Evacuees from New Orleans and nearby Gulf Coast cities poured into Texas after Hurricane Katrina struck on Aug. 29. Houston, located 350 miles west of New Orleans, suddenly no longer ruled as the country's apartment vacancy king. The negative impact of three years of overbuilding was erased virtually overnight.

Already well-positioned for an impressive comeback in 2006, Houston now looks like one of the country's stellar performers. Operators face plenty of challenges, however, as they will be called upon to help provide transitional services for traumatized new residents, some of them looking to start over and others hoping to return to their previous homes as quickly as possible.

Katrina's Impact

The number of displaced households welcomed into Texas after Hurricane Katrina proved staggering. An estimated 100,000 people were already staying in Lone Star State hotels at the time the hurricane hit, according to media reports. A week later, about a quarter-million people had registered for assistance at Texas emergency relief centers.

Houston's available better-quality apartments were snapped up immediately, mainly by employers leasing apartments to use as corporate housing once New Orleans-based operations could be relocated. Even while evacuations of people trapped at the Superdome and the New Orleans Convention Center were still in process, virtually no vacancies were left in the portfolios of key Houston apartment owners like Trammell Crow Residential and Camden Property Trust.

Many apartment owners in the area set up special programs for hurricane victims, agreeing to waive or reduce deposits, offer month-to-month leases, and take delayed payments from households waiting for financial assistance from the Federal Emergency Management Agency. Some companies relaxed the standards on household size, since there was such a shortage of big apartments capable of accommodating large families.

As of early September, Houston still had about 27,000 evacuees staying at emergency shelters. Plans called for placing those households in other locations by the end of the month. It appeared some would be able to go back to Louisiana, where trailer and tent camps were being considered. Others were targeted for placement in Houston apartments, though that process was expected to be a challenge since the Harris County Housing Authority reported that nearly all of the evacuees remaining in local shelters qualified for Section 8 subsidized housing.

Building is Winding Down

Roy Wiemann

With so few barriers to entry, no market can crank out additional product quite the way Houston can, and the metro area is just finishing another one of its notorious building booms. From the beginning of 2003 through the middle of 2005, roughly 28,800 new apartments were delivered. Another 5,500 units under construction as of mid-2005 were scheduled for completion by the end of the year, bringing the three-year delivery tally to more than 34,000 units.

Timing couldn't have been much worse when this product began to come on stream in early 2003, as the jump in new supply hit just as the metro was hemorrhaging renters to single-family home purchases. With the metro's median home price at only $135,500, according to the National Association of Realtors, the rush to purchase when mortgage interest rates dropped became a real stampede. According to Dallas-based M/PF YieldStar's quarterly survey, apartment occupancy bottomed at just below 87 percent, lowest in the country, during late 2004. Surprisingly, however, rent cuts during the occupancy slide proved small. Operators smartly realized that cheaper rents wouldn't stem the flow of residents leaving through the back door to make home purchases.