Amid Capital Markets Freeze, Investors Still Love Central Texas

by Taylor Williams

By Taylor Williams

The growth story of Central Texas is compelling enough that commercial developers and investors are still aggressively targeting the region, even as costs of doing business hit the roof. In fact, both cities recently cracked the Top 10 on Urban Land Institute’s list of markets to watch in the organization’s Emerging Trends report for 2024.

To dispense with the bad and obvious, the region — loosely defined as the swath of land bookended by the Austin and San Antonio metro areas — is not exempt from wide-ranging industry headwinds. Newer trends like working from home, as well as entrenched issues like a shortage of affordable housing and crushing interest rates, impact deals and projects in high-growth markets perhaps even more harshly than their smaller counterparts. This is simply due to the principles of supply and demand. 

Further, the region faces homegrown challenges stemming from a decade-plus of hyper-accelerated expansion, namely a skyrocketing cost of living and insufficient infrastructure to support demand from tenants and residents. 

But the fundamentals of job and population growth remain so robust in Central Texas that buyers and builders, particularly within the industrial and multifamily spaces, can still invest and develop in this costly environment without real fear of compromising healthy long-term returns. That is a challenging premise to actualize when interest rates quintuple in less than two years and capital sources clamp down, but it’s also a story that has been selling itself in the region since long before the Federal Reserve declared war on inflation. 

Market Highlights

The Austin Chamber of Commerce projects that the state capital MSA will have experienced a 27.8 percent population increase at the culmination of the 10-year period ending in 2030. In addition, a 2021 study by the Alamo Area Metropolitan Planning Commission found that the metro area of San Antonio — a regular placer on lists of top-growing markets over the last decade — will top 4 million people by 2050. The U.S. Census Bureau anticipates that by 2030, there will be somewhere between 6.5 million and 7 million people combined living in the two metro areas.

The Bureau of Labor Statistics reported that Austin’s unemployment rate in August was 3.9 percent, just a shade above the national average but actually up considerably from 3.1 percent at the beginning of the year. According to information from The Federal Reserve Bank of Dallas, San Antonio’s unemployment rate also spiked in 2023, jumping from 3.8 percent to 4.4 percent over the summer as layoffs rocked corporate America. Yet the city remains an attractive destination due to its affordability and economic diversity, marked by budding, recession-resistant industries like healthcare, insurance and cybersecurity. 

The bottom line is that these cities — and the municipalities that lie between them — are still places that commercial developers and investors want to be. And given the aforementioned local trends and recent patterns of commercial growth and preference in general, industrial and multifamily have emerged as the biggest real estate beneficiaries of growth in Central Texas. This is especially applicable to the renowned I-35 and State Highway 130 corridors.

“A lot of multifamily buyers we talk to want to buy right now,” says Patton Jones, vice chairman of the multifamily capital markets division at Newmark’s Austin office. “They see Central Texas as one of the best places to be invested 10 years from now based on the quality of the employers, the amount of jobs that are coming and the amount of land that these companies have amassed.”

“We’re still getting about 25 offers on anything we bring to market, and buyers consistently say they love the
long-term prospects and story of Central Texas and want to take advantage of short-term fluctuations in pricing and cap rates,” he continues.

John Colglazier Jr., partner at the San Antonio office of Partners Real Estate, sees similarities in the local industrial scene, even if the underlying numbers  are less spectacular than they were a couple years ago.

“There’s tremendous demand for Tier 1 sites with good stories and tenancy in traditional markets, as well as anything along the corridor with direct interstate access and maybe some frontage,” he says. “Those deals aren’t trading at the crazy prices we saw 18 months ago, but it also wasn’t sustainable to see deals routinely trading at sub-4 cap rates. So it’s really more of a normalization that Central Texas is seeing as opposed to a slowdown.”

Colglazier cites nearshoring of U.S. manufacturing operations, growth of international trade with Mexico and ripple effects from mega-projects as the key drivers behind the sustained interest in Central Texas industrial sites and facilities. 

