MHN Special: Austin Market Report with Nielsen-Claritas Research

displayGallery(123993);By Erika Schnitzer, Associate EditorAustin, Texas—known for its live music scene and enormous university—is a relatively young city, which makes it an ideal rental market. Ranked by Money magazine as the No. 2 Best Place to Live in 2006, Austin has continued to experience employment growth, with its government base helping to minimize the downturn, according to David Ward, executive vice president, regional investment director Southwest region for Post Properties Inc.Because of its relatively young demographic, Austin has “historically [had] a higher rental demographic versus home ownership,” asserts Ward. While the gap between renting and home ownership has narrowed in recent months, Ward predicts that it will once again become defined as home ownership rates return to normal and rental occupancies pick up.Below is the generational breakdown throughout the United States, compared with that of Austin. According to Nielsen Claritas’ figures, 25.5 percent of the U.S. population is comprised of “Authority Figures,” those born in or before 1945. The same group makes up a smaller population in Austin—16 percent. Looking at the “Social Netizens,” those born between 1986 and 1994 and the youngest generation shown in the chart, we see that while the group comprises only 1.7 percent of the nation’s population, Austin’s “Social Netizens” group comprises 3 percent of the city’s CBSA (Cored-Based Statistical Area).By comparing the generations on either end of the spectrum, we see that Austin’s population is, in general, much younger than that of the nation as whole. Based on this information, we can infer that Austin would tend to be a higher rental city, as it is usually the younger demographics who rent—as opposed to own—their homes.According to Mark Johnson, associate at Colliers International’s Multifamily Advisory Group International, of all the cities in Texas, Austin saw the largest drop—410 basis points—in year-over-year occupancy, from January 2008 to January 2009. One year ago, Austin had the highest occupancy rates of any city in Texas. Despite this drop, occupancy remains at 88.8 percent, higher here than in most other Texas markets and on par with Dallas. In addition, because of the high home prices, the shadow market has not had too much of an effect on the city.Rent-wise, all Texas markets experienced some growth, before concessions, reports Johnson. Austin, always with the highest rents in the state, was up 4.4 percent year-over-year, from $833 to $870. While it lagged behind Houston in terms of growth, Austin remains at the top of the market in terms of dollar amount.Given the current state of the economy, it is no wonder that developers are at the same time both hesitant and eager to explore new markets. Careful consideration of market demographics is absolutely critical at any point in time, but even more so in these troubled economic times, notes Terry Munoz, vice president and practice leader of the real estate, retail and restaurant industries for Nielsen Claritas, a national marketing information source that, like MHN, is part of The Nielsen Co.“We need to move from the ‘if you build it, they will come’ [mentality] to fact-based decision-making,” asserts Munoz. “In a recession lenders require an even higher level of due diligence from developers. And unless developers are asking how to best market their products now, ROI and retention will fall by the wayside.”What do Austin renters want?    According to Ward, the typical Austin renter is similar in demographic to the general renter pool—a young professional, 25- to 45-year-old, who is well-educated and employed in either the tech or government sector Most renters, whether singles or couples, do not have children. Click herefor a list of the top 10 socio-economic segments in Austin’s CBSA (Core-Based Statistical Area), along with a description of each.So, what does the Austin renter look for in a community? “In urban markets, we reach a pretty high rental demographic, so we provide smaller unit sizes but substantial amenities,” says Ward.    Because Austin has the highest home prices in Texas, rentals also tend to be higher-priced, resulting in a certain expectation of quality in a residence. Consequently, rents at Class A properties increased 2 percent at the end of the fourth quarter 2008, to $1,017 per month, while Class B and C properties grew only 1 percent during the same time period, to $710 per month, reports Johnson.While the typical Austin renter wants to live in a nice community, says Ward, from an income standpoint they also need to look at smaller square footages. Thus, Post’s Austin properties provide an average of 850 sq. ft. of living space. However, Ward notes that this smaller-than-average living space demands a high-quality amenity package. “When we look at underwriting our transactions, we try to price in value of upgraded amenities on return and make sure what we incorporate there is a demand for and price to pay to enhance NOI,” he says.Because of this expectation, Ward says that Post tends to “deck out units” so residents feel they are getting “the bang for the buck.” Community amenities typically include patios, pools, large fitness areas, Internet cafes and community rooms. High-density products are often built around a professionally landscaped courtyard, and Ward notes that urban vegetable gardens are gaining in popularity.  