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Dark clouds over apartment market starting to clear

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Courtesy The Core

All those free-rent specials landlords have been using to lure tenants to their brand-new buildings might not be around for long.

The explosion of multifamily construction that turned Houston into a renters' market has fallen off dramatically and experts are predicting the generous concessions could cease in 2018 as the market methodically absorbs the tens of thousands of units developers have built in recent years.

"Inside the Loop, you can find certain properties with three months free rent ," Mark Taylor, senior managing director for the Houston office of CBRE said during a quarterly market presentation Tuesday. But, he added, "Can you get that in a year? No way."

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Another report released Tuesday shows rents may be beginning to climb out of their rut.

The average Houston rent has increased in six of the past seven months - though by only $12 - reaching $1,068, according to Dallas-based Axiometrics. Year-over-year, however, the average rent was down 1.9 percent.

In February, Paul Cummings moved into a one-bedroom apartment in a new complex in the Heights.

The landlord gave him two months free rent on a 12-month lease. He didn't have to pay anything the first month and the second month was prorated throughout the remaining 11 months.

Cummings had been shopping around for months, trying to decide whether he should buy a place or take advantage of all the apartment specials out there.

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"When I first started looking, they all offered a version of the same deal, which started at six weeks free," he said. "As they became a little more desperate, they said, 'It's two months now.'"

Yet landlords are feeling less desperate as the pace of apartment construction has dwindled.

In Houston, multifamily permits have dropped 83 percent from their record high in the third quarter of 2014, CBRE's data show.

There are 7,800 units under construction, most of which will be completed over the next two years.

In the second half of 2019, "we'll be in a landlord's market with pent-up demand," said Hal Holliday, an executive vice president with CBRE.

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Deals won't last long

The local Apartment Guide still lists multiple complexes offering two to three months of free rent or other concessions and discounts. But there's evidence, too, that the good times for penny-pinchers are not indefinite.

At 1300 N. Post Oak Road, where some two-bedroom apartments list for $1,715 a month, the advertisement warns that savings - a $500 price break and maybe a free move - "will not last long!"

Not too long ago in Texas, more permits for apartment buildings were issued than for single-family homes.

From 2010 to 2015, those two classes of housing approached parity, as big cities like Houston and Dallas encouraged denser development rather than sprawling into suburban neighborhoods.

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That trend has ended. The number of new multifamily buildings starting construction has fallen over the past couple of years, as single-family units continued their upward march.

Upscale construction

The downturn in multifamily projects is probably temporary as housing markets work off the excess supply that's built up, said Jim Gaines, chief economist at the real estate center at Texas A&M.

Much of the recent construction was decidedly upscale.

Luxe complexes in Montrose and the Heights that opened during the glut positioned sign-spinner pitchmen out front to draw in passers-by with athletic skill and bright yellow message boards.

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At one of those places, Elan Heights off Interstate 10 near downtown, the buskers are gone now, and the building's slickly designed website features a more nuanced message for those wanting to lease a unit: "Up to TWO MONTHS FREE! (limited time only)."

"We're taking up the supply pretty rapidly despite limited job growth," added Ric Campo, CEO of Camden Property Trust.

Campo said the market held up better than expected in part because of growth in non-energy industries and a wave of people - many of them empty-nesters from the suburbs - moving into the urban core to rent.

"That added to the demand that I don't think people counted on," Campo said.

To be sure, the multifamily market took a big hit from the energy downturn and the turnaround won't be immediate.

Marketwide, occupancy was 88.9 percent at mid-year, down 1.2 percent from a year ago, but up 1.5 percent over the past six months, according to CBRE.

The issue is supply, said Jay Denton, vice president of analytics for Axiometrics.

"Once this current extreme volume of new construction is completed, the pipeline will be relatively bare," he said in the report. "But the priority will be to occupy all the units opening this year."

'We're real pleased'

Downtown's Market Square Tower, the new 40-story building with a rooftop "sky pool," is 75 percent leased, and the developer expects to start backing off on its aggressive concessions later in the year.

"We're real pleased," said Philip Schneidau, CEO of developer Woodbranch Investments Corp. "The penthouse units aren't even delivered yet and three out of the four are leased."

With his discount, Cummings is paying $1,824 for his 880-square-foot apartment in the Heights. He's hoping when his lease expires next year, he'll be able to negotiate a rent close to what he's paying now. Otherwise, he may start looking for a home again.

"I'm not looking forward to February 2018 and staring at a full-bore $1,946 rent," he said.

Lydia DePillis contributed to this report.

An earlier version of this story misstated the average Houston rent.

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Nancy Sarnoff covered commercial and residential real estate for the Houston Chronicle. She also hosted Looped In, a weekly real estate podcast about the city’s most compelling people and places. Nancy is a native of Chicago but has spent most of her life in Texas.