Austin and San Antonio midyear review

It’s time for a midyear review of our real estate markets in Texas. This week we will start with what is happening in Central Texas and San Antonio. The underlying theme is the continued job growth in Texas and all the benefits it brings.

Not only does Texas have a rapidly growing job market, it also has an exceptionally large GDP of $1.5 trillion in 2013. It was second highest nationwide last year and greater than the combined GDP of the following nine states combined. GDP growth exceeded the national growth rate by a large margin in each of the last three years.

By most measures, including employment and economic output, Texas recovered from the recession a couple of years ago. Booming oil production is named as one of the largest factors contributing to the economy’s strong growth. The mining industry, which includes oil production, accounted for 13.5% — well over $200 billion — of Texas economic output, five times the sector’s contribution to the national output. But over the last 15 years over 40% of all jobs have been created in the health and education industry. Texas total nonfarm employment increased by 64,100 jobs during April 2014. Between April 2013 and April 2014, Texas total nonfarm employment increased by 348,000 jobs or 3.1 percent.

The Texas unemployment rate was 5.2 percent for April 2014, down from 6.4 percent a year earlier in March 2013. The Texas unemployment rate has been at or below the national rate for 88 consecutive months / 7+ years. The second part of that story is the lack of inventory in most real estate channels and the continued buildup of demand.

San Antonio

Home to one of the largest medical facilities in the nation, San Antonio has seen strong job growth from military medical operations. This is welcome news as the national defense budget has been cut dramatically. Ambulatory health-care services combined with new technology has created more than 12,000 jobs over the last five years and looks to continue for a while. Medical isn’t the only thing driving development. San Antonio is also home to the largest oil and gas development in the region in the Eagle Ford Shale. Record drilling levels and high-yield wells are pumping new jobs into energy and related sectors. In San Antonio the real estate downturn wasn’t as severe as in the rest of the nation. Government presence (three large military installations) has somewhat protected the market. However the lack of job growth (a net positive of 1,000 jobs over the last 12 months) in 2013 put a drag on optimism and the local economy.

The local housing market continues to improve with home resales increasing in value but with volume nearly identical to last year. Resale inventory is at 4.5 months (6 months is considered equilibrium) making it a seller’s market. New home starts followed a similar path with a slight increase in volume, but values improved dramatically. New home sale has seen an improvement in the upper end with luxury housing priced $300,000-500,000 dramatically improving 33%, and homes over $500,000 are 28% over last year.

In most markets developed lot inventory has been the biggest challenge. San Antonio lot inventory has increased each of the last three quarters thereby increasing the overall lot supply from 17,002 lots in 2Q13 to 18,384 lots as the end of the first quarter of 2014. This has helped to stabilize values and lot inventory and provide relief to high demand areas that saw their lot supplies diminish over the last three years. After 7+ years of little appreciation, land, labor and material are driving up the cost of lot development. This ‘catch up’ value increase has pushed the San Antonio affordability ratio where it is now virtually impossible to reproduce lots for new housing priced under $175,000.

Renter-household formation continues to be strong as broad-based employment growth continues to boost the San Antonio economy. The Alamo City is particularly benefiting from jobs generated by the nearby Eagle Ford Shale. Oil-field service companies have created thousands of jobs, bolstering hiring in a broad array of sectors including professional, health, education, and government. These jobs will support the addition of a projected 65,000 new households between 2012 and 2017, boding well for apartment operators. Wanting to capitalize on surging demand, developers are bringing 4,700 units to the market this year, concentrating on the Broadway corridor, northwest and north central San Antonio. In addition to the boom of the oil industry, the northern region is home to major employers such as the University of Texas at San Antonio, USAA and the Medical Center District. Although construction market wide is significant, strong demand will put downward pressure on vacancy, resulting in continued moderate rent growth.

The San Antonio apartment market is strong for a San Antonio market. While a 91.5% occupancy rate may seem low in other cities, San Antonio’s stability at this rate continues to attract investors. In the past four years, there has been over 13,250 new units added to the local inventory, yet occupancy has fluctuated minimally, showing less than a 4% difference between the highest and lowest occupancy rates during that time. In addition, rental rates have continued to creep up, increasing almost 20% over the four-year period, to reach a current record high of $0.99 per square foot. With this stability developers are enthusiastically building in this market and investors are eager to buy. There are currently 10,846 units under construction in San Antonio. In addition, the next 12 months are expected to see approximately 7,900 more units break ground. Much of this construction remains concentrated in the northern and western outskirts of the city where demand is strong. While this area was previously undeveloped, and thus, under-served by the multi-family market, there is a concern that these areas may become overbuilt. Occupancy rates have remained relatively flat, increasing only .26% during the quarter. If this was indeed the case, expect occupancy levels to increase a bit more dramatically during the second quarter, as new unit additions should be less than the 1,520 units added this quarter.

Expect to see apartment construction continue at a brisk pace, while occupancy rates should increase during both the second and third quarters. Rents will continue to creep along, while investor interest will remain high, fueling additional sales.

