Craig Swanson, Marcus & Millichap
Steadily rising home prices and a growing population base facilitated strong demand for apartments in Austin last year. A positive employment outlook and favorable demographic trends will continue to augment housing demand and attract investors to the Austin apartment market in 2016.
In 2015, Austin employers added 34,600 workers to payrolls, expanding the workforce by 3.7 percent, according to the Bureau of Labor Statistics. Strong hiring last year contributed to a 40 basis point year-over-year decline in the metro’s unemployment rate, which reached 3.4 percent in the third quarter. The largest gains were in primary office-using sectors, which accounted for nearly 50 percent of additions.
Austin will continue to grow this year, with more than 60,000 individuals anticipated to move to the metro, supporting the creation of 23,000 households. Employers are projected to add 37,500 new jobs this year, increasing the workforce by 3.9 percent, according to Marcus & Millichap Research Services. As was the case last year, demand for housing will intensify.
Austin’s population and employment boom in 2015 led to surging demand for both single-family and rental housing. Ultimately, the consistent rate of growth for single-family home prices fostered higher demand for apartments as home prices in the city’s core rose out of range for a lot of would-be homeowners.
Average listing prices in this area of the city range from $400,000 to over $1 million, according to Trulia, while average rents can vary from $1,000 per month for an efficiency apartment to over $3,000 per month for a three bedroom unit.
Many residents who sought to locate near popular employment and cultural districts chose to rent in lieu of homeownership. To meet the demand for rental housing, builders have maintained a steady pace of above-average deliveries for the past two years. Development in 2015 targeted the southern portion of Austin, specifically the San Marcos, south, southeast and southwest submarkets.
Alongside Austin’s projected population growth this year, the single-family and multifamily construction pipeline will remain steady in 2016. Deliveries will hold firm from last year as nearly 10,000 units are scheduled to hit the market.
Development this year will be focused in the metro’s southern submarkets, where 5,200 apartments are under construction.
The largest apartment project underway in the metro is Still Waters at Southpark Meadows in southeast Austin. The project will add 512 rental units to the metro’s inventory when completed in mid-2016. That said, demand for housing will remain strong this year, increasing residents’ need for affordable housing options as conditions further tighten.
Vacancy Remains Low
Even with the onslaught of construction in Austin over the last two years, supply additions have had little effect on vacancy rates as the need for housing in the metro has kept vacancy at or below 5 percent. Though operations advanced overall in 2015, some short-term softening did occur in the fourth quarter, when 35 percent of the year’s new multifamily stock was delivered.
Vacancy reached 4.1 percent at the end of 2015, a 50 basis point decrease year over year as nearly 9,000 apartments were absorbed. Vacancy was lowest in the Downtown/University and San Marcos submarkets, dropping to 2.9 percent and 3 percent, respectively. Vacancy was highest in the Pflugerville/Wells Branch submarket, ending the year at 5.6 percent, according to MPF Research Services.
Persistent demand will place downward pressure on vacancy this year, despite development remaining elevated. This year, vacancy will remain at historical lows, hovering in the low 4 percent area and impacting the average rent throughout Austin, according to Marcus & Millichap Research Services.
Steady Rent Growth
In 2015, steady rent growth allowed the average effective rent in Austin to reach $1,151 per month, a 6.7 percent increase from 2014.
Though the surge helped to narrow the gap between the average monthly rent payment for an apartment built in 2000 and an average monthly mortgage payment to $60 last year, the price gap stilled favored renting. Considering a 20 percent down payment and including payments for taxes and insurance, the monthly mortgage payment on a median priced home grew to $1,360 per month in 2015, while the average rent for an apartment built since 2000 swelled to approximately $1,300.
With the exception of the Downtown/University submarket, effective rents last year ranged between $955 per month in North Central Austin and $1,361 per month in South Austin, where rents grew by 7.7 percent.
In 2016, rent growth will be robust as vacancy further constricts. For the sixth consecutive year, rents in Austin will climb faster than the national average. The average effective rent will rise to $1,220 per month, a 5.4 percent annual increase, according to Marcus & Millichap Research Services. The strength of Austin’s multifamily market will also drive investment activity this year.
In 2015, investor demand for Austin’s multifamily assets was limited only by the number of available assets as transaction velocity swelled 6 percent. In addition to limited listings, an influx of out-of-state investors contributed to Austin’s highly competitive multifamily market.
Last year, sales were focused on institutional-grade assets in the over $20 million tranche, and throughout the year cap rates for these assets compressed from the mid 4 percent area to the low5 percent range, depending on location.
Investors also targeted neighborhoods to the north and east of downtown, and local buyers — in search of upside potential — sought out older assets in areas of growth where capital deployed for renovations could potentially provide significant rent increases.
The pace of development will remain elevated in 2016, resulting in a third year of robust deliveries, strong tenant demand and improving fundamentals, which will continue draw investors to the market.
Cap rates should remain near the mid 4 to low 5 percent range seen at the end of 2015. Upside-oriented investors will again target older properties in areas of growth that are ripe for repositioning and implementing unit upgrade programs as a means to realize rent advancement.
A final important factor impacting sales activity this year will be the degree to which the maturation of loans taken out before the recession influences multifamily owners’ decisions to refinance or sell. If owners are influenced in favor of selling then the amount of product available in the market could receive an extra boost.
All things considered, in 2016 Austin’s projected population and job growth, combined with its steady multifamily and single-family construction pipeline, will support strong demand for rental housing. This will further depress vacancy.
These solid fundamentals and demographic trends will further elevate average effective rents metrowide. And, even if loan maturation prompts multifamily owners to become multifamily sellers, supply additions will trade quickly given the already-intense multifamily market. For these reasons, the multifamily outlook in Austin is very good.
— By Craig Swanson, regional manager, Marcus & Millichap. This article originally appeared in the March 2016 issue of Texas Real Estate Business.