“There’s so much to be excited about in Central Texas — we’re on the front end of nearshoring and have only scratched the surface of what Samsung’s impact on the region will be,” he says. “And with so much capital still on the sidelines, we should see transaction volume rebound in the first half of next year.”

Sources acknowledge that rate hikes have, unsurprisingly, hurt deal volume. But it’s not for lack of demand on the buyer side, but rather sellers of land and stabilized assets generally not being pressed to sell. That reluctance speaks volumes to the long-term potential for growth and financial appreciation that exists within the region. 

“There is a disconnect between buyers and sellers in Central Texas,” says Jones. “While sellers may have reservations about today’s pricing due to an increase in cap rates and interest rates, buyers are actively seeking opportunities to buy the dip and take advantage of what is widely considered to be a short-term downturn. They anticipate that eventually rates will decline and supply will slow, putting them in a desirable position.” 

“Capital markets have slowed and new development has drastically declined, but we anticipate a strong rebound as the capital markets recover, interest rate settle down and [multifamily] deliveries dwindle,” he continues. “When you apply a long-term lens, this is a great location for long-term growth, complete with a transportation artery. The 130 corridor is the catalyst for growth on the east side of the city — Amazon and Samsung to the north, Tesla to the south and municipalities in between that benefit from the huge employment growth.”

Mega-Project Impacts

In Austin, the emerging, large-scale employment drivers are more company-specific, but equally explosive. Tesla’s GigaFactory in southeast Austin and Samsung’s semiconductor manufacturing facility in Taylor, a northern suburb, are real game-changers, accounting for thousands of acres and new jobs and billions in capital investment.  

“The major driver of growth here is the activity of the big employers — Amazon, Samsung, Tesla, Meta, Oracle, Indeed and more — all having major establishments in Austin, which is the key provider of jobs to the area and what spurs the real estate growth,” says Logan Reichle, first vice president at CBRE’s Central Texas office.  

“That’s plainly visible, but what’s not seen is the smaller businesses that support those companies,” he continues. “The number of users that dovetail off Samsung, Tesla and others provide another layer of jobs that continues to fuel Austin’s growth, from top-tier executive jobs and innovation/technology folks to the manufacturing and warehousing workers that do the back-end work.”

Adam Rabin, Reichle’s partner and a senior associate on the CBRE Central Texas capital markets team, adds that the ripple effects of Austin’s mega-projects are visible even further north.

“There’s a large chip manufacturing operation in the Killeen industrial park that’s tied to Samsung in Taylor,” he says. “We are seeing smaller Central Texas markets benefit directly from something in the Austin area. Additionally, Meta is constructing a large data center in Temple, so some of the industrial parks in these cities are seeing growth after having been somewhat stagnant for many years.”

According to local industrial brokers, there are literally hundreds of deals/requirements in the market right now that are tied to these mega-projects. 

“We’ve yet to see the full impacts of Samsung’s project in Taylor, but regarding Tesla’s mega-project, we’re seeing an influx of requirements for the industries and vendors and suppliers that support and work with them — everything from consoles to tires to electronics,” says Ace Schlameus, managing director of industrial leasing at JLL’s Austin office. “For a long time, the only groups in this market that took that much space were mega
e-commerce groups, but Tesla has leased a significant amount of space themselves now that they’re running out of room at the GigaFactory.”

In January, the electric vehicle giant filed plans with the Texas Department of Licensing & Registration to spend more than $775 million to expand the GigaFactory. Tesla has also signed multiple leases at Kyle 35 Logistics Park, a 1.3 million-square-foot industrial development by Alliance Industrial located along the I-35 corridor south of Austin.

Landing bursts of tech talent is nothing new for Austin — Tesla relocated its headquarters to Austin in 2022 after Oracle did so in late 2020 — but these industrial projects have major real estate implications beyond office and retail usage and absorption within the urban core. And all those people working those new jobs will need places to live.

