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Dec. 29, 2011

MARKET SNAPSHOT: Austin Sees Surge in Out-of-State Investor Interest

By Erika Schnitzer, Managing Editor

Austin—The Live Music Capital of the World is expecting a population growth exceeding 50,000 people. This will undoubtedly increase the demand for apartments, pushing rents and occupancies.

As of the third quarter of 2011, employers added 15,500 jobs, increasing the workforce by 2 percent. Austin’s unemployment rate was 7.1 percent as of October, down 40 bps from the month prior.

Class A rents are slightly higher than the monthly mortgage payment on a median-priced home in the suburbs, notes Marcus & Millichap. Asking and effective rents increased 2.7 percent and 3 percent, respectively, year-over-year to the third quarter. Class B and C asking rents increased slightly more than those of Class A—2.7 percent versus 2.4 percent. Marcus & Millichap expects that asking and effective rents will end the year 3.1 percent and 3.6 percent, respectively, higher than the year prior.

As far as submarkets, Marcus & Millichap’s most recent report indicates that the Near North Central market saw the greatest year-over-year effective rent growth, at 6.8 percent. Following that market were the Near South and Near Northwest submarkets, which each saw a 4.4 percent year-over-year rent increase. At the same time, the Ranch Rd 620 N market saw a 2 percent decline in effective rents.

Overall vacancy was 5.4 percent in the third quarter—a 270-bp improvement. Class A vacancy reached 5.3 percent, while Class B and C assets were 5.6 percent vacant as of the third quarter. Marcus & Millichap projects that vacancy will drop an additional 200 bps.

According to Marcus & Millichap, the Near South Central and Far South submarkets have the lowest vacancy rates, at 3.2 percent and 3.8 percent, respectively. Near Northwest and Round Rock/Georgetown/Hutto saw the highest vacancies in the market, at 6 percent and 6.1 percent, respectively.

While approximately 1,500 units were delivered between the third quarter of 2010 and the third quarter of 2011, an additional 1,100 units are currently under construction and are expected to be added to the existing stock at some point during 2012. Additionally, close to 16,000 units are currently in the planning pipeline, with about 15 percent of this planned for the Central submarket.

Transaction activity in Austin has increased 32 percent over the last year, compressing cap rates. As Marcus & Millichap notes, much of the aggressive plays are coming from out-of-state investors, while local buyers are more likely to seek lower quality assets or properties in the suburbs.

Class A assets are, in fact, trading in the mid-5 percent range. Stabilized Class B properties, meanwhile, are trading in the high-6 percent to low-7 percent range, while stabilized Class C properties are trading at cap rates close to 9 percent.

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