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Population and employment growth are providing a substantial boost to the Austin apartment market. Metro-wide vacancy is hovering in the mid-4 percent range and is 150 basis points below the average historical rate. Rents also increased measurably. In addition to rising job and resident totals, limited new apartment product in recent years supported an average quarterly rent growth of 1.2 percent, compared to three-month gains of roughly 1 percent in the year prior to the recession.
The most notable economic news in the metro is Apple Inc.’s substantial expansion. Over the next eight years, the company will construct and staff a 1 million-square-foot, 39-acre development in Austin’s Far Northwest submarket. Day-to-day operations will yield more than 3,600 new hires, doubling the metro’s number of Apple employees.
In the near-term, LegalZoom Inc. plans to add 600 new employees before the end of the year. Additionally, Accenture and General Motors hired a combined 700 workers during the first half of 2013.
Beyond the large job announcements, both small and large businesses are hiring, attracting new residents and fueling apartment demand. In the 12-month period ending in the second quarter of this year, total nonfarm employment in Austin increased by 28,900 positions, a gain of 3.5 percent. During that same period, nationwide employment expanded at 1.7 percent, less than half the local rate. Furthermore, of the major Texas metro areas, the Austin unemployment rate of 5.4 percent is the lowest in the state, 70 basis points below Corpus Christi and 90 basis points under both Dallas/Fort Worth and San Antonio.
Not surprisingly, the robust job creation helped lift the Austin population. The number of residents increased by more than 50,000 people last year, a gain of 2.8 percent. Additionally, each of the key renter age groups increased in 2012, particularly the 30- to 34-year-old cohort that expanded by 3.5 percent, or 5,300 people.
Apartment net absorption has surged with the influx of residents and the rise in payrolls. Since mid-2012, Austin apartment operators posted net absorption of 5,175 units. The leasing activity brought down vacancy 40 basis points to 4.5 percent during that stretch, below historical averages.
On a submarket level, vacancy is healthiest in the Near South Central submarket, with vacancy hovering at an estimated 3.7 percent in the second quarter of this year. While vacancy for each property class is relatively tight in this part of the metro, demand is greatest for well-located Class C properties. In this segment, operationally sound lower-tier properties are posting vacancies in the mid-3 percent range, with rents roughly half that of the submarket’s Class A units. Meanwhile, operators of best-in-class assets in the Near South Central submarket are noting vacancy in the mid- to high-4 percent range. Elsewhere, the Central, Far Northwest and Far South submarkets are posting vacancies below the marketwide rate.
Like many other metros, Austin rents declined during the recession; however, the cuts were relatively modest, and the rebound in rates has been significant. From mid-2010 to late-2011, when inventory growth was muted and Austin staffing levels expanded at three times the nationwide rate, metro-wide asking rents advanced nearly 10 percent. In the past 12 months, asking rents ascended 4 percent to $1,017 per month.
Outsized job creation, combined with the ability of Austin’s apartment owners to quickly raise asking rents, has bolstered development activity. Permitting activity, an indicator of future supply growth, reached an annualized rate of 13,900 multifamily units in June, up 79 percent year-over-year.
Apartment stock will grow through the rest of the year, with roughly 2,000 new units expected during the second half of 2013. Supply is expected to keep up with demand this year; but, the nearly 9,600 apartments slated for next year will cause vacancy to tick up. Over the next 18 months, completions will be particularly elevated in the Highway 183/Cedar Park/Leander and Far South submarket, with notable supply growth in central Austin, too.
The rise in construction activity has not deterred investors.
As George Deuillet III, senior vice president in Hendricks-Berkadia’s Austin office noted, large equity funds are aggressively pursuing Class A product in Austin. These investors are also targeting well-located, Class B product. Deuillet anticipates continued demand for these assets, especially in opportunities when purchases can be funded with new debt.
Additionally, cap rates are in the mid-4 percent to mid-5 percent range for top-quality product, with Class B/C initial yields between 5.75 percent and 7 percent, depending on location and renovation needs, according to Deuillet. While cap rates have compressed to historic lows, the recent uptick in interest rates may put some upward pressure on cap rates going forward.
— David Delich, senior director of research, Hendricks-Berkadia