Because much of Austin’s demographics are somehow related to the University—whether they are faculty or past or present students—the demand in this area is the city’s highest, particularly within a two- to five-mile radius, says Johnson.Opportunities for investmentWard remains optimistic about Austin, predicting that Texas will fare better than most other states across the country and that Austin will be similar to Houston in its apartment fundamentals. He remains positive, saying that he would rank it among some of the highest cities, despite “some softness because of the amount of product on the market.” He believes that this softness will be relatively short-lived, however.Johnson believes that the stick-built, four-story projects with concrete and steel parking garages will be the first projects to be built and will be the ones performing the best once the economy turns around. He asserts that, compared with other products on the market—particularly the high-rise projects that developers had built with a condo exit strategy in mind and the garden apartments, for which there is not enough land—the more traditional projects will be reasonably priced.   “Location is key in a market like Austin,” notes Ward. Thus, the best bets are the areas around the University, as demand there is high. Because the CBD has historically been the most desirable area for renters and has some of the highest rent growth, it also has a high barrier to entry.  But if you can get in to the market, a five-mile ring around the CBD is the best place to concentrate, according to Ward.Click hereto see where residents are renting in Austin’s CBSA.The Austonian, a 56-story, 178-unit high-rise residential and retail project designed by Ziegler Cooper Architects for Benchmark Development and Second Congress Ltd., will be the tallest building in Austin, as well as the tallest residential building west of the Mississippi. The vision for a high-density residential luxury property in Austin was reinforced by the initiatives of the City of Austin, and specifically, Mayor Will Wynn. City leaders set the goal of adding 25,000 new residents to downtown Austin over a 10-year period.A participant in the City of Austin’s Green Building Program, the Austonian will feature occupancy sensors and dimming ballasts in common areas; low-VOC adhesives, sealants, paints and coatings; non-toxic pest management and cleaning products; a rainwater collection system; special coated and insulated glass for year-round energy savings, and more. (Click here to see a SLIDESHOW depicting this green condo’s model residences, sky lounge, lobby and more.)“I think
our focus on the urban locations probably gives us the most stability, long-term,” Ward says. “You don’t have lows as low, and highs are pretty good. Location is key in a market like Austin.” As Munoz notes, “Austin is a microcosm of redevelopment and re-gentrification.” To that end, trends in the city include mixed-use and transit-oriented development, although the experts have different opinions about whether they are ideal investment opportunities. While the consensus seems to be that mixed-use developments are, in fact, a trend because they appeal to both young demographics as well as some of the older, active adult renters. Johnson does not believe there is enough traffic to draw retailers to lease space in the projects. Consequently, he says, neighborhood-focused retail is more common than anything else in these project types.Furthermore, “a lot of mixed-use was driven by municipalities,” Johnson notes. He warns that this is not necessarily a good thing, as it can force developers to lose efficiencies. The market has to dictate that there is a need for multiple products within it, says Munoz “It’s not one strategy fits all. Austin is a vibrant young marketplace but has older demographics as well.”With the completion of its first rail line—which comprises five or six train stations—Ward notes that the trend of transit-oriented development is here to stay. “As rail line grows in Austin there will be more development associated with those stations,” he predicts. And perhaps renters will be more inclined to venture a few miles further away from the University and CBD.* Nielsen Claritas is a marketing information resources company dedicated to helping companies engaged in consumer and business-to-business marketing. It is dedicated to maximizing clients’ profitability with targeted and measurable marketing programs and enterprise-wide technology solutions. Nielsen Claritas uses its PRIZM segmentation system to study 66 socio-economic demographics, including groups such as “Young Digerati,” “Brite Lites,” “L’il City,” “Bohemian Mix” and “Gray Power.”