Robert Kramp, CBRE
Michael Wardlaw, CBRE
Since 2011, Austin’s multifamily market has become one of the strongest in the state and nation. With stable job growth, demand is projected to remain strong. Marketwide occupancy hovered around 94 percent at the end of the second quarter of 2015, with rents increasing at a 6 percent year-over-year clip.
Austin and Travis County continue to rack up the rankings, with Thumbtack naming the area a top environment for small businesses and WalletHub naming it the best large U.S. city to live in. Headlight Data ranked Travis County the second fastest-growing financial services sector in 2014 and Austin came in as the number one city for startup activity on the 2015 Kaufmann Index.
Generally, the first question on everyone’s minds is how long this bullish cycle will last. With the development pipeline running at historically high levels, what is the impact on today’s market and how does the future look?
Apartment construction dropped off dramatically in 2010 and remained compressed until 2014. However, population grew incredibly fast during the construction trough, resulting in heightened demand. Today, there are 16,000 units in some stage of development with just over 10,000 expected to deliver in 2015. The difference between today and the previous two cycle peaks can be boiled down to demand.
There were 168,887 in-migrations into the Austin metro area from 2008 to 2012, which equates to approximately 92 residents moving to Austin per day. However, the most recent population data suggests that number is now even higher.
Record Growth
Meanwhile, Austin is the fastest-growing metro in the state and in the U.S. Austin grew by 3 percent from 2013 to 2014, adding 57,496 residents, with Houston following close behind at 2.5 percent and Dallas/Fort Worth growing by 1.9 percent. Since 2010, Austin has added 215,556 residents, a surge of 12.5 percent. For perspective, Houston added 541,104 in the same time period, representing only a 9.1 percent expansion.
A booming hospitality sector is fueling advances in local employment. Leisure and hospitality comprises 12.2 percent of Austin’s total employment, and has seen the largest job gains so far this year. The newly opened JW Marriot Austin is the largest hotel in Austin’s history with 1,012 rooms. High hotel occupancy rates are driving construction in that sector. As one might expect with the drop in crude oil prices, the only sector seeing a slight slowdown is manufacturing, which has contracted by 400 jobs this year as demand for heavy machinery and equipment has tapered.
Austin’s employment base is unique for Texas with the public sector making up the largest industry, followed by professional and business services, which includes a large number of tech-oriented payrolls. Austin now features more technology workers in its employment base than anywhere else in Texas, representing 9.4 percent of the jobs market. That number is also growing.
Austin tech companies added 3,000 new jobs in 2015, a pattern that has been sustained for years. In fact, Forbes named Austin the fastest-growing tech sector in the nation from 2004 to 2014 with a growth rate of 73.9 percent and 36.4 percent growth in STEM jobs — the fourth highest in the nation.
Austin also boasts a 27.8 percent increase in its Millennial population, according to U.S. Census Bureau data, placing it in the top seven metro areas. This growth in residents age 20 to 34 years old is a large driver of demand as the Millennial generation is the most likely to flow into the rental pool.
Job creation is driving apartment leasing, keeping pace with new unit deliveries. The strength of the market can be demonstrated by the demand throughout the city. Developers normally consider 20 to 25 move-ins a month a very healthy market. Most lease-ups today are experiencing far better. For example, Ethos in South Austin is averaging 31 leases per month and Whitestone in Northwest Austin is averaging 34 leases per month.
Strong Leasing
Lease-ups in urban locations are averaging 20-plus move-ins a month, which is considered healthy as the rents often start at $2 per square foot and can exceed $3 per square foot in the central business district. Burnet Flats, in North Central Austin, averaged 21 leases per month during lease-up, and Gibson Flats, in South Austin, completed lease-up with an average of 22 leases per month.
Going forward, it will be important to track new development starts and construction across the market as particular submarkets have received concentrations of new supply. Significant construction in the market has led to increased pricing and the consensus among developers is that costs have increased 30 to 40 percent over the last four years.
Increased construction costs, coupled with the fact that many of the best sites are already under construction, point to new development starts beginning to trend downward.
It appears that Austin’s cycle of strong market fundamentals should continue into the foreseeable future due to increasing construction costs, difficulty obtaining attractive development sites with entitlements, tremendous in-migration and continued job growth.
— By Robert Kramp, director of research & analysis, and Michael Wardlaw, senior associate, CBRE. This article originally appeared in the September 2015 issue of Texas Real Estate Business.