Patton Jones, ARA Austin Office
Austin continues to be one of the hottest multifamily markets in the country due to its exceptional economic and population growth.
According to Angelou Economics, Austin gained 39,100 jobs in 2014, a growth rate of 4.5 percent. In the 12 months ending in November 2014, Austin experienced an unemployment rate of 3.9 percent, well below the national average of 5.6 percent, according to numbers published by the U.S. Bureau of Labor Statistics. Fueled largely by the city’s increased hiring in the tech sector, Austin had an in-migration of 66,000 people in 2014, a growth rate of 3.5 percent.
The city attracts residents from all over the country due to the low cost of living, the University of Texas college atmosphere, the beautiful hill country setting, and internationally renowned events such as Austin City Limits, Formula 1 Grand Prix and ESPN’s Summer X-Games to name a few.
Supported by technology, creative industry jobs and the seat of state government, the Austin MSA was recently ranked No. 2 on Forbes magazine’s list of “America’s Fastest Growing Metros,” down from the No. 1 position the city held for the previous four years.
The U.S. Census Bureau estimates Austin will exceed 2 million residents by 2016 and grow by 33.6 percent over the next 10 years. The Austin metropolitan area population grew by 3.5 percent in 2014, compared to growth for the entire state of Texas of 1.7 percent. The city also ranks No. 2 among 2014’s best performing cities, according to the Milken Institute’s latest report. It is no surprise, then, that companies like Dell, Whole Foods Market, Samsung and Apple choose to call Austin home.
Employment and population growth are the foundation of a healthy multifamily market. The Austin MSA experienced 94 percent occupancy and $1.25 per square foot average effective rental rates across all product classes as of the fourth quarter of 2014, according to Austin Investor Interests.
The annual rent growth was an impressive 5.2 percent, and average rental rates have been steadily increasing for nearly five years. With 47 percent of the metro’s working age population between the ages of 20 and 44 and the well-paid young professional preference for renting, Austin is a prime market for apartments.
Investment Trends
Austin remains a popular destination for institutional and private multifamily investors. The solid market attracts a variety of investor types and it is common to receive eight to ten offers for a fully marketed asset.
In 2014, bidders for Class A properties included pension fund advisors, public and private REITs, private family offices and foreign investors. These groups used all cash or low leverage in their acquisitions. Syndicators, private owner/operators and value-add funds pursued Class B and C properties.
These groups typically used high leverage Freddie Mac and Fannie Mae loans in their acquisitions. Core Class A cap rates range from 4.5 percent to 5 percent, while suburban Class A product has traded in a range of 5.25 percent to 5.75 percent.
Class B and C product cap rates have compressed due to the ever-popular value-add trend, as well as record low interest rates, recently trading in a range of 5 percent to 5.75 percent dependent upon vintage and location.
Core Class A product has traded in the $200,000 per unit range. Suburban Class A product has traded in the $125,000 to $145,000 per unit range. Class B product has traded in the $80,000 to $100,000 range, while Class C apartments have averaged $55,000 to $75,000 per unit.
The most popular investment trend in Austin today is in the value-add category. Investors are targeting ‘80s- and ‘90s-vintage properties and conducting kitchen and bath upgrade programs.
The investments range from $3,000 to $10,000 per unit and may include new appliances, granite counter tops, lighting and hardware packages, two-inch wood blinds, faux wood floors or stained concrete and the addition of patio dog yards. In some cases, investors are upgrading and modernizing the clubhouse and amenities at an additional cost. The post-rehab average monthly rent increase in Austin today ranges from $75 to $150 per unit, or $0.04 per square foot, depending on the level of finish.
Conventional Supply High
There are roughly 14,000 units currently under construction and expected to deliver over the next 24 months. Due to a high level of supply in the last 18 months, equity providers are cautious when analyzing new construction projects.
Great sites always get financed and average sites have been extremely hard to finance. It is commonly believed that this healthy, cautious approach will lead to decreased starts and deliveries in 2016 and 2017.
Due to robust job growth and in-migration, absorption has kept pace with deliveries and citywide occupancy hovers in the mid 90 percentile.