Growth Will Lease All New Supply
Population and job growth in sunbelt markets have long made them attractive for multifamily development and investment. The ‘Texas Miracle’ of in-migration and job growth fueled by corporate relocations has been a prime example of sunbelt attractiveness. In 2023, Texas cities accounted for seven of the 10 fastest-growing cities in the U.S. according to the Census.
Over the last five years, Dallas, Austin, and Houston have added more than 1.0 million new jobs. While national employment is only 4.5% above pre-pandemic levels, Texas markets are outperforming by a factor of two or more. Over the last five years, Austin employment has grown by 19.2%, Dallas by 12.5%, and Houston by 8.8%.
Moody’s Analytics currently forecasts that population growth will continue near pre-pandemic pace in Texas markets over the next five years. In addition, robust growth will continue in the prime renting cohort of ages 24-35. Moody’s expects Dallas, Houston, and Austin to add nearly 200,000 residents in the 24-35 age range over the next five years.
Supply Is Already Correcting
After delivering nearly 97,000 units in 2024, construction has fallen 44.4% year-over-year (YOY) to 85,530 units.
After standardizing construction as percent of inventory, construction levels have fallen below pre-pandemic levels in every market. Dallas construction fell to 4.3% of inventory, the lowest level since 2015. In Houston, construction is 2.1% of inventory and the lowest level since 2017.
In Austin, construction peaked at 19.7% of inventory in early 2023 but has returned to its 2019 level at 7.9% of inventory. Austin’s elevated figure during the run-up of supply reflects its smaller inventory base and is an expected byproduct of its evolution into an emerging secondary market.
Further Contextualizing Supply
Updating a recent Cushman & Wakefield analysis, the chart below calculates Years of Excess Supply, or how long it would take for vacancy to return to pre-pandemic levels at the current pace of absorption. The analysis compares recent demand, represented by trailing 12-month net absorption, to recent supply, which includes units under construction plus the number of units that need to be absorbed to return vacancy to Q4 2019 levels.
The analysis reveals that based on the demand over the last 12 months, market vacancy would return to pre-pandemic levels in 1.6 years in Houston and 2.1 years in Austin. Dallas follows closely behind at 2.3 years.
The key question for developers is when will market conditions be ripe to break ground on new projects. The chart below answers this question by analyzing Years of Excess Supply over the last two years, providing an indicator of whether absorption has kept pace with supply.
Although deliveries have driven market vacancy rates higher, the fact that forward looking conditions continue to improve is a clear indicator that demand is absorbing the recent wave of supply. After construction fell precipitously in the second half of 2024, market fundamentals should quickly rebound over the next two years.
Given a typical development timeline of 18-24 months, the analysis indicates that Texas markets may be ready for new development as early as the latter half of 2025 if demand brings Years of Excess Supply near 1.5 years.
Outlook
Cushman & Wakefield expects conditions in Texas markets to improve through 2025 as population and job growth continue generating demand while new construction is constrained. Landlords will focus on leasing-up new supply in the short term, then focus on rent growth as occupancy firms up.
Among Texas markets, Cushman & Wakefield expects Dallas and Houston to be ready for new development first given their relatively lower vacancy rates and strong track record of absorption. Austin may require an additional six to nine months given its relatively higher level of new supply. That stated, some submarkets will recover sooner and be ready for new development as early as 2025.
