MARKET SNAPSHOT: Institutional and Private Buyers Eye Austin Apartments for Investment Opportunities

Austin, Texas—Austin, Texas, is poised for an extremely strong economic recovery, according to ARA’s (Apartment Realty Advisors) Year-End 2010 Austin market report.

“It’s not that we didn’t get hit hard [by the recession], says Patton Jones, principal in ARA’s Austin office. “It’s that Austin took its pain from the tech bust. … The economy was more diversified when this recession came. The state capitol and University of Texas are in Austin so we’re a beneficiary of government growth.

“Our economy has weathered the storm better than most,” Jones adds. “We feel that the multifamily world will tighten really nicely within the next two to three years so the city may see 5 percent to 7 percent rent growth annually for the next three years. That’s hard to find in the U.S.—that’s a good reason for people to come to the city and buy apartments.”

In the last 12 months, 30,000 people have moved to Austin, and the city experienced a record absorption of 7,500 units, reports Jones.

As of December 2010, the unemployment rate for the Austin-Round Rock-San Marcos MSA was 6.8 percent, down 30 bps from the month previously, according to the Bureau of Labor Statistics.

“We are coming off heavy supply and going into an environment of zero supply,” Jones points out. “When the recession hit, Austin was seeing heavy apartment development, delivering 7,500 [units] annually between ‘06 and ‘08. Today there are zero conventional units under construction in Austin.”

With this lack of new supply, the market is beginning to experience aggressive concession burn off and increasing net rents.

Annual rent growth across the Austin MSA market was 7.01 percent, according to ARA’s report. The CBD submarket, however, experienced a 15 percent annual growth rate, according to the report. But, notes Jones, the city as a whole has not made up the difference just yet, as rents slid about 10 percent between 2008 and 2009.

“We rode the roller coaster down in ‘08-‘09; we’ve certainly turned the corner and now we’re in increase mode,” he says.

At the same time, while occupancy dropped to 88.7 percent in 2009, 2010 saw a slow, steady improvement; citywide occupancy at the end of 2010 stood at 93.6 percent.

“In the Downtown CBD market, you’re already seeing rents pop because one-bedrooms and two-bedrooms are full,” Jones tells MHN. He adds, however, that while suburban submarkets are starting to turn around, they might take some more time to recover.

“We were as high as three-months concession; citywide, we’re down to 1.5 months, on average. If you average it out, you’ll see concessions at the lowest in downtown and at the highest in the far north suburban markets,” he adds.

In terms of the investment market, in general, says Jones, “you’re seeing aggressively low cap rates based on buyers seeing opportunity in the market.” A recent A+ deal, for example, received 22 offers, whose top bidders were all-cash, institution-type buyers.

However, there is also interest from private buyers who see opportunity in the value-add play. “Anything we put out to market right now is popular,” says Jones.

“The current owner/operators are still bidding on product because they feel like Austin is one of the best place to reinvest their dollars, and we are getting plenty of new interest from private, wealthy families, who are first-time Texas buyers that typically would buy in Arizona or Nevada [but] that they are looking for a better economic story.”

In general, Class A assets are trading at a 5 percent cap rate, with those in urban locations trading at slightly lower rates than those in the suburbs, while Class B deals trade at approximately 6 percent.

The highest sales prices have occurred in and around the CBD, according to Jones, where Class A product has traded between $150,000 and $180,000 per unit. Suburban Class A garden-style product ranges between $75,000 and $85,000 per unit, while Class B product has traded in the $40,000 to $50,000 range. Class C apartments have averaged between $15,000 and $35,000 per unit.

Austin is poised for a strong recovery, notes Jones, as more companies look to the city for expansion. (Samsung, for example, recently announced plans to build a $3.6 billion chip processing factory in Austin.)

In addition to a lack of economic diversification, the major complaint for the metro is that its infrastructure has not kept up with the city’s growth. “We have lakes, hills and environmentalists. You cannot just lay down a road in Austin,” says Jones. “Infrastructure is something our government is working on but they need to continue to come up with solutions.”