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Houston, We Have Several Problems

H-Town’s aging office towers and multifamily syndication have ravaged the city’s once booming real estate market


On the surface, everything appears to be as smooth as oil in Houston. 

The largest city by population in Texas — and the fourth largest in the entire country — entered the 2020s boasting a population of 2.3 million people, an increase of 7.5 percent over the previous decade and a 15 percent jump since 2000. Unemployment in the city fell to 3.9 percent in April, driven largely by the 100,000-plus jobs tied to the thriving Texas Medical Center in Hermann Park, which is now one of the world’s largest medical campuses.  

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As the oil and natural gas capital of the United States, Houston’s energy economy has stabilized since the fallout from oil prices in 2014 and 2015 briefly shattered the region’s productivity. Crude oil prices have largely recovered from the April 2020 nadir of $24 per barrel during the outbreak of COVID, and reached more than $100 per barrel in spring 2022 before leveling out at $77 per barrel in July 2023. 

“For the longest time we were just known as the energy capital, oil and gas, those two things have been here, and we’ve always had a lot of health care and a very strong legal community,” explained Houston native Taylor Wright, a senior vice president at Colliers. “But now people have relocated to the city in droves for a number of different reasons, and what’s soared is a massive culinary scene, a vibrant music scene, a lot of live music, indie music, and a growing technology sector.  

“We’ve seen this massive population growth and it has impacted the local economy in ways we can’t quantify,” he added. 

Moreover, parts of the city’s commercial and residential real estate sector have proven to be surprisingly resilient in the face of high interest rates, constrained credit and restricted liquidity. 

A recent industry study cited by The Houston Chronicle found that between 2013 and 2022 Houston ranked first in the nation with more than 55,600 single-family home-building permits, and ranked first in industrial construction with an excess of 65 million square feet of new industrial space. Houston also added 5.7 million square feet of self-storage capacity and 27 million square feet of new office space in that time, both second in the nation behind New York City.  

“Houston led all top 25 markets in multifamily absorption and is one of the leaders of new apartment units in the country, and that’s the result of a strong workforce that’s doing well,” said Matthew Werner, managing director of REIT strategies at Chilton Capital Management, an investment firm headquartered in Houston. “The energy sector also got smarter about capital allocation and hiring decisions after the collapse of oil in 2015 … so it’s a much more efficient market, and if there is a downturn, there aren’t that many people to fire and let go.” 

‘A terrible market’ 

Still, all is not well in The Bayou City — especially in the city’s sprawling downtown and central business districts, and in its office sector in particular.  

The total overall vacancy of Houston’s office sector sits at 26 percent, according to a second-quarter report from Avison Young. That is the highest office vacancy among tracked markets and significantly above the national average of 16.5 percent. 

Transactions have also stalled. Houston’s office leasing volumes dropped by nearly 30 percent in the first quarter of 2023 compared to the last three quarters of 2022, while the year-over-year change in investment sales volume for the asset class plummeted 56 percent — down from $765 million in first quarter 2022 to $333 million in first quarter 2023, according to research from Partners Real Estate, one of the largest CRE firms in Texas. 

Some of Houston’s once prime commercial towers, including skyline icons from the mid-1970s and early 1980s such as One City Centre, TC Energy Center and Pennzoil Place — with their angular glass architecture, triangular lobbies, geometric floor plans and pyramid-shaped atriums — have either defaulted on loans or seen longtime tenants vacate their premises. 

“There are a ton of Class B and Class C office buildings that are older assets, they are atrium-style buildings, maybe not nearly as nice as newer product constructed in the past 12 years, and what people found out is trying to get 50 people into a triangle-shaped office building, or into a building with a lot of acute or right angels, isn’t the most efficient use of space,” Wright said.  

Other commercial spires have sold for far below market value. San Felipe Plaza, a 959,000-square-foot office tower built in 1982, sold for $83 million in March, half of the $165 million the building was sold for in 2005 and a fraction of the $219 million value the building had been appraised at prior to the pandemic.  

Owners of Greenway Plaza, an interconnected, mixed-use business district of 10 office towers built between 1969 and 1981 alongside Interstate 610 in Downtown Houston, recently defaulted on a $465 million loan attached to the campus, and saw Moody’s Ratings Agency downgrade two bonds that back the loan from AA and AAA to A and BB.

