How strong is our real estate market?

The strength of the home market in San Antonio and Austin continues to build as realtors and homebuilders record another strong quarter of activity, which will in all likelihood lead to a strong year.

I thought it would be good to address some of the questions we get for both markets.

“You keep saying that there is insufficient inventory to support the inmigration to Texas. Can you elaborate?”

First, lets discuss Austin’s new home market. At the end of last year, there were 14,855 developed lots on the ground, according to Metrostudy. Now, lot inventory has only increased by about 800 more, with over 1,500 delivered in the last ninety days. If the Austin market does 8,500 to 9,000 home starts this year, we won’t have enough lots for next year. Realize in Austin it takes around thirty months or more to go through the entitlement process to get a developed lot. Also realize that the vast majority of developed lots are already contracted for, even though there may be no activity presently on the vacant lots you see. So at the current rate at which lots are being delivered and absorbed by the market, production builders will not have enough lots by the end of next year. Again, it will take a while to get new lots entitled, putting pressure on supply, which in turn raises prices on what is left and what is coming down the pipeline. As higher lot pricing increases the price of new homes in many areas we expect some push back from the consumer, who will be forced to the resale market or more affordable locations.

San Antonio’s new home market had just over 29,500 lots at the end of last year, with approximately 2,500 lots being delivered this quarter. San Antonio home builders will build about the same amount of homes as Austin, with around 9,000 starts in 2013. At current absorption rates, that gives San Antonio about a 42 month supply of lots based on current start rates. In both markets 24 months is considered equilibrium. Above that is a buyer’s market, below a seller’s market. The entitlement process in SA is somewhat faster allowing development within 12 months if needed.

However in both markets the excess VDL (vacant developed lots) supply is concentrated in more remote locations where the recovery of the new home market may not occur for some time. So both markets will experience a tightened supply and greater demand.

“Everyone needs shelter, so if they can’t buy, will they be able to rent?”

Both markets are healthy, with about 143,000 units in Austin and 134,000 in San Antonio. This includes apartments, duplexes and most single family rentals. Austin occupancy remains around 96%, leaving just over 5,700 units to lease. There will be about 10,000 new units delivered in Austin, but with current job creation and inmigration they will be absorbed quickly.

San Antonio occupancy fell a little, to 94%, with just over 4,000 units being constructed this year. South Central and Southeast Class C properties brought overall occupancy down with 86% and 70% occupancy. With continued development in the Eagle Ford shale nearby, this could be an opportunity for investors.

Both markets should experience good absorption and appreciation as long as job creation continues. About 60,000 and 42,000 people per year are moving to Austin and San Antonio, respectively. This increased demand is what is driving the market.

“Do you expect this kind of demand to continue?”

Job creation, pricing, financing, convenience, and water will dictate the strength of the market. For the next 3 to 5 years Austin looks to continue with demand outstripping supply. It makes me nervous saying this because there are so many variables that affect this and I was around for the 80’s oil bust. That said, job creation continues to look good for longer than 5 years based on Austin’s recruiting, finance , regulations and the economic slowdown of the last 5 years. San Antonio began seeing this last year a solid improvement and should continue for the next 2 to 3 years.

“What are some new trends you are seeing in real estate?”

One dramatic change we are seeing in both markets is the demand for in-fill development in Austin and San Antonio. In-fill development is taking underutilized interurban parcels and redeveloping them. It typically starts with rental properties being remodeled to class ‘A’ in conjunction with restaurants and retail. This in turn generates demand for purchase product nearby.

An example of this is the Mueller Redevelopment, a 700-acre Planned Unit Development (PUD) in the northeast central portion of Austin. The project is being developed on the former site of the Robert Mueller Municipal Airport, which closed in 1999. There is projected to be 4.2 million square feet of non-residential development, anchored by the 30-acre Dell Children’s Medical Center, Dell Pediatric Research Institute, the first building in The University of Texas Health Research Campus, the administrative headquarters of the Seton Family of Hospitals, SEDL, Strictly Pediatrics Subspecialty Center, and more than 20 retail stores and the Austin Studios film production complex. In all, there will be 650,000 square feet of retail, 4,600+/- homes, and 140 acres of open space. Mueller embraces and provides opportunities for using the ‘form based cores’ the city is seeking in redevelopment. The projected economic development and job creation is to be done in a way that complements and extends the compact and pedestrian-friendly pattern of the community. Mueller will be home to as many as 10,000 jobs,

A few miles from site is Highland Mall. Once a jewel of shopping in Austin, the last five years have been a challenge with major stores leaving and the owner’s facing financial problems, leaving over 1.2 million square feet of retail empty. Austin Community College has partnered with a developer to bring a high density, pedestrian friendly environment with 1.3 million square feet of institutional space, 1,200 residential units, 800,000 square feet of office space, and 150,000 square feet of retail space.

Following along the old Airport Corridor, starting at Mueller, going past Highland on down to North Lamar and Airport you have Crestview Station, a mixed-use development in Central Austin’s Crestview neighborhood. The plan is anchored by a Capital MetroRail station and will have approximately 500 single family homes, 500 multifamily units, 150,000 square feet of retail and commercial space, and green space. Crestview Station will be another high density, pedestrian friendly community in the near north corridor. All this should have a positive effect on the surrounding neighborhoods.

In San Antonio, the same factors for redevelopment are driving the Pearl Brewery redevelopment. A 22 acre conveniently located site was built as an independent brewery over a hundred years ago. When it closed in 2001, the city encouraged redevelopment using the existing facilities, embracing the old architecture and heritage of the site. When finished the proposed buildings will encompass 188,000 square feet of leasable space and will be used for a combination of multifamily residential, retail, restaurants, and office space as well as over 600 new trees and landscaping. Other parts of downtown San Antonio such as the old Judson candy factory are also being redeveloped, allowing an alternative choice to those who want to live closer to downtown.
All this redevelopment should have a positive effect on the surrounding neighborhoods, improving values and allowing an alternative to the traditional far-flung master planned communities. Ten years ago, in-fill development was nonexistent in Texas, and based on their current success should continue to be strong. But only time will tell. It definitely changes the neighborhood dynamics from ‘dying or deteriorating’ to ‘high demand’ in a short period. As the cost of land, materials, labor continue to escalate than these type of urban communities should continue their success.

Another dramatic change in new housing will be housing cost. Lumber futures are 30% more than they were a year ago and above boom prices, with similar increases for steel, sheetrock, and other materials. Why? During the recession the demand for these decreased dramatically, sending prices plummeting and closing mills and factories across the nation and the world. So expect material costs to continue increasing at least another 35% over the next three years. On top of those costs will be the cost of land increase. In a classic case of Economics 101, little supply and high demand will force land prices to continue to escalate for production builders.

The Central Texas region will continue to experience intense tremendous suburban growth. Although we have pointed out the enormous amount of residential development currently underway within the urban core, the thousands of new units being created there are only a drop in the regional bucket of total residential units needed. Even with the success of the urbanizing efforts currently afoot in Austin and San Antonio, there simply is not enough supply for the demand.

The purpose of this exercise was to show you how strong demand is and will continue to be in Austin and San Antonio and to make the case for buying in this market. With finance rates so low there is not a better time to buy. With every 1% increase.