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Addressing Increasing Demand in Austin’s Apartment Market

The-Arnold_Austin

Investment activity in Austin's office multifamily market accelerated in the second half of 2018 with sales of properties like The Arnold, a 346-unit complex located along East Sixth Street.

The Austin apartment market is currently experiencing significant growth. Increasing demand is driving more intensive development and developers are addressing tenants’ desire for a better experience. 

The result is the development of communities that capitalize on space to the fullest extent. Architects are providing extremely detailed designs of common area “living experiences” before properties are constructed. Examples of such designs include the final positioning of equipment in fitness centers, pool/cabana layouts, rooftop lounges and Zen gardens that are thoughtfully and efficiently planned to maximize the effect while being cost-conscious.

Sean Sorrell, HFF

The importance of garage layouts and identifying necessary parking needed has increased as we become more dependent on ride-sharing services like Uber and Lyft, as well as Lime and Bird scooters to move around the city.

Job, Population Growth

The key to the success of new developments and long-term investments is the ongoing population and job growth, future projections of which remain extremely positive. Austin enjoys a prime age (25 to 34) rental percentage that reportedly exceeds 30 percent, approximately 44 percent higher than the national average of 20.9 percent.

Additionally, we must take into consideration locals opting to move from single-family homes to rental communities in favor of more services and less upkeep associated with homeownership, as well as those who consider Austin their second home.

Finally, there is the ongoing growth  at institutions that have fueled Austin’s success from the beginning: the state government and The University of Texas at Austin (UT). These two pillars prosper even in economic downturns, and while the publicity of large employers moving into the city is important, the bureaucracy and the university are sustainable employment bases.

Strong job growth is fueling development of new Class A multifamily product like Society, a 262-unit project by Dallas-based Leon Capital.

Job growth remains at the forefront of the local economy. The recent expansions and announcements by Google, Facebook, Indeed and Amazon are beyond compare, and Dell’s move back into the public marketplace will bolster that company’s future as well.  

But one of the largest new employers in Austin came with a subdued fanfare: the Futures Army Command, which, in layman’s terms, is using the high-tech industries to prepare for military activities in the future.

While the employment of 500 personnel of this Armed Forces branch is notable, it is the related synergies that are most intriguing. First, several defense contractors are already looking for space in Austin, and it is not unusual to have multiple branches in one area. Thus, a related division of the Air Force or Navy could find its way here in the future. This could ultimately be Austin’s biggest announcement of 2018.

The Central Business District (CBD), Urban East and Domain areas will continue to see employment growth. The Domain has added more than 5,000 tech jobs since 2017. That figure could  hit 6,000 over a 36-month period, based on Amazon’s recent announcements. 

Development Opportunities

The Urban East is another dynamic job market with creative office space completed by notable developers Endeavor and Transwestern, along with additional recent announcements by Cypress and Cielo. Note these office buildings are being developed due to demand and not speculation.

As a result, demand for apartments in this highly desirable “renter-by-choice” submarket is enjoying a gentrification that is eye-popping. Recent transactions on The Arnold and 7East reveal an investor market that is now pricing these assets as core investments.

The CBD is in an ongoing transformation from an 18-hour city to The Wall Street Journal’s new moniker of “Superstar City.” Joined by notably larger markets like New York, Boston, San Francisco and Seattle, this is a true challenge the city will face to meet the expectations of employers, their personnel and investors when compared to these other national heavyweights.

Several significant developments are in process with HFF’s recent sale of McCourt’s Waller Creek development to WeWork. The planned office building will only partially cover the site and the area’s development potential, including Endeavor’s 93 Red River, can service the new anchor tenant with upscale housing in one of the CBD’s gentrifying areas.

As density and demand increase in these areas, many question what areas are underserved in terms of certain types of urban development and/or renovation. In this context, the importance of the employment of state and university personnel comes full circle.

Central Austin has experienced some apartment development in the last several years, but it does seem muted compared to the other submarkets. Historically, there was strong demand in this area from college students. But the vastly expanding West Campus student housing development activity is removing this pressure, thereby increasing the opportunity for conventional tenancy. There have been some excellent developments within this area, but considering the appeal, it would seem underserved, especially in terms of an uber luxury living asset.

Multifamily fundamentals remain strong, with 2018 statistics showing occupancy approaching 94 percent citywide and year-over-year effective rental rates up 4 percent.  The CBD led the way with an astounding 11 percent year-over-year rent growth figure.

Gables Republic Park’s 221 units will be the only CBD delivery this year, so expectations are similarly strong for 2019. Across the metro, approximately 9,000 units were completed, but absorption exceeded 10,000 units. Early reports show very strong continuation in 2019 after the first 45 days flurry of rental activity.

Transactions

On the transactional front, the city enjoyed a very strong market, but was perceptively slow “out of the gate” in 2018. The second half of the year saw the largest sales with Northshore, The Arnold and Stonelake’s Groves South Lamar commanding core pricing.

Significant suburban transactions include Tacara at Steiner Ranch and the HFF sale of two Mansions assets: Travesia and Stonehill. There will be significant investment opportunity this year that will be led by new-construction assets that have stabilized.

Investment capital remains abundant with many institutional advisors continuing their efforts to enter and/or increase their presence in the market. Family office activity has increased dramatically, and international investment interest is at an all-time high. Investors from Mexico, Canada, Europe, Middle East, Asia, South America and Australia remain active in the market. 

Conclusion

Market fundamentals are strong and the investment world is taking notice. Comments at industry events project Austin’s CBD and the surrounding area to be one of the most gentrifying markets over the next 10 years.

While the future appears bright, it remains to be seen how the city addresses the challenges associated with its attention and acclaim. However, investors’ perception of the city has changed, with more confidence that Austin will remain in the top echelon of apartment investment markets for the foreseeable future.

By Sear Sorrell, senior managing director, HFF. This article first appeared in the March 2019 issue of Texas Real Estate Business magazine.

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