2012: A Year in Review

2013 is here and 2012 is behind us. 2012 started great and continued to gained steady momentum. We thought it would be worthwhile to review.

We started the year with a battered national economy, high unemployment and low credit liquidity, which hampered the economic recovery. However, by the end of the year, national markets have began healing as housing and other real estate inventory declined and demand improved.

In Texas, strong job growth and low inventory in the major metros created high demand for all channels of real estate, which in turn created more jobs in a state that has led the nation in job creation over the last five years.

When we look back, 2012 will have set a lot of milestones for each metro. I thought we would look at what we consider some of the biggest starting with Austin. We will follow up in future weeks with the other Texas metros.

Biggest successful groundbreaking: Formula One

The announcement of the Circuit of the Americas track took many people in Austin and Texas by surprise. While there was some skepticism in racing circles about plans to bring a Formula One event to Austin in 2012, there has been plenty of support and enthusiasm for the project both locally and internationally.

By many measures, Austin’s Formula One debut was a big success. The nearly two years of planning and prepping paid off: Circuit of the America’s state-of-the-art track and facility in Elroy won widespread praise from drivers and fans, many of whom said they would be returning for next year’s race. Despite some long shuttle lines and bottlenecks, Capital Metro efficiently moved thousands of fans to the event without the expected hours-long traffic jams. Many downtown businesses benefited from larger crowds, and the city of Austin came across as welcoming and charming on an international stage, which could boost tourism in the future.

It is premature to declare the event a winner without a final analysis of the costs and benefits. Also, there were some financial disappointments and rough patches that should serve as lessons for next year, when Formula One’s US Grand Prix again is staged in Austin. But from the initial evaluation, it was a success.

Formula One’s economic impact to the Austin area was estimated to be $483 million, according to an economic study from COTA supporters; costs for direct expenditures were estimated at $293 million. The race was supposed to generate $26.4 million in new tax revenue for the state and $6.1 million for the city of Austin. Taxes for other local entities were not included.

Such an analysis is important because the Texas Major Events Trust Fund is supposed to provide $25 million a year to Formula One, plus certain expenses. If the race generates less than that in sales taxes, the investment will be deemed unwise. The city, which provided water and sewer lines to the facility and used its police, fire and EMS departments to provide public safety, will do its own analysis about whether its investments paid off. The county’s costs also must be assessed, including what it spent on constructing roads and providing security and traffic control through its departments.

From this analysts view point the potential of the surrounding land improved dramatically with the F1’s success no matter what hiccups occurred.

This figure does not even take into account anything beyond the race itself. Other tracks around the world often become the site of development or hubs for nearby growth, including condos, amusement parks, driving schools, concert venues, technology centers, auto manufacturers’ testing labs, etc.

Grand Prix events in 2008 generated approximately $221 million in Malaysia and $394 million in Bahrain. The Texas Comptroller’s office projects an economic impact of around $300 million annually if the race were to be held in Austin—a larger windfall than that of South by Southwest and an entire season of The University of Texas football home games combined. Stay tuned, it should be interesting since Texas and the south have generally been considered a NASCAR market.

Biggest sustained trend: Apartment market strength

A continued surge in leasing activity, apartment occupancy, and rising rents have made the Austin apartment market the development darling since late 2010. And based on building plans, 2013 is likely to be an even bigger year for apartments, with thousands of rental units on the drawing boards. Developers have already started a handful of projects, and more are in the pipeline.

Regionally, most ‘A’ and ‘B’ sites have been tied up, with activity picking up in the ‘C’ and ‘D’ Class. Even with all the new construction, all four metros see continued strong absorption keeping pace with new properties coming on the market. Many institutional investors strongest focus this year and next is Austin, Houston, San Antonio in that order of preference in acquiring sites and communities.

Biggest improvement: The Austin housing market

We continue to see a better market than the rest of the nation in terms of supply and demand. Yes, other markets are rebounding with higher appreciation, but it is because they fell so far and are just now rebounding. We have seen a healthy rebound (8.4% city wide) in appreciation and sales. Over the last twenty years the metro area has had about a 7.1% appreciation.

We saw demand increase and a strong start of 2012. Sales (new and resale) continue to improve, forcing higher values. However, with continued job creation, lack of speculative building and developing, and pressure on supply should help focus builders and lenders fill the need.