Last year, Starwood Property Trust bought Marathon Oil Tower, a 1.2 million-square-foot, 41-story tower built in 1983, through a foreclosure sale, assuming a $55 million mezzanine loan and $88 million third-party mortgage attached to the property. 

“It’s literally happening citywide,” Wright. “There are some buildings that are functionally obsolete at this point, and tenants are leaving those buildings.”  

The wave of defaults, vacancies, low sales prices, and debt-service warnings have harmed Houston’s reputation, even among the nation’s most experienced real estate investors. In a June interview with The Real Deal, Related Companies CEO Jeff Blau called Houston, “a terrible market,” and criticized the city’s reliance on oil, as well as its lack of zoning laws and large amount of urban “sprawl.” 

But if the office sector is bleeding out, then the multifamily world is turning into a dangerous laceration, one that could carry an untold number of complications. The numerous issues attached to multifamily in the Houston metropolitan area have created a growing list of troubles for developers, investors and renters alike. 

No boom, just bust 

During the pandemic, Houston’s multifamily industry hummed along like a well-oiled machine, so to speak. Developers delivered roughly 20,000 units in 2021 and nearly 18,000 units in 2022; last year Houston was one of only five cities with at least 10,000 units absorbed, according to Yardi Matrix data. 

2023 is a different story. Through June of this year, Houston absorbed only 4,479 new units into the market, with Class B, C and D absorption levels all trending negative, according to the Greater Houston Partnership, the region’s largest chamber of commerce. 

Rents typically appreciated at 4 percent per year in Houston, a rate of increase that soared to double digits during the pandemic, according to the Greater Houston Partnership. But overbuilding and smaller job gains have stalled new growth, and rents have plateaued. The average rent for a Class A unit in June 2023 was $1,783 per month, while the average rent for a Class B unit was $1,276; those average rents in June 2022 were $1,782 and $1,254, respectively, according to the partnership. 

“The multifamily market there hasn’t boomed in the same way as you see in Dallas-Fort Worth or Austin,” said Daniel Oney, research director of the Texas Real Estate Research Center at Texas A&M University.  

Then there’s the element of syndication, a real estate phenomenon which captured headlines during the pandemic when debt was cheap and rents increased at an aeronautic clip. Here acquisition companies masquerading as landlords used cheap credit to buy residential buildings with floating-rate debt and sold the promise of high returns to investors looking to reap the value of property ownership without the skills or responsibility of property management. 

Over the past four years, Jay Gajavelli’s Applesway Investment Group borrowed $230 million to create a Houston rental empire of more than 3,200 units. Swapnil Agarwal’s Houston-based firm Nitya Capital created a 20,000-unit portfolio valued at $1 billion within 10 years of his 2013 entrance into the market. 

But the swiftest interest rate increase in 40 years in 2022 and 2023 spoiled the plans these syndicators had for a never-ending stream of easy investor dollars fueled by the promise of permanent rent spikes and quickly flipped properties. A series of articles by the Wall Street Journal portrayed Gajavelli and other multifamily syndicators as acquisition companies masquerading as landlords. 

“The big problem with multifamily right now is that a lot of the new development was done by these multifamily syndicators,” explained Manus Clancy, senior managing director at Trepp. “These were huge syndicators that loaded up on multifamily debt, and a lot of that debt was floating rate.”  

As rates went up, and mortgage payments came due, the cash flow for the syndicators froze; the cash crunch occurred as rent growth started to level off, and labor prices exploded, creating a perfect economic storm for a classic asset-class collapse, according to Clancy. 

Gajavelli found himself in dire straits in April when four of his Houston properties fell into foreclosure, sinking more than 3,000 units. Agarwal has since sold off 57 percent of Nitya Capital’s holdings in the past year, including five Houston multifamily properties of 1,500 units. 

Neither Applesway Investment nor Nitya Capital responded to requests for comment on their current real estate strategies. 

“You had players that came into multifamily that didn’t understand how to operate properties, so the bad deals came from speculation,” said Oney. “There’s a lot of talent and skill that goes into maintaining an apartment complex, keeping it up, promoting it, and some of the deals that have gone bad you saw people focused on the financing side, but they didn’t think about the operation side, and now they’re getting bitten because the property is less desirable.” 