Colglazier sees Tesla’s major splash in Austin as a sort of culmination of the long-running growth in the automotive industry in Central Texas, which in his view began about 15 years ago when Toyota opened a 2,000-acre manufacturing facility in San Antonio.

“Tesla rode on those coattails, taking advantage of the strong labor pool in South Texas and proximity to Mexico, which is a big advantage as we see more nearshoring,” he explains. “Tesla represents a hybrid of the automotive and tech industries and has further entrenched Austin not only as a tech manufacturing and fabrication center, but also as another major piece in the automotive story of south-central Texas.”

Navistar was among the next wave of big automotive users to commit to San Antonio. The Illinois-based truck and bus manufacturer debuted its $250 million, 1 million-square-foot facility, which fronts I-35 and links supply bases in the United States and Mexico, in early 2022. 

Other sources concur that a sort of chicken-or-egg scenario exists in the area with regard to the labor that large-scale industrial operators require. But regardless of which came first, the quality and supply of labor and the launch of mega-projects are now feeding off one another.

“The population explosion impacts the companies that want to be here to service the existing population and take advantage of where the market is headed, and those companies are now in the process of providing jobs for the people who are here,” explains Schlameus. 

“It’s tough to say which came first — the population growth sort of started happening, but it’s made it more attractive for these groups to plant their flags,” he continues. “Then it becomes more attractive to move here because there are more job opportunities. It’s a natural evolution of communities into denser areas that require more services, retail, schools, housing and medical services.”

Indeed, retail and restaurant scenes are growing and to some extent improving in smaller, yet fast-growing communities in Central Texas. Austin has long been known for its chic and trendy food-and-beverage scene, and with spaces in the urban core both limited and highly expensive, operators are finding value in suburban pushes.

Brad Bailey, senior vice president and head of capital markets at CBRE’s Central Texas office, sees this piece of the regional evolution as both a factor of natural growth patterns and the prevailing work-from-home movement.

“We’re starting to see more new retail and restaurant concepts infiltrate some of those suburbs, and for the same reason that those work-from-home models have been challenging for office, it’s been very advantageous for retail,” he says. “We’re seeing that traveling up and down the I-35 corridor between Austin and San Antonio or living a bit more remotely and having a hybrid work approach has helped the suburbs and the corridors grow faster.”

All of this evolving activity appears to be exactly what’s happening in the communities that dot the I-35 and State Highway 130 corridors, which connect Austin and San Antonio. Buda, Kyle, San Marcos, New Braunfels, Seguin, Lockhart — the growth and densification of each individual municipality represent a step in a larger process of bridging the entire region into one giant metroplex. 

With huge changes occurring in how people work, the notion that Austin and San Antonio will eventually function as endpoints of a single mass market becomes more plausible by the year.

Infrastructural Concerns

Sources interviewed for this story expressed varying degrees of concern about the region’s ability to develop and maintain critical infrastructure to support development of new housing and residential product. This includes a comprehensive mass transit system to link various municipalities.

It’s a trade-off that seems inevitable given the outsized paces of growth that various cities in Central Texas have seen. In some ways, their charm as residential locales is part of what inhibits their ability to match supply with demand in terms of real estate development. 

“When you have an attractive area to live, there’s a finite amount of land, water and roads, which is part of what makes it an appealing place to live,” says Schlameus. “But for developers and users, there are limitations on what you can build due to zoning and entitlement issues, plus it takes longer to permit in this market.”

Unsurprisingly, pockets that have experienced the most fervent paces of in-migration and new development are facing issues, in terms of land, roads and water/sewer services.

“Because of how fast some of these smaller cities to the east of Austin have grown, there’s not yet enough taxpayer money to develop the infrastructure they need, and we’ve seen real issues with supporting the pace of growth,” says Bailey.

Bailey further notes that this is a particularly pronounced issue in the areas surrounding Samsung’s plant in Taylor. But as one heads south toward San Antonio, the supply of and access to key utilities and other pieces of infrastructure eases, allowing municipal organizations in the likes of Buda, Kyle, San Marcos and New Braunfels to keep pace with the growth.

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