Austin, San Antonio Apartment Markets Perform Similarly As Fourth Quarter Unfolds

by Taylor Williams

In both Austin and San Antonio, consistent job creation and in-migration contributed to solid household formation and rental demand over the 12-month period ending in June. Many of these new households comprise younger professionals that favor the renter lifestyle.

Following stretches of rampant construction, solid apartment demand from this demographic was met with fewer project deliveries in both markets over the past year. The decline in supply additions, coupled with strong absorption, reduced vacancy to near cycle-low levels in both metros during the second quarter. Robust leasing activity across all classes of apartments allowed the average effective rent to rise by more than 5 percent in each locale.

Craig Swanson, Marcus & Millichap

These market conditions, paired with projected economic expansion and above-average first-year returns, boosted out-of-state buyer interest in Austin and San Antonio over the past four quarters, equating to notable spikes in transaction velocity.

Austin: Class A Demand

Austin’s reputation as a tech hub with a well-educated workforce has influenced many professional and business services-related companies to expand in the area, increasing the number of higher-earning residents in the metro. This has strengthened demand for luxury apartments, lowering Class A vacancy by 90 basis points over the 12-month period ending in June amid the delivery of more than 7,000 units.

Overall, the metro enters the second half with a 4.8 percent vacancy rate, with six submarkets home to sub-5 percent unit availability. Tight conditions would appear to warrant robust construction; however, annual delivery volume will total 6,900 doors in 2019 following the completion of more than 9,000 apartments in each of the previous four years.

The disciplined construction pipeline and steady rental demand will benefit apartment performance this year and warrant a rate of rent growth on par with the national rate of increase.

Strong market conditions and average first-year returns in the mid-5 percent range are motivating investors to purchase assets within Austin’s city limits near the core. The metro is coming off a 12-month stretch wherein deal flow increased by nearly 40 percent, largely driven by heightened activity on the part of out-of-state investors.

Currently, competition between California- and New York-based institutional firms is high for cash-flow opportunities near the core, with these buyers willing to pay premiums for newer assets. An increase in the number of higher-priced closings has lifted the metro’s average pricing beyond $150,000 per unit. Investors targeting lower price points are scouring the North and East Austin neighborhoods, where properties can trade below $100,000 per door.

SA: Construction Slows

Strong hiring among professional and business services-related companies continues to support overall employment growth in San Antonio, with the sector adding 6,300 workers over the past 12 months. As is the case in Austin, gains in the number of higher-earning younger professionals have benefited apartment demand.

Net absorption over the past year was approximately 5,500 units, supporting a 70-basis-point decline in market vacancy to 6 percent in the second quarter. Rental demand was widespread as unit availability compressed across all classes of apartments. Still, the metro’s overall vacancy rate sits notably above the national average, which has some developers pulling back on apartment projects.

Entering the second half of 2019, construction was underway on approximately 5,100 units, with activity concentrated north of the Interstate 410 loop, where some of the largest projects in the metro are rising. A slowing development pipeline coupled with tightening vacancy supported a healthy rent increase of 5.2 percent over the past year, with average Class A and B rates each rising by roughly 6 percent.

Strong rent growth, a favorable yield profile and lower average pricing than other major metros contributed to a heightened period of trading over the past 12 months, with sales activity up 20 percent on a year-over-year basis.

Increased deal flow was supported by growing out-of-state buyer activity in Central San Antonio, Northeast San Antonio and Far Northwest San Antonio. These locations are receiving vigorous bidding competition as buyers chase favorable cash flows in submarkets where rent growth outperforms the metro average and quick access to employment nodes is provided.

Class A assets in these locales have been trading in the $130,000s on a per unit basis, with new
institutional-grade properties changing hands at cap rates around 5 percent. Buyers targeting value-add opportunities can routinely acquire Class C properties around $70,000 per unit.

Similar Year-End Results

Austin and San Antonio continue to parallel each other throughout the year, as both metros saw their employment bases rise by more than 20,000 individuals amid low unemployment and persistent company expansions.

This job creation is bolstering household formation and rental demand during the remainder of this year while delivery volumes are falling notably below the totals recorded in recent years. Steady absorption and a smaller development pipeline have allowed each metro’s vacancy rate to compress moderately this year, supporting solid annual rent growth of roughly 5 percent.

— By Craig Swanson, vice president and regional manager, Marcus & Millichap. This article first appeared in the October 2019 issue of Texas Real Estate Business magazine. 

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