Since the Great Recession, a strong, steady pace of job creation has attracted thousands of new residents to the Texas capital.
This growth has subsequently provided numerous job options for locals, pushing the area’s unemployment rate to 3 percent, one of the lowest in the country. Sinking unemployment, along with wages that have grown faster than the national rate, have spurred robust household formation trends over the last few years, benefiting the local housing market.
Rents vs. Mortgages
While the volume of apartment deliveries remains elevated compared to historical averages, favorable demographics and a shift in residents’ attitude toward homeownership keep demand for units strong.
Rising home prices, especially within the city of Austin, have many residents looking to apartment living, as the concept of homeownership is fiscally out of reach. At the end of last year, the average effective rent of approximately $1,200 per month was $750 less than the monthly mortgage payment on a median-priced home, a disparity that has nearly doubled since 2012.
As a result, the area’s homeownership rate has plummeted, clocking in at just over 50 percent in the third quarter of 2017, down from a high of 71 percent in 2006.
Craig Swanson, Marcus & Millichap
As the renter population has grown, apartment developers have increasingly targeted the Austin area, adding nearly 50,000 units over the last five years. Demand has been strong and positive net absorption fell short of these supply additions by just 6,000 units during that span.
Submarket Specifics
Apartment deliveries have been widespread, but the Downtown-University area has received the largest share of new stock since 2012, with roughly 5,000 new apartments having been completed.
Developers have also targeted the northern suburbs of Pflugerville-Wells Branch and Cedar Park, the southern suburb of San Marcos and the area bounded by MoPac Expressway, Highway 290, Interstate 35 and the Colorado River. More than 4,000 units have been added in each of these areas over the last five years and strong absorption has kept vacancy tight — below 5 percent in most of these locations.
In 2017, apartment builders focused heavily on East Austin, bringing 2,000 units on line over the course of the year. These additions increased vacancy considerably; the rate rose by more than 600 basis points to nearly 10 percent.
In 2018, deliveries are expected to hit a five-year low as developers shift activity away from areas of higher vacancy to Far South Austin (near Interstate 35) and Slaughter Lane, as well as in North Central Austin at The Domain. Approximately 3,000 of this year’s anticipated 8,300 units will be delivered in these two areas, up from a combined 650 units in 2017.
The largest project scheduled to come on line this year is in Far South Austin along the I-35 corridor. Dubbed Lenox Springs, the project is expected to be delivered during the fourth quarter and will add 400 units to the market.
This year, vacancy should remain in the low-6 percent range, ticking up slightly from 2017 as developers of recently completed properties compete for tenants. Much of the vacancies in Class A product lies in submarkets where deliveries have been highest, such as Riverside, Far South Austin and East Austin, where rates are rising above 7 percent.
The vacancy rate remains tightest in Austin’s Class B and Class C apartment stock — currently measuring in the low-5 percent range. The market is also seeing a gap of more than $500 in rents between these units and Class A apartments, which keeps many renters from jumping into newer, luxury rentals.
These trends in household formation and vacancy have attracted numerous investors to the metro in recent years, and competition for apartment properties has pushed pricing levels to nearly 50 percent above the previous peak achieved in 2007. However, a moderating pace of rent growth over the last couple of years has contributed to a normalization of price appreciation in the market.
Listings have been limited as investors have held on to assets and enjoyed increasing property values. The slower pace of rent growth and gentler increase in prices could spark additional listings this year that will be met with avid buyer interest as investors target the market for stable plays. Buyers familiar with the local market will be positioned to capitalize on inefficiencies on any asset, giving them the potential to generate future returns above 6 percent.
Properties located within central Austin and along the I-35 corridor from San Marcos in the southern portion of the metro to Georgetown in the north are highly sought-after. Growing suburbs such as Cedar Park and Pflugerville are also generating healthy investor interest. In addition, the thousands of luxury units coming on line continue to attract interest from sources of institutional capital and garner first-year yields closer to 5 percent.
— By Craig Swanson, regional manager, Marcus & Millichap. This article first appeared in the February 2018 issue of Texas Real Estate Business magazine.