Texas has absorbed an enormous wave of apartment construction, and the statewide averages that describe it, softening rents, rising concessions, a market still digesting supply, have made some out-of-state investors wary of the market as a whole. According to one operator active across the Sun Belt, treating Texas as a single market is the error underneath many of the deals that go wrong.
Ron Kutas, Chief Executive Officer of OneWall Communities, an owner-operator of workforce housing expanding in the region, puts the mistake simply: “They underwrote a general market, but bought a submarket.”
A Market of Submarkets
The problem, as Kutas describes it, is scale. Unlike the Northeast, he says, the Sun Belt is huge, and its markets are far larger, which means market-level data is skewed and can mislead. He can map a Northeast market like the Lehigh Valley in Pennsylvania or East Orange, New Jersey, and read its competitors and resident base with confidence. A Texas metro does not resolve that way from a spreadsheet. The labor market, he notes, can change from one street to the next.
The supply picture illustrates it. Most of the new construction pressuring Texas averages is Class A. A Class B or Class C property can sit near heavy new supply and feel little direct effect, or a great deal, depending on where the displaced renters actually come from. It is basic supply and demand, Kutas says, but only legible at the neighborhood level.
The Houston Paradox
Kutas is openly contrarian on Houston, a market he says has burned many investors. Two features make it hard to underwrite from a distance. Houston has minimal zoning, which makes the future supply pipeline unusually unpredictable, and by Kutas’s read it carries some of the highest loan maturity and default rates among major markets. It is also, in his description, less one city than roughly 26 distinct submarkets, a structure buyers from outside the region tend not to grasp until they have operated there. That same opacity, he argues, is why selective opportunity remains in certain Houston submarkets, while better-covered markets like Dallas and Austin draw most of the incoming attention.
The Rent-Growth Trap
The costliest error Kutas sees is in how out-of-state buyers underwrite rent growth. An institutional team looks at a submarket, sees room to raise rents 10, 15, or 20 percent, and books it as upside. What the model often skips is whether the in-place residents can absorb the increase. Push rents too hard and a property that historically turned 20 percent of its units a year can suddenly turn 40, 50, or 60 percent, as residents who cannot afford the new rents leave.
The damage is capital, not just vacancy. A business plan that budgeted to renovate a fifth of the units each year now faces two or three times that volume at once, without the reserves to fund it. Units sit empty longer, cash flow falls, and the turnaround that looked conservative on paper stalls. The rent growth was not imaginary. The resident base’s tolerance for it was simply never checked.
Reading The Renter, Not The Spreadsheet
Handed a Class B asset in a soft Sun Belt submarket, Kutas says the first thing he would do is the analysis the in-house team usually skips: a full read of the resident base’s income, where those residents work, and their actual tolerance for rent growth. Institutional asset managers, in his description, sit behind spreadsheets looking at macro-level submarket data without assembling the operational picture that determines whether a plan survives contact with the property.
The Texas supply wave will take time to clear, and the coming quarters will test how widely the submarket variation spreads. If Kutas is right, the investors who keep underwriting the state average, rather than the neighborhood, will keep mistaking one Texas for another.
About OneWall Communities: OneWall Communities is a vertically integrated property management and investment firm specializing in workforce housing. With 15 years of owner-operator experience, OneWall has evolved to offer institutional-level 3rd party management services that combine operational excellence with a community-first approach. For more information, visit onewallcommunities.com.
This article is intended for informational purposes only and does not constitute legal, financial, or investment advice. The views and opinions expressed herein reflect those of the individuals quoted and do not represent an endorsement of any company, product, or service mentioned. Readers should conduct their own due diligence and consult qualified professionals before making any investment decisions.
Disclosure: Individuals or companies mentioned may have a commercial relationship with KeyCrew.
Media Contact Information
Heather Hook | KeyCrew Media | heather@keycrew.co
