Austin apartment market: addressing increasing demand
The Austin apartment market is currently experiencing significant growth as increasing demand is driving more intensive development and developers are addressing tenants’ desire for a better experience. The result is the development of communities that capitalize on space to the fullest extent. Architects are providing extremely detailed designs of common area “living experiences” before the property is constructed. For example, designs include the final positioning of equipment in fitness centers, pool/cabana layouts, rooftop lounges and Zen gardens that are thoughtfully and efficiently planned to maximize the effect while being cost conscious. The importance of garage layouts and identifying the necessary parking needed has increased, as we are becoming more dependent on ride-sharing services like Uber and Lyft as well as Lime and Bird to move around the city. The future of these services will combine with other technological innovations to lead Austin into a future where not every adult needs to own a car.
Job and Population Growth
The key to the success of these new developments and long-term investments is the ongoing population and job growth for the city, which remains extremely positive in future projections. In addressing our population, it is critical to recognize the local prime age rental portion of the population (ages 25 to 34) is substantially higher than the national average of 20.9%, with some estimates exceeding 30% of the Austin population, which is 44% above the national average.
Additionally, we must take into consideration those locals who are opting to move from single-family homes locally to a rental community in favor of more service and less mandated. As a wise friend once stated: “No one leaves this world wishing they had stayed home and done more chores.” Combined with the locals opting for this lifestyle are those who consider Austin their second home and Austin leads the state in this category, with many who come from Dallas and Houston and others who come from as far away as Chicago and New York.
Finally, there is the ongoing growth and expansion of the foundation that has fueled Austin from its early success: Jobs in the state government and The University of Texas at Austin (UT). These two pillars exist and prosper even in economic downturns, and, while the publicity of the large employers moving into the city are important, the state government and the university continue to serve as a sustained employment base for now and the future.
Job growth remains on the forefront of the local economy. The recent expansions and announcements by Google, Facebook, Indeed and Amazon are beyond compare, and Dell’s move back into the public marketplace will bolster that company’s future as well. But, in my opinion, one of the largest new employers in Austin, came with a subdued fanfare: the Futures Army Command, which, in layman’s terms, is using the high-tech industry in a collaboration to help prepare for military activities in the future. While the employment of 500 personnel of this Armed Forces branch is notable, it is the related synergies that are most intriguing. First, several defense contractors are already in the search for space in Austin, and it is not at all unusual to have multiple branches in one area. Thus, a related division of the Air Force or Navy could find their way here in the future. As we look back 10 years from now, this could be Austin’s biggest announcement of 2018.
Austin’s CBD, Urban East and Domain areas will continue to see additional employment expansions. Of note, the Domain is in the midst of adding more than 5,000 tech jobs since 2017, and, with the recent announcement by Amazon on their earnings call, that figure could approach 6,000 over a 36-month period. Recent office and apartment transactions are pricing the Domain as uber core, with competition heavy and focused.
The Urban East is another dynamic job market with creative office space completed by notable developers Endeavor and Transwestern, along with additional recent announcements by Cypress and Cielo. Note these office buildings are being developed due to demand and not speculation. As a result, the demand for apartments in this highly desirable “renter-by-choice” submarket is enjoying a gentrification that is eye-popping. Recent transactions on The Arnold and 7East reveal an investor market that is now pricing these assets as core investments.
The CBD has ongoing transformation from an 18-hour city to The Wall Street Journal’s new moniker “Superstar City.” Joined by notably larger markets like New York, Boston, San Francisco and Seattle, this is a true challenge the city will face to meet the expectations of employers, their personnel and investors when compared to these other national heavyweights. Several notable developments are in process with HFF’s recent sale of McCourt’s Waller Creek development to WeWork, which garnered attention and focus from some of the nation’s preeminent developers. The planned office building will only partially cover the site and its development potential, including Endeavor’s 93 Red River, can service the new anchor tenant with upscale housing in one of the CBD’s gentrifying neighborhoods.
As these areas increase in density and demand, many are wondering about the areas that may be underserved in terms of certain types of urban apartment development and or renovation. This brings me back full circle to the earlier discussion about the employment of state and university personnel. Central Austin has experienced some apartment development in the last several years, but it does seem muted when compared to the other submarkets. Historically, there was a strong demand in this area from college students, but the vastly expanding West Campus student housing development activity is removing this pressure, thereby increasing the opportunity for conventional tenancy. Moreover, this area (with the south border of 32nd Street to the north border of Highway 183 and east/west borders of Interstate 35 and Mopac, respectively) has some of the best access to employment hubs, UT, state offices, CBD and Domain, as compared to anywhere in the city. There have been some excellent developments within this area, but, considering the appeal, it would seem underserved, especially in terms of an uber luxury living asset.
Fundamentals of the city remain strong, with 2018 statistics showing occupancy moving up to the 94% range city wide and year-over-year effective rental rates up 4%. The CBD led the way on this front with an astounding 11% year-over-year rent growth figure. Gables Republic Park’s 221 units will be the only CBD delivery this year, so expectations are similarly strong for 2019. Across the metro, approximately 9,000 units were completed, but absorption exceeded 10,000, and early reports show very strong continuation in 2019 after the first 45 days flurry of rental activity.
On the transactional front, the city enjoyed a very strong market, but was perceptively slow “out of the gate” in 2018. The second half of the year saw the largest sale with Northshore, The Arnold and Stonelake’s Groves South Lamar commanding core pricing. Significant suburban transactions include Tacara at Steiner Ranch and the HFF sale of two Mansions assets: Travesia and Stonehill. There will be significant investment opportunity this year that will be led by new construction assets that have stabilized.
Investment capital remains abundant with many institutional advisors continuing their efforts to enter and/or increase their presence in the market. Family office activity has increased dramatically, and the international investment interest is at an all-time high. Investors from Mexico, Canada, Europe, Middle East, Asia, South America and Australia remain active in the market.
In summary, the fundamentals of the market appear strong, and the investment world is taking notice. Comments at industry events include projections of Austin’s CBD and the surrounding area to be the most gentrifying market over the next 10 years. While the future appears bright, it remains to be seen how the city addresses the challenges associated with the attention and acclaim. However, the investors’ perception of the city has changed, with more investor confidence forecasting that Austin remains in the top echelon of apartment investment markets for the foreseeable future.