By Andrew Dickson, managing director, Newmark
Almost daily, Newmark’s Central Texas multifamily capital markets group speaks with investors looking to enter the Austin multifamily market.
With headlines aplenty about corporate relocations to the city, investors are often looking to trade tax-burdensome environments for business-friendly ones like Texas. What is driving the interest, and what is it actually like buying multifamily assets in Central Texas today?
Andrew Dickson, Newmark
Economic Synopsis
According to data from Opportunity Austin, the economic initiative of the Greater Austin Chamber of Commerce, more than 100 companies have made relocation or expansion announcements in Austin, resulting in over 15,000 jobs pledged through June 2021.
Opportunity Austin tracked 22,114 new jobs announced in 2020 — a record-breaking year — and the city is presumably on its way to another record-setting year in 2021.
It is worth noting that many of the jobs announced in 2019 and 2020 are still forthcoming. Like many industries, tech firms often cluster together. Whether relocation announcements are due to existing synergies with other firms or cost-reduction strategies, we anticipate the trend of tech or tech-adjacent companies moving to Central Texas to continue.
Due to these local shifts, as well as macroeconomic housing impacts, the single-family housing market in Austin is as active as we’ve ever experienced.
The Austin Board of Realtors recently reported that the median home price in Austin reached $575,000 in June, a 30.9 percent increase from June 2020. In April, Austin had only 0.6 months’ supply of single-family inventory, which sent many would-be homeowners into apartments, positively impacting multifamily owners and developers.
While multifamily rents are up in nearly every major metro area coming out of the pandemic, Austin’s rents are trending toward unprecedented levels of growth this year. According to CoStar Group, Austin is on pace for approximately 20.1 percent year-over-year rent growth by the end of 2021, with rents increasing from $1,301 to $1,562 per month.
Nearly every developer we speak with has shared that his or her company is executing more than 50 or 60 leases per month and can’t seem to deliver units quickly enough to keep up with demand. The previous
high-water mark for annual multifamily absorption in Austin was just over 11,200 units; 2021 absorption is trending toward over 15,500 units.
With about 20,000 units currently in various stages of construction, an estimated 50 to 60 percent of those units will deliver over the next 12 months. All of that is to say that these incredibly strong multifamily fundamentals in Austin are here to stay.
Demand Drivers
In terms of multifamily capital markets transactions, all asset profiles — value-add, core-plus and core — have received outstanding interest and demand. This demand is due to three primary factors: the macroeconomic environment; pent-up buyer demand after several months of minimal transaction activity in mid-2020; and shifting investor interest from other regions and asset classes, such as office and retail, to Sun Belt multifamily product.
Due to the competitive landscape, buyers are increasingly putting up hard money at contract execution and tightening other terms to win marketed deals. Interest is as strong as ever, from both private and institutional investor bases.
Many buyers in Austin are currently shifting their focus away from trailing cap rates and toward forward-looking organic rent growth or business plan execution as ways to satisfy their respective return thresholds.
The sheer number of groups interested in any single listing can often lead to price increases of 5 to 10 percent from initial offers to the final awarded price. In addition, a wide array of incredibly attractive debt options is fueling this competitive bidding.
Most of the properties our team has sold this year have had some component of value-add upside. In most
cases, bridge lenders and debt funds have been lending at around 70 to 75 percent (or higher) loan-to-cost ratios, which has attracted private syndicator buyers that historically would have been maxed out on pricing due to lower leverage constraints.
For buyers looking to break through with a first Austin multifamily investment, the feedback our team is receiving is that it feels like a fast-moving train. The diligence and perspective of every investor we’ve worked with over the past several years has been rewarded. Rent growth and asset appreciation will continue as businesses and people target Austin as a place where they can successfully live, work and play.
— This article first appeared in the July 2021 issue of Texas Real Estate Business magazine.