in place, we are forecasting demand to outpace supply once again by an annual average of 8,500 units from 2021 to 2023. We expect new supply and net absorption to average 57,900 units and 66,400 units, respectively. Over the longer-term, we expect new supply to outpace demand from 2024 to 2026 as the state and nation face potential economic stagnation midway through the decade. Despite these potential headwinds, we believe Texas multifamily investments, and specifically workforce housing, will continue to achieve attractive long-run returns. Throughout this article’s exploration of Texas multifamily supply and demand, we have made some generalizations about the nature of these market dynamics for the sake of simplicity, education, and the ease of comparison over time. In reality, this nature is highly nuanced and highly favorable to workforce housing investments.
To understand this nuance, we must examine the constraints of both supply and demand. Due to rising input costs like land, labor, and raw materials, the economic feasibility of creating new market-rate workforce housing is nearly nonexistent. Instead, multifamily developers continue to build luxury apartments with significantly larger rents than their workforce housing counterparts. In the short-term, this strategy can prove lucrative for some developers, but beneath the initial high returns is a difficult reality: expensive new supply, despite its glamour, simply does not meet the housing needs of the average worker in the long-run.
Over the long-run, Texas, as well as many other U.S. markets, will continue to experience a mismatch between the rents required by the average worker and the exorbitant rents of new supply. Despite our position that new supply in Texas may soon outpace demand, the relationship is heavily weighted toward the luxury apartment market segment. Due to this mismatch, we fully believe that the workforce housing segment will face stable demand, sustainable upward pressure on rents, and consequently, sustainable long-term returns.
CONTI believes our workforce housing strategy, one that emphasizes the alignment of affordability to the average worker’s income, is subject to less volatility and better reflects the true housing needs of our target markets.