Even experienced multifamily operators are feeling the effects not just from interest rate hikes or lower rental rates, but from surging insurance costs and the high price of Texas’ state property assessments. 

Ricardo Pagan is the founder of Claridge Properties, a multifamily owner and developer of approximately 1,500 units of workforce and affordable housing in Houston. Pagan lamented the insurance rates for his Houston apartments, especially since Hurricane Harvey ravaged the city in August 2017, causing catastrophic flooding across the metropolitan area at a cost of $125 billion, the second most expensive tropical storm in U.S. history behind Hurricane Katrina in 2005.

“That’s a very bad conversation,” Pagan said. “Look, there’s a lot going on in the world we’re in — the amount of storms, the strength of storms — but the bottom line is: Houston, and every other coastal community in the United States, has been hit really hard in the last three to four years.” 

Pagan estimated that insurance rates for his units in H-Town have gone up every year the last four years. He said an asset that carried an insurance cost of $640 per door two years ago carries a cost of $1,340 today. 

“We were getting quoted $1,700 per door, part of larger umbrella policy,” he said. “The amount of storms have shifted the mindset of these underwriters. I think three or four large insurers have already walked away from the market. Those two things were the perfect storm for pricing to get out of control.”  

If insurance costs weren’t enough trouble for owners and operators, Pagan added that property tax assessments have also picked up significantly in recent years, as Texas aims to replace its lack of a state income tax with revenue gained from its booming property development sectors. 

The problem now, according to Pagan, is property assessments have become increasingly arbitrary and ultimately unrealistic for owners and developers to honor. 

“Every year, we’ve had to litigate with the City of Houston because they put our assessments even beyond our purchase price,” he said. “So we had to sue and tell them, ‘Guys, the property isn’t worth that, and, second, you’re pushing up assessments on property that it can’t afford to cover.’”  

A long hangover 

Ironically, as bad as a struggling rental market is for multifamily owners, it’s even worse news for the sponsors of downtown office towers and retail. This is because Houston, despite being the fourth most populous city in the U.S., doesn’t have many residents living in its downtown area. 

“Downtown Houston lacks one major component, and that is the residential aspect,” said Colliers’ Wright. “Very few people live downtown. There are some residential options, but for the most part Downtown Houston is primarily commercial office towers.” 

A vast majority of Houston’s 30 million square feet of downtown office product was built prior to 1986, so not only is the office product relatively obsolete, but so are the surrounding neighborhoods and streets that lack residences or mixed-use living spaces. 

“There’s just a lot of buildings where you can put any rent number on there and no one would be interested,” said Werner. “There’s just not much you can do about it if the ceilings are eight feet higher and all these columns go around outside the buildings as was common in the 1980s.”

As the central business district of Downtown Houston slowly withers, companies are moving to the suburbs. In 2015, ExxonMobil vacated its downtown headquarters at 800 Bell Street — where it held court since 1963 — to move to the suburb of Spring. Hewlett Packard Enterprise moved its global headquarters in 2022 to Spring as well, all but ignoring the chance to go downtown or uptown. 

“Downtown is not close to where a lot of the typical workforce live, and you factor into that the maintenance caps, taxes, parking costs, and what it’s like to be in a high-rise, the tenants would rather be further away,” Werner said. 

Ultimately, according to Texas A&M’s Oney, what’s occurring in Houston’s office and residential markets today can be seen as a product of the long hangover that began when the 1980s oil boom collapsed. Houston, like Dallas, delivered a lot of tall, high-quality office buildings and created a persona of unlimited space and inexhaustible energy reserves to millions of Americans during the yuppie decade of Reaganomics and “Greed is Good.” 

But when oil tanked in 1986 (as it did in 1992, 1999, 2009 and 2015), it took the fortunes, and future, of Houston’s real estate industry with it. Today, buildings and streets that were once prized are no longer viewed as viable real estate for a city looking to the future. 

“You do have an overhang in these Class A buildings because they were built when these companies were flush with money,” Oney said. “This is going on 40 years, and the offices have never gotten to single-digit vacancy rates. They have been in the low double digits of vacancy for 40 years.

“Now Houston is basically in another oil recession, similar to what you saw in the ’80s, but not quite as bad,” he continued. “That oil bust in the late ’80s knocked the legs out from under that industry … and Dallas and Houston have never really recovered from that.”

Brian Pascus can be reached at