The Austin economy has outperformed the US economy for several years. We wanted to examine the strengths and weaknesses of the Austin economy, and determine where we are headed in the future.
Let’s start with apartments, which have been very attractive to investors over the past three years.
Austin was one of the first markets to see apartment construction return after the recession. Job creation and population growth have strengthened apartment and new home demand dramatically. Over the longer term a surge in apartment deliveries should lead to an uptick in vacancy, however vacancy rates have remained very low as the new supply is absorbed by the market.
At the end of 3rd quarter 2013, there were 145,099 rental units, with 95% occupied, leaving 7,105 units available, and an additional 10,000 units under construction to be completed in next 12 months, giving us 17,105 rental units available.
Once built, these newly delivered units will increase the supply of Austin apartments by 7%. In addition, there are over 36,000 apartment units in the development pipeline. We may be at a tipping point in apartment development. The substantial apartment revenue growth, which is what had attracted apartment developers and equity to Austin after the recession, has begun to slow. In 3rd quarter 2013, Austin saw annual revenue growth of 4.1%, compared to 8.9% just two years ago. Driving that decline was a slowdown in rent growth. In 3rd quarter 2013, year-over-year rent growth measured 4.2%. Though healthy, that was down 3.0 points from a cycle peak in 4th quarter 2011.
Occupancy has remained healthy at over 95% for the last couple of years and should maintain that with continued great job creation (particularly in the higher paying jobs). One thing that has driven the rental market was the lack of inventory in for sale homes. We have added 75,000+ new jobs since the beginning of 2008; Austin’s employment base has expanded by a nation-leading 9.7%. Due to the recession and the lack of lending, there was not enough shelter (rental or for sale) for the new arrivals. The lack of resale and new home inventory drove those people to new apartments. As new home and resale inventory ramp up to meet this need, it should affect rental growth and sales.
Apartment sales have remained healthy over the last few years due to the strength of the rental market. During the last year, competition among the large REITS and institutional investors drove cap rats for large well located assets in the low 5 percent range, the nirvana cap rate for most apartment investors. The upturn in lending rates has not yet affected the desired cap rates as many of the properties bought were Class ‘A and B” built in the 1990’s offering upside potential. Most apartment brokers and investors will tell you that they anticipate continued strong activity for a couple of more years. As rates increase it will put added pressure on Class ‘C’ apartment complexes as cap rates should move above 6%.
The multi unit rental will need to bear watching as the inventories and employment growth change over the next couple of years.
Housing inventory continues to be challenged in keeping up with demand. There will be 9,200 to 9,400 starts this year. There should have been 15,000+ last year, and another 11,000 this year based on current employment numbers, yet we are 8,000 home starts short with the inability to address new developed lots to decrease pressure off of new home demand. There are 5,536 active listings in Austin MLS.
Starts and listings are where we are challenged. Almost every one of your desirable inner core (Tarrytown, Barton Hills, Northwest Hills, etc.) and suburban neighborhoods (Circle C, Avery Ranch) are extremely tight for inventory, causing record appreciation. I would say that new and resale market is around 5227+/- units short for just this year.
Because of the increase in demand, Austin homes have become some of the most expensive in the state. This should be somewhat of a concern, as we continue to compete with other metros on cost of living. Steady appreciation should continue in most neighborhoods through 2014.
Where do we stand overall for shelter needs in Austin?
17,105 rental units available
+ 5,536 listings =
32,041 units available with current numbers and no more people moving here.
There have been around 60,000 people moving per year for the last three years. It has slowed a little, but we still don’t have enough shelter. Remember we have over four years of catching up on total units needed, plus what we need currently.
Rentals are caught up, with over 35,000 in the development pipeline, and the amount coming on line the next two years ( 18,000+)
Apartment occupancy per submarket in Austin:
Cedar Park/Leander (89.35%)
Far NW (96.5%)
What is current lot availability in the Austin area? Even with over 6,800 new developed lots brought to the market this year, new lot inventory continues to be challenged to keep pace with demand. Austin has a 1,000 fewer lots than we had a year ago, now 14,417 according to Metrostudy. This is the tightest we have seen the lot market in over ten years. With nearly 9,000 starts last year and 9,400 this year and only 7,500 lots in the delivery process, the number of lots will not keep even with demand. The result of this, is higher land, lot and labor prices. As higher lot pricing results in new home pricing in many areas we expect some push back from the consumer who will be forced to the resale market or more affordable locations.
Where are most of the available entitled lots located? What areas of Hays, Williamson and Travis County are primed for growth and further development? Available and marketable would be a better question. Those areas that have the most available presently are the least desirable.