What is happening?

Supply is shrinking
With inventory declining in many submarkets, finding the home of your dreams may become more difficult going forward. There are buyers in many markets surprised that there is no longer a large assortment of houses to choose from. The best homes in the best locations sell first. Don’t miss the opportunity to get that ‘once-in-a-lifetime’ buy.

Rents are skyrocketing
Rents locally have historically increased by 3.2% on an annual basis. Average rent for Austin apartments increased by 6.1% over the past year, which was the 6th-largest increase in the nation. Austin was the only Texas metro among the top ten growth leaders. San Francisco topped the list with a rent increase of 12.6% last year.

Price increases are on the horizon
At the start of 2012, analysts knew that there was a limited inventory of new and resale homes as well as a limited number of rental units coming on line. That said, no one could predict just when the market would turn, but appreciation was sporadic per submarket, and minimal in the five county area. However, many pricing indices (examples: CoreLogic, FHFA, MLS) are reporting that prices are continuing to rise through 2012 and based on the demand, will rise through 2015.

Although the Federal Reserve has said that they will keep borrowing rates low, interest rates are projected to rise. The Mortgage Bankers Association has projected that the 30-year mortgage interest rate will be 4.4% by the end of 2013. That is an increase of approximately one full point over current rates. Interest rates are currently some of the best in history, so why not buy now? Remember the rule that for every point that rates go up, you are able to buy 12% less.

Buy low, sell high
We would all agree that, when investing, we want to buy at the lowest price possible and hope to sell at the highest price. Housing can create family wealth as long as we follow this simple principle. Today, real estate is selling ‘low’. It’s time to buy. Based on prices, mortgage rates and soaring rents, there may have never been a better time in real estate history to purchase a home than right now. Presently we see production builders tying up almost any lot. The top quality lots were taken, so to keep their machines going they have to accept and secure less than desirable lots, due to the lack of inventory in the market.

Biggest office deals

Starting in March of this year, Apple Computer announced the expansion of its Austin presence with a $304 million campus that will ultimately create 3,600 new jobs. In addition, General Motors plans to open a new information technology center in Austin that will staffed by at least 500 people initially with the potential for continued growth. Also, Visa Inc., the international credit card giant, tentatively agreed to build a major global information technology center in Austin that would create 794 new jobs within five years. All of these have a tremendous effect on our limited office space with few new projects in the pipeline.

With every job, you can count between 2 to 2.5 people moving here, so job growth will continue to put a strain on the limited amount of office space in desirable areas. In Texas, Austin is not unique – we are seeing the same dynamics in San Antonio and Houston.

Biggest worry for the New Year: Financing

Shouldn’t the worst be over? Don’t bet on it. Regulation continues to hamper mortgage financing as well as development financing. The good news is the stricter capital requirements of Basel III have been delayed (Basel III would take all real estate financing from 100% risk to 150% risk, causing larger capital requirements from buyers/developers as well as the lenders). Dodd-Franks and the Consumer Finance Regulatory Board are forcing stricter guidelines, which in turn cause the cost of finance to go up and make it more difficult to qualify for.

We don’t see this getting better in the next four to five years. It allows opportunity for large equity, but really handicaps the consumer and small mom and pop builder’s developers who don’t have the capabilities of large equity.

Biggest news in residential development

In January 2010, there were 24,300+/- developed lots in the Austin area not under contract. Of those, 12,000+/- were desirable lots for production builders. By March 2010, 11,000+/- were under option (no longer available), showing the desirability and belief in the Austin housing market by national builders and their management. This flurry of activity in 2010 is looked back at with envy as a time when you could still get quality lots cheaper.

Over 6,000 lots in the Austin area that have not started entitlement or development have been tied up in the last twelve months. Builders and developers will point back to 2012 as the year they really saw the market take a strong turn positive. Are they seeing high appreciation to make up for the last five years? No! No one is overpaying on acquisitions yet. This is typical of markets coming out of recessions – consumers are overcautious about overpaying, and some miss the boat.

Residential and commercial real estate should continue to gain strength in 2013 through 2016, locally and nationally. If you are waiting on the sideline for a better deal, it may be a while.