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For some, apartment glut signals time to build

Business // Real Estate (Prime Property)

For some, apartment glut signals time to build

So many luxury apartments have opened recently that landlords are offering move-in bonuses, free rent and chances to win week-long cruises just to fill them up.

Some Houston developers say it's time to start building more.

The owner of Memorial City Mall, for example, announced Thursday it would begin construction this month on an 8-story building with 327 luxury rental units and a rooftop pool.

Over the last few months, other established builders have announced plans for new high-end apartment projects even as their peers suffer through one of the worst multifamily downturns in years.

Weingarten Realty Investors, a publicly traded company that owns neighborhood shopping centers throughout the county, last month said it would add a 30-story apartment tower to its flagship retail property, the River Oaks Shopping Center.

And Midway, developer of west Houston's CityCentre, recently began tearing down a 1990s apartment complex near Buffalo Bayou Park where it will build a mid-rise mixed-use building with luxury rentals, high-end office space and an H-E-B grocery store.

The strategy might not be as counterintuitive as it seems.

"There's really nothing wrong with starting to build now," said commercial mortgage veteran Hal Holliday.

Houston developers have historically adhered to a feast or famine approach.

When job growth and population exploded in Houston soon after the nation's financial crisis, landlords were able to raise rents to new highs. Developers quickly put stakes in the ground and a glut began to form.

When the price of oil took a nosedive, the financing spigot dried up. Proposed projects were canceled as developers finished their buildings hoping for oil to turn around.

Despite the oversupply, Holliday said developers should be planning for future demand.

"If we slam on the brakes and don't try to gently push on the gas we're going to find ourselves back into a pent-up demand situation, and that's always accompanied by rising rents and probably too many people jumping in," he said.

Memorial City project

MetroNational, which will own the Memorial City apartments, is a family-owned real estate and development company that has long owned hundreds of acres around Interstate 10 and Gessner.

Its new apartment complex, which will be developed in partnership with Slate Real Estate Partners, is part of the company's goal to further the area's reputation as a premier mixed-use destination. Beyond the mall, the Memorial City area has multiple office towers, a hospital and a hotel.

"As Houston goes up and down, they'll say we've been here on this campus 60 years," said Slate's Benjamin Pisklak. "Let's build an asset that stands the test of time."

MetroNational officials weren't available to comment Thursday.

The apartments will be built just behind the mall on a parking lot at the northwest corner of Barry­knoll Lane and Memorial City Way.

Ziegler Cooper Architects designed the building, which will have one-, two- and three-bedroom units ranging in size from 555 to 1,796 square feet. Opening is slated for late summer 2019.

The project isn't the only new multifamily that will open in the area in relatively short order.

MetroNational's new Hotel ZaZa, now under construction, will include 133 upscale apartments.

In two years, the local apartment market should be improving rapidly, said Greg Willett, chief economist of Richardson-based RealPage, a real estate data firm.

"From our perspective it's probably time for the capital market sources to take the redline off Houston," he said.

Eying an upswing

That's not to say this year isn't going to be brutal for landlords.

Occupancy will continue to drop, as will rental rates, especially in the urban neighborhoods where much of the construction has taken place. Willett said rents are off about 6 percent from where they were last year.

Some 27,000 new units are in the lease-up phase, yet only about 30 percent of those are rented, said analyst Bruce McClenny of Apartment Data Services.

About 13,000 more units are expected to be developed this year. Those numbers taper way down into 2018 and continue to trail off.

Until that happens, "we've got a lot of ground to cover," McClenny said.

Despite the glut, other developers have pitched new projects, which they expect to be open once the recovery has taken hold.

Weingarten officials said they aren't overly concerned about timing because the company plans to own the property for the long term.

By its estimated opening date in 2021, however, the market could likely be on another upswing.

"I'm not at all alarmed what's happening now," said Holliday. "Capital sources and developers are taking risks on construction."