Office construction will remain below the five-year average in 2014, due to continued office surplus in the CBD. Northern San Antonio receiving most of the new inventory as employers seek locations near the growing employment base. Class A office vacancy in Northwest San Antonio has fallen since peaking in late 2011, and a number of speculative developments are underway. In far West San Antonio, the presence of major corporate data centers including Microsoft, Chevron, and Valero motivated Stream Data Centers to build a second facility in the region. Through all this the improving office and greater space demand has put upward pressure on rents this year.

Local and out-of-state buyers will target traditional office properties in the North San Antonio, Northwest, Far North and Far West submarkets. Proximity to the large employers such as the medical district and universities will keep these submarkets desirable to investors. On average, first-year yields in San Antonio start in the low-7 percent range for Class A assets, while Class B properties typically trade in the low-8 to low-9 percent range.

Positive momentum will increase investor competition, placing upward pressure on prices and encouraging sellers to bring assets to market. Last year, listings were limited and almost exclusively Class B properties. Though available inventory is tight, it will expand as merchant builders and impending loan maturities boost listings of Class A and Class C assets. Generally, Class A units change hands at cap rates in the high-5 to 6 percent range, while Class C properties start trading in the high-7 percent range. Investors with a high risk tolerance will target outlier markets such as New Braunfels and Boerne where cap rates trend higher. Acquisition financing is more available as regional banks, flush with cash flow from Eagle Ford Shale, are playing a more active role in smaller unit lending.

The technology strength is obvious to those that live in San Antonio, with the explosive growth of Rackspace and Geekdom. The city was ninth in job growth over the last five years. A nationwide restructuring of military bases could lead to many new jobs. So on many fronts those looking to find opportunity have a lot of options in the Alamo city.


The Austin metro area continues to get plenty of positive economic press. Nationally, Austin has come in the top five major metros for job growth over the last five years, due in large part to a more diversified economic base. Homegrown tech companies like Dell, National Instruments, as well as foreign investment such as Samsung (with the largest foreign investment in the US in Austin) and others complement incoming companies like Apple and IBM (which both now have large bases in Austin), as well as startups coming out of the University of Texas. When you look at the explosive growth of new tech companies such as Homeaway, Bazzarvoice, Invoto and many others, the economic future is obvious.

Austin is one of the strongest residential markets not only in the state, but the nation. Austin-area homes continued to sell at an accelerated rate, decreasing the average days on market by five days year-over-year, down to 45 days in April 2014. At the same time, monthly housing inventory decreased 0.4 months year-over-year to 2.3 months. (Six months is equilibrium – above six months it is a buyer’s market, below a seller’s market). The market also featured two percent fewer new listings, three percent fewer active listings, and six percent fewer pending sales in April 2014 compared to the same month of the prior year.

More than 11,000 apartments are scheduled for delivery in the next 12 -15 months, which will put upward pressure on market wide vacancy during lease-up. Normally, more units increases vacancy rates, but due to Austin’s 95+/-% occupancy, rent values continue to improve, although not as rapidly as the last 4 years. The local rental market remains tight with rent values increasing. The balance between buyers and sellers in the market will begin to align this year, though multiple bids per listing will remain commonplace in the early part of 2014. A number of factors will materialize that encourage apartment owners to divest in the coming months. Rising interest rates will place upward pressure on cap rates, signaling to some investors that the market has peaked. As the year commences, cap rates are generally in the low-5 percent area for core listings and move up to the low-6 percent range for 1980s class ‘B’ assets.

Austin’s decision to back a new medical school that will open in the fall of 2016 will help attract many more in the medical field – research, as well as support industries and practitioners. Partnering with the university and the strength of the other medical centers in Texas will allow the state to become much more attractive on a global scale to many. Couple that with the nation’s aging population, you can see the strength of the economic argument.

Austin business leaders plan is to maintain its high-flying output over the next number of years as it focuses on clean technology, data centers, digital media, biosciences, and other industries.

In addition, other real estate channels such as office are benefiting from the strength of the market. Several recent corporate relocations and expansions in the thriving high-tech economy will push down vacancy in Austin this year. Google Fiber will also make its debut in the market, providing resources and opportunities for further development of high-tech industries. Builders are increasingly optimistic, capitalizing on strong demand by proceeding with several build-to-suit and speculative developments in the CBD and northwest Austin. The CBD will be home to the new IBC Bank Plaza and Colorado Tower, which will collectively add more than 565,000 square feet of office space.

Construction of the Dell Medical School at the University of Texas will attract and spur the development of healthcare and ancillary services in the CBD and university area and has already affected values east of I-35. Additional expansions will result in the highest net absorption in five years, allowing operators leverage to raise rents. Close to 2 million square feet of additional office space has been announced for development. With current employment growth, current office projections and absorptions seem to keep ahead of demand.

Substantial employment growth and improving operations will draw additional investors to the Austin market this year. Local buyers will target value-add opportunities in suburban submarkets, including Northwest and Southwest Austin to capitalize on upside potential. These assets generally trade at cap rates near 7.5 percent. Properties with less than 50,000 square feet will account for the majority of these transactions

In future weeks we will review the other major Texas metros and cities and see where they stack up in comparison.

Texas is a state that is seeing great job creation and a better-than-national real estate market, and both metros reviewed are truly blessed with good absorption, lack of supply, strong rentals, etc. Sales and appreciation have increased, but if you look over the last 5 years, it has been stable and comfortable growth current projections show that trend continuing.