InterFace Panel: Austin, San Antonio Multifamily Markets Face Looming Supply Glut

by Taylor Williams

By Taylor Williams

The multifamily markets of Austin and San Antonio — two of the fastest-growing cities in the country over the last decade — are on pace to deliver above-average volumes of new apartments in 2024, causing some industry experts to express concerns of potential oversupply.

The origins of oversupply are not hard to trace, assuming the average apartment project in those markets takes about four years to complete from the time the site is identified and the entitlement and permitting processes begin to when the property is stabilized. Call it five years for some projects that experienced delays due to COVID-19. But in either case, the current wave of new product was largely financed at historically low interest rates at a time when healthy rent growth was easily underwritten. Demand was there, so developers supplied.

And for similar reasons, the distress should be short-lived. With interest rates having risen by 400-plus basis points over the last two years and cuts for 2024 looking increasingly less likely, 2025 should be a year of very few new construction starts. Many owners that are delivering product this year will want to allow time for excess supply to be absorbed and see what happens with interest rates and rent growth before going on the offensive again.

Such dynamics were at the forefront of the discussion of the development panel at the inaugural InterFace San Antonio Multifamily conference that took place on April 4 at the Hilton Palacio Del Rio hotel. During the introductory phase of the discussion, panelist Bryan Brown, managing partner at Cardinal Multifamily, immediately addressed his firm’s anticipated response to the growing oversupply of apartments in San Antonio.

“We’ve got about 2,700 units that have either been completed or will be completed this year and another 300 units that we’ll start construction on in August, and then nothing until 2026 because we’re too scared,” Brown said.

Panelist Pawel Hardej, principal at Metropolitan Development Co., said that his company was starting new projects in 2024 after being dormant the past couple years. This strategy allowed the company to avoid high interest rates and the delivery of new units at a time when rents were falling. Presumably, while working through permitting and entitlements in 2024, interest rates will have come down in 2025 when it’s time to secure financing, and rents will be trending upward again in 2026 and 2027 when new supply hits the market.

“The best kind of projects to do in this market are the projects you’re not doing,” he said. “We haven’t started any projects over the last two or three years because nothing made sense looking forward, so we’re starting projects now.”

The development panel included a data expert, Bruce McClenny, industry principal at MRI Apartment Data, who provided some basic numbers on the supply-demand balance for San Antonio.

“We’ve already had about 3,000 units delivered in San Antonio this year, with another 12,000 or so under construction,” McClenny said. “We’ll probably end the year with somewhere between 11,000 and 12,000 new units delivered, which is well above the normal run rate of about 6,000 to 7,000 units per year.”

McClenny contextualized his analysis by noting that many Sun Belt markets, which have been the primary beneficiaries of population growth and subsequent housing booms in recent years, are in the same boat.

“It’s not a good recipe, but San Antonio is no different from any Sun Belt market that we follow,” he said. “And just up the road, Austin has maybe twice as many units under construction as what they’ve historically delivered. So they’re under a lot more stress in terms of supply and demand.”

“San Antonio has always been a steady market,” McClenny continued. “The market delivers 5,000 to 7,000 units per year and sees 3 to 4 percent rent growth, but this year is going to be different. We’re projecting negative 3 percent overall rent declines, but the balance lies in the fact that 2025 will basically be the opposite when we have fewer units delivered and more absorption.”

Relative Comparison

Daniel Khalil, associate director of market analytics for CoStar Group (not a conference panelist), also notes that San Antonio’s pace of multifamily growth in recent years has been quite torrid when assessed separately from that of Austin. CoStar projects that the volume of new units delivered in 2024 will be closer to 14,000, or about 6.7 percent of the total inventory.

“San Antonio’s growth rate really only looks slow when compared to the city that’s 80 miles away, which is partially why in some respects, that market flies under the radar,” he says. “Austin experiences astronomical growth rates that capture everyone’s attention, yet growth in San Antonio tends to be very fast compared to other markets as well.”

CoStar’s data also shows that for the 12-month period that ended on March 31, San Antonio absorbed about 3,800 units, further validating concerns that the market will need time to fill up the hefty volume of new apartments coming down the pike. The market also posted a negative 2.6 percent rent decline for the first quarter of 2024 on a year-over-year basis.

Despite those numbers, Khalil notes that San Antonio is actually moving in the right direction.

“San Antonio was facing some weakness of demand in 2022; the market had four straight quarters of negative absorption that year,” he says. “But 2023 and 2024 thus far have been a different story and increasingly positive from quarter to quarter, almost uniformly. Last quarter was the best quarter San Antonio has had in terms of absorption in a couple years.

In the greater Austin area, CoStar estimates that there are approximately 35,000 apartments in various stages of development, which translates to about 11.7 percent of the total inventory. The market absorbed about 11,000 units in 2023 while posting a negative 5.6 percent rent decline — a testament to overbuilding already taking root in the state capital.  

Panelist Brown discussed the relative performance of the two Central Texas markets in terms of bureaucratic and investment tendencies that affect just how quickly new supply can be delivered.

“The building permit situation in San Antonio is far worse than in Austin in that it’s bad, which is good [for the supply-demand balance],” he said. “You’re not going to see the type of overbuilding in the next year or so in San Antonio that you’ll continue to see in Austin. More crazy money will come into Austin, too soon [into the next development cycle], and it won’t come into San Antonio.”

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