Which Apartments Are Getting Squeezed?

The Real Estate Espresso Podcast

Which Apartments Are Getting Squeezed?

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Which Apartments Are Getting Squeezed?

Welcome to the Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce.

Today we’re looking at the Houston multifamily apartment market, and in particular, the pressure that’s building in the middle of the market. Now we’re talking about Houston specifically, you can take the lessons from Houston and apply them to other markets across the U.S. and probably elsewhere.

When people talk about apartment fundamentals, they often speak in broad averages. Occupancy’s up, rent is down, absorption’s positive, cap rates are stable. But the thing is, the averages can hide a lot of insights.

The latest first quarter report from Colliers shows Houston sitting at 90.4 percent occupancy, that’s 9.6 percent vacancy. That number is unchanged from the prior quarter and up actually from 88.6 percent occupancy a year earlier. On the surface, that sounds like an improvement and it sounds healthy, but when you look under the hood the story becomes more nuanced.

Houston delivered 6,469 new apartments in the first quarter, that’s a big number. At the same time, the market absorbed 3,578 units. Demand was positive, but it did not keep pace with new completions, that’s a warning sign.

Now supply and demand do not affect every property in the same way. Colliers’ data showed that Class A properties absorbed 3,246 units in the quarter. Class C properties absorbed 678, and even Class D properties had a positive absorption of 413 units. It was the Class B properties, sandwiched in the middle, that recorded negative absorption of 759 units, and that’s the story. That’s what we need to pay attention to.

Class B is getting squeezed from both sides. At the top end, brand new Class A properties are competing aggressively for residents. There’s leasing concessions, there’s incentives. These buildings need to lease up. That’s an imperative. They’ve got construction loans, they’ve got investor return targets. They have deadlines. They cannot afford to sit empty. So, they offer concessions: one month free, maybe six weeks free, reduced deposits, gift cards, free televisions, all kinds of things. Whatever it takes to get bodies into units and move the lease-up forward.

That is creating a problem for the Class B owners. The renter who would have normally chosen a well-located Class B property now has a better option. For the same effective rent, they can move into a brand new Class A building with better amenities, newer finishes, a better fitness center, package lockers, co-working spaces, and maybe even structured parking.

The Class B owner is now competing against yesterday’s luxury product and today’s lease-up product at the same time. That’s not a comfortable place to be.

The second pressure comes from below. Class C rents in Houston average $974 a month in the Colliers report, and the B-class units were at $1,242. That’s a $268 difference per month. For many households, a couple hundred bucks makes a difference. If inflation has eaten into disposable income, higher insurance costs, groceries are more expensive, car payments are higher, then the household budget becomes tighter. Some renters who would prefer Class B may trade down to Class C to preserve cash.

So Class B gets squeezed from the top by discounted Class A and from the bottom from affordability pressure. That’s why negative absorption in B-class matters. It’s not just a statistical anomaly, it’s a signal that the middle of the rental market is vulnerable.

Let’s be careful. It doesn’t mean every Class B property in Houston is in trouble. Real estate is hyperlocal. A well-located B-class asset with strong management, reasonable leverage, controllable expenses, and a clear value proposition can still perform. But the generic Class B property is exposed.

The northwest submarket is especially active. According to the report, it led the region in units delivered, units absorbed, and units under construction. That kind of activity can be a sign of growth, but it can also be a sign of temporary imbalance. The new supply doesn’t arrive gradually, it arrives in big chunks. A 300-unit project opens, then another, then another. The renter demand might be there over time, but the lease-up pressure happens immediately.

And for owners of existing Class B assets, the question is this: what is your competitive advantage? What’s your protective picket fence? If your only argument is that your property is cheaper than Class A, that might not be enough during a lease-up cycle. That’s because Class A can temporarily become cheaper on an effective rent basis. If your only argument is that your property is nicer than Class C, that too might not be enough when renters are under financial pressure.

So owners of Class B assets need a sharper strategy. That might mean targeted renovations. Just spending $12,000 a unit to chase a renter who can move into a brand-new property might not produce the return you think it will. It might mean operational excellence: faster maintenance response, better resident communication, cleaner common areas, stronger on-site management. Those things matter more than many owners realize.

It might mean focusing on resident retention instead of simply pushing rents. In a soft, competitive environment, the cheapest vacancy is the one you never create. It also means accepting that the business plan probably needs to change. If the original underwriting assumed steady rent growth and a quick value-add premium, meaning forced appreciation, today’s market might not support that. Preservation of capital comes first and then yield second.

From an investor standpoint, this is where your discipline really matters. Do not underwrite yesterday’s rent growth into tomorrow’s business plan. Don’t assume that cap rates are going to save you or interest rates will save you. Cap rates have held pretty steady at 5.7% for the fourth consecutive quarter, but stable cap rates do not offset weak property performance. The asset still has to produce income.

The lesson is simple. Supply matters, product segmentation matters, and averages can mislead you. Houston’s overall occupancy might look stable, but the Class B segment is telling you a different story. New deliveries are pulling renters up with concessions, and affordability is pulling some down. The middle is where the squeeze is happening.

So as you look at this, don’t just go out and buy a Class B asset because it’s cheaper than replacement cost. Cheap is not the same as safe. Capital preservation starts with understanding where the pressure is likely to appear before it shows up in the trailing 12‑month financials.

As you think about that, have an awesome rest of your day. Go make some great things happen.

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