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Texas Capital Is Growing Fast
Published: April 01, 2008
Employment growth and a strengthening economy are helping to reinforce an already solid Austin multifamily market. By the end of 2007, Austin added approximately 29,100 jobs and experienced an unemployment rate of 3.6 percent, the lowest in four years and well below the national average of 4.6 percent.
Other driving factors that keep Austin on investors' radar screens include phenomenal demographics and the fact that Austin remains, on a whole, untouched by current economic trends plaguing the rest of the country.
With a population of just over 1.5 million, Austin was recently ranked number one on Forbes magazine's list of "America's Fastest Growing Metros" among the top 100 cities in the country (Jan. '08). The Austin metropolitan area grew a staggering 41.1 percent from 1996 to 2006, compared to the population growth for the entire state of Texas at 23.7 percent, and the United States at roughly 12.9 percent for that same 10-year period.
Fostered by an environment of education, technology and government, Austin continues to thrive as one of the most desirable cities for corporate relocation and new business expansion. In fact, Austin was ranked number one by Expansion Magazine as the top city for business relocation (Aug. '06). Also, Money magazine voted Austin number two among the best places to live based on financial, educational and overall quality of life (July '06).
One of the biggest secrets behind Austin's success is its extremely talented and educated workforce. The primary supporting factor is The University of Texas (U.T.) at Austin, one of the nation's largest public universities with an enrollment of 50,000 students. In addition, St Edwards University (4,000 students) and Concordia University (1,500 students) call Austin home. The city continues to uphold its reputation for breeding, attracting, and maintaining today's most innovative minds, as supported by The Harvard Business Review who named Austin "Number One in Creativity." With over 44 percent of its population holding a college degree or higher, Austin ranks fifth among the most educated cities in the U.S. It's no surprise, then, that companies like Dell, Whole Foods, and Samsung choose to call Austin home.
Employment and population growth are the foundation for a healthy multifamily market. Austin is experiencing the highest rents since the tech employment boom of 2001. As jobs were plenty back in 2001, the Austin MSA experienced 98 percent occupancy and $.99 psf average rental rates. The ensuing tech bust of 2003 drove occupancy down to 88 percent and rental rates to $.82 psf. Fast forward to the fourth quarter of 2007 and occupancy has reached 93 percent and rental rates are $0.96 psf, according to Austin Investor Interest. Rental rates rose for the 11th consecutive quarter with a $.01 per square foot increase across all product classes. The Austin MSA annual rent growth was an impressive 5.2 percent. In 2007, deliveries were just over 3,500 units and approximately 2,100 units were absorbed. With nearly half (46 percent) of the metro's working age between 18 and 44 (median age of 32 vs. U.S. median age of 36), Austin is a prime market for apartments.
Approximately 55 percent of Austin's residences are renter-occupied and with rising interest rates and tightened standards on mortgage loans, Austin's population of renters is only scheduled to increase.
Investment Trends
Austin remains a popular destination for institutional and private multifamily investors. In 2005 and 2006, the majority of multifamily transactions were purchased by tenant-in-common and high leveraged private investors utilizing CMBS debt. By late 2007 and into 2008, these investors have exited the market and deals are now being sold to REITs, pension funds, and well-capitalized low leverage private investors. Core Class A cap rates have risen from an average of 4.5 percent pre credit crunch to 5.25 percent post credit crunch. Unique locations and value add opportunities are still garnering a lot of attention and driving cap rates down to sub 5 percent levels. Class B product has recently traded at a 6.5 percent cap rate and Class C product is trading around a 7.5 percent cap rate. The highest conventional apartment sales prices have occurred in/around the CBD where garden-style Class A product is trading in the $180,000 per unit range. Suburban Class A garden style product is trading in the $95,000 to $120,000 per unit range. Class B product has traded in the $55,000 to $65,000 range, while Class C apartments have averaged $35,000 to $45,000 per unit.