Entitled, undeveloped lots
Over 7,000 in Bastrop County
Over 7,000 in Buda
16,000 in NE Austin / Manor
2,000 in NW Austin
7,000+ in SE Austin
8,000 in Georgetown
4,000 in Hutto
5,000 in Kyle
8,000+ in Leander
6,000 in Pflugerville
9,000 in Round Rock
5800 in San Marcos
30,000+ in unincorporated Travis County
11,000 in unincorporated Williamson County
There are over 150,000 entitled undeveloped lots in the five county area
The forecast for 3.0 to 3.2 percent in annualized GDP growth reflects a level strong enough to expand employment by approximately 23,000 new jobs, down from previous years. Unemployment, however, is expected to remain in the low-5% percent range. Total employment for the metro now sits 5% over prerecession peaks. Austin maintains a healthy growth remaining in the top ten job growth areas in the country.
On a state basis, the continued federal budget impasse will cloud government employment growth for a while. Sequester and budget cuts have affected 90,000 jobs in defense in Texas. Ask the Realtors in El Paso, Killeen and San Antonio if they have felt the difference.
What about other real estate channels?
Office continues to improve. Austin’s high tech heritage has been rooted in manufacturing, (IBM, Dell, Samsung, AMD, etc.) This side of the industry is having major shifts as evidenced by AMD and Freescale downsizing this year. However, the ‘soft-tech’ side has more than picked up the slack with strong growth (“soft tech” is IT management, software design, computer engineering). Speculative development has begun to reemerge in the traditional areas (CBD, NW corridor), but it will be at least twelve months before many of these begin to show an effect on inventory. During this period, employers will be challenged to find large available contiguous spaces, which may hamper moves from other states.
The office channel is now different in its attraction of major investors brought by the continued booming economy and lengthy development cycle. Most major investors and REITS continue to focus on Austin on the Class A and B space in the CBD and other traditional business core areas. Rents continue to improve and should maintain with the limited amount of new construction and the new medical school and center coming on line.
Retail has had a great year in Austin. The market’s favorable demographics and high paying jobs growth continue to attract major retailers here. Home sales have had a positive effect with more sells of appliance and home goods. Austin has been a bright spot for most national and regional retailers due to the strong job growth. Rents continue to improve, and improved occupancy is apparent when driving around with many more store fronts open. Developers have moved over 700,000 square feet into the development pipeline which will slow down interest as the market sees if it can be absorbed. Outer rim neighborhood community centers are still in the double digit vacancy rate area, slowing interest from most investors in those areas. The lack of retail development over the last few years has allowed single tenant and multi tenant sales to improve. With little development apparent in the pipeline, inventory will be tight for buyers.
Austin’s demographic trends will continue driving economic growth, which will support near- and long-term residential, office, retail and industrial space demand, presumably for the next 3 to 4 years with current demand and pipeline. Population over the next 20 years will double in the Austin area. In addition the strong rise in population will stimulate consumer spending, trade, and manufacturing. Rising capacity utilization rates and inventory rebuilding will stimulate industrial demand. With focus on the proper industries, demand should continue to improve in our region.
Where is new development going? In-fill continues to be a major change in last 4-5 years. Mueller, Crestview, and the whole north Airport Boulevard area are a great testament to that. PSW, Milestone Communities, and other custom builders have continued to change the building environment with over 400 for sale / sold units over the last year.
As always the next undeveloped outer ring for many. With the recession we saw production slow above 620 in the NW Austin corridor. All that has changed with the increased number of jobs being created in that area (12,000+). Most of the undeveloped land along 183, Parmer, etc. has been put under contract, forcing most developers to look along Hwy 29. Many community announcements will be happening soon.
With more tenured builders like Jimmy Jacobs changing management and improving equity positions this last year, we may see different products and thought processes to address to meet the needs of Austin newcomers. 2014 and beyond will be interesting to watch.
With continued strong real estate appreciation, is there a concern over a housing bubble in Texas? We continue to get this question about our local and regional market.
The quick answer is no.
First four things have to be available for a housing bubble: tight supply, demand, regulation, and easy financial terms. Two of these are present, only in Austin does regulation come into play. Financing is still a challenge in today’s environment.
With current demand, job growth, more demanding lending standards the potential is there but not near as much as the run up in 2004 through 2006. Supply and demand will continue to be the governing factors and presently they seem to show favorable strength of the Texas regional market for a while.
There is a lengthier article about this on the Independence Title blog dated 3/29/13.
What about shadow inventory in Austin and Texas? There will always be foreclosures and short sales even in a good market. However this is not a concern presently, because of the small amount of foreclosures in Texas and the continued decline of such. There is a lengthier article about this on the Independence Title blog dated 3/22/13.
When will lending get easier? Because of the numerous restrictions placed on mortgages as well as banks, it may be another 5 to 7 years of challenging financial origination. I wish there was more optimism about this. But current government actions hamper any optimism. The good news is that because of the strength of the local and regional market, most banks and equity are very interested in Texas loans. Don’t expect the lending values and opportunities of the last 20 years. Equity and banks cannot afford to be as liberal. That said, there is plenty of loan interest in the Central Texas area. Loan originations for most channels of real estate will benefit from pricing near cyclical lows, rising occupancy, rent and income growth. Further, stronger bank balance sheets and continued low interest rates will increase small business loans, aiding recovery in our regional demand.
In the coming weeks we will visit the other Texas metros and review their opportunities and needs.