The most popular investment trend in Austin today is in the value-add category. Investors are targeting '80s- and '90s-vintage properties and conducting kitchen and bath upgrade programs. The investments range from $2,500 to $7,500 per unit and may include new appliances, resurfaced countertops, lighting and hardware package, 2-in. wood blinds, faux wood floors or upgraded carpet, and the addition of washers & dryers to units. In some cases, investors are upgrading the clubhouse and amenities at an additional cost. The post-rehab average monthly increase being received in Austin today is $75. Despite the credit market uncertainty, a recently listed mid '90s vintage value-add property received 30+ offers.
Downtown Development
Austin's downtown landscape is undergoing a dramatic transformation. High-rise buildings are scraping over 50 stories high with ground-floor retail and rooftop pools. Mayor Will Wynn has pushed to ease zoning restrictions in the CBD in an effort to get 25,000 people living downtown by 2015 (currently 5,600 people reside in the CBD). Downtown has over 1,400 condominium units under construction and nearly 3,200 more units planned in 2009/2010. Due to current capital market conditions, it is hard to predict which future condo projects will come out of the ground.
Existing condominium sales have been brisk. The 360 Tower is sold out, The Shore is 98 percent sold, Bridges on the Park and Sabine on 5th are exceeding 60 percent sold. Projects breaking ground and just initiating presales are the Four Seasons Residences (the first residential building in Texas designed by Michael Graves), the W Hotel & Residences, and the Austonian. These high-end projects are marrying luxury living with the 6th Street music scene and outdoor environment of Town Lake and Zilker Park. The Austonian, located on 2nd and Congress, is a $200 million, 55-story building that will contain first-floor retail with residential units above, ranging from $500,000 to $3.8 million.
High-rise apartment living, something new to Austin, is garnering the highest rents in the city. Year-over-year rent growth was a staggering 15 percent in the CBD submarket. The 2001 vintage product is getting $1.60 psf rents and 2005 mid-rise product is averaging $2.10 psf. The new wave of tower construction is bringing AMLI on 2nd, Altavida, and The Monarch to downtown Austin. The supply pipeline for 2008 is expected to be just short of 1,000 units, followed by another 259 units in 2009. Preleasing for the new tower apartments range from $2.40 psf to $2.70 psf. Young professionals, empty nesters, U.T. alums, and movie stars are driving the downtown rental rates to new highs.
Infrastructure
Austin's infrastructure has been dramatically enhanced in the past year. Texas 130, a 49-mile four-lane toll way east of Austin, gives commuters an alternative north/south bypass. Texas 45 is another toll way recently constructed that acts as an east/west artery. In addition, Capital Metro has begun construction of its $90 million urban commuter rail system that will run between downtown Austin to Leander in northwest Austin. The city is promoting Transit-Oriented Development (TOD) that supports a mix of land-uses, such as residential, office, shopping, civic and entertainment, within easy walking distance from a transit station. Developers are moving aggressively to secure land sites around the many rail stops. For example, Crestview Station located in north central Austin is being transformed from an old industrial site into approximately 55,000 square feet of retail, 1,000 new homes, and a 304 unit apartment community. The Lakeline Station, located in northwest Austin, has spurred a $400 million, 20-acre mixed-use development that will include a combination of single and multifamily, 150,000 feet of retail, parks and a proposed school site.
Other Hot New Areas
Construction has begun on Austin's largest urban development, transforming the old Mueller Airport into a mixed-use neighborhood. The 711-acre site is home to the Dell Children's Medical Center and will showcase TOD and pedestrian-friendly development. Southpark Meadows is a 425-acre, $300 million mixed-use project near completion with 1.6 million square feet of retail, 650 multifamily units, 110 townhomes and 330 single-family homes. Hill Country Galleria will include a million square feetof retail, multifamily, townhomes, a hotel and large cinema. One of the hottest new areas is the intersection of Texas 130 and Hwy 290 in northeast Austin. Potential projects include a mall, offices, multifamily and hotels.
Patton Jones is managing director of the Austin office of Apartment Realty Advisors.
