By Taylor Williams
AUSTIN, TEXAS — Sources of institutional capital are slowly trickling back into buyer pools of deals for multifamily properties in Austin, a move that marks an inflection point within the sector as a whole and speaks to investors’ long-term faith in that market’s fundamentals.
And faith is perhaps just what the doctor ordered. In some ways, Austin has become a victim of its own success over the past decade, a sort of cautionary tale of growth gone too heavy too fast. The feverish attempts of multifamily developers to keep pace with demand during that time have come to a head, and the market now languishes in a state of oversupply. With rents softening and interest rates only just now showing concrete signs of decreasing, institutional capital has been more than content to sit on the sidelines of this market for the past 18 or so months.
Editor’s note: InterFace Conference Group, a division of France Media Inc., produces networking and educational conferences for commercial real estate executives. To sign up for email announcements about specific events, visit www.interfaceconferencegroup.com/subscribe.
But that is starting to change, at least according to a panel of multifamily investment sales professionals who spoke at the inaugural InterFace Austin Multifamily conference in mid-September. Held at the JW Marriott Hotel in the state capital’s downtown area, the conference provided a true behind-the-scenes look at the machinations that are causing the Austin apartment market to turn the corner. Patrick Strake, multifamily investment sales lead at the Austin office of brokerage firm Franklin Street, moderated this particular discussion.
Psychology at Work
Institutional capital — an umbrella term for well-heeled investment groups such as REITs, private equity firms and pension funds — is notorious for its ruthless numerical analysis.
Committees, red tape, nonnegotiable return thresholds — all of these terms are synonymous with the innerworkings of institutional capital. When evaluating deals, these groups put forth highly specific metrics and standards that if not met will likely send the deal to the bottom of the pile like a bad resume on a hiring manager’s desk. These groups crunch numbers with emotionless resignation, as numbers are meant to be treated.
Yet for all their stringent, machine-like vetting processes, institutional capital groups are still run by people and are therefore subject to basic human psychology. That is to say that these groups can, despite their penchants for cold quantitative analysis, still get caught up in the qualitative fervor of excitement that has been emanating from Wall Street since the Federal Reserve delivered a 50-basis-point rate cut on Sept. 18 — the first in about four years. Though known for their discipline, institutional capital firms nonetheless seem to be buying into the idea that more rate cuts are coming and that market conditions are shifting — albeit with guarded optimism.
“The psychological impact of rate cuts — and this may be wishful thinking — should hopefully translate to a more risk-on environment as institutional and large private investors see this accommodative monetary policy as a green light to start putting out some of the cash they’re sitting on,” said panelist Kent Myers, senior managing director of investments in the Austin office of Institutional Property Advisors, a division of Marcus & Millichap.
“The psychological impact [of a rate cut] will help, and anticipation of further ones will only stimulate things more,” added Patrick Noonan, vice president and regional account manager at IPX 1031, an exchange-based brokerage firm with a regional office in Dallas. “It seems like the lights have started to turn back on, at least in the world of [1031] exchanges, with call volumes increasing.”
Panelist J.P. Newman, founder and CEO of Thrive FP, which functions as both a lender and owner, said that the rate cut would make deals “more underwritable.” At the institutional level, this often represents the stage of evaluation in which the deal is killed. Like the other panelists, Newman was cautious with his analysis, noting that even with multiple rate cuts, it will still take time for institutional buyers to once again make their presences felt in the market.
Fundamentals on Display
Following the panelists’ attempts to channel the mindsets of their institutional clients, Patton Jones, vice chairman at Newmark’s Dallas office, then steered the conversation back to the quantitative side. Jones pointed out that the building boom that Austin has experienced over the past couple years, owing to projects that were greenlit before rate hikes began unfolding, has been a major factor in keeping institutional capital sidelined during that time.
“Going back to the beginning of this year, we were tracking about 50,000 units under construction, with the assumption that about half of that [volume] gets delivered in a calendar year,” he said. “So we knew we’d have soft fundamentals in 2024 and 2025. Then you overlay the interest rate increases throughout 2023, and you basically had institutions not doing anything, just continuing to wait for some kind of sign.”
“In 2023, the market was dominated by private investors, family offices, syndicators and owner-operators, but no institutions — they weren’t even touring or bidding,” Jones continued. “In the last 30 to 45 days, as it’s become more evident that rate cuts are coming and the 10-Year Treasury [yield] is coming down, we’re now seeing some institutional activity.”
Jones emphasized that his assessment of institutional capital’s conservative stances was strictly a factor of economic conditions, not a lack of trust in the long-term fundamentals of the Austin multifamily market. Both he and Myers conceded that it will still take time — probably 12 to 18 months — for existing supply to burn off, thus allowing rents to resume healthy paces of growth and more deep-pocketed investors to return to the market.
“Given the lack of new construction that’s been capitalized over the past 18 months and the continued growth and outsized absorption in Austin, we should see a very dynamic market in 2026, 2027 and 2028,” Myers said. “But right now it’s still institutions sort of sniffing around deals that are on the market, generally looking for price discovery; outside of that, it’s mostly been private capital [deals] structured with low-leverage agency financing.”
Matt Pohl, managing director of investment sales at Walker & Dunlop’s Austin office, took it a step further, saying that he’s started to see some institutional groups formally express interest in certain deals.
“We’re seeing expanded bid lists; going back to the beginning of the year, it was almost exclusively private [capital],” Pohl said. “Today we have far more qualified REITs and institutions coming in and showing interest in the market.”
Pohl added that Austin is doing a fair job of absorbing its mountain of new supply, which could ultimately lead to a record year for that particular statistic. He then outlined how that metric could serve as a catalyst for more overall investor interest in the Austin multifamily market in the coming years, including from institutional players.
“We’re seeing rent growth being underwritten shorter into the hold period as we get closer to 2026, and that’s very accretive to hitting levered returns,” Pohl explained. “If you can combine that with debt at a 4 [percent interest rate], whereas earlier this year it was a 6, the economics of pushing forward on an acquisition are that much more favorable.”
Like with all major markets and asset classes, these supply-demand trends will vary somewhat from one submarket to the next. But the panel agreed that although rents, cap rates and returns aren’t what they were a couple years ago, to bet against Austin as a whole in the long run would be less than wise.
“If you buy today, you’re buying on the hope of the future,” said Newman. “It’s a different market now, and if you’re an investor today, do you want to go three, four or even five years with little to no cash flow and say it’s completely a basis play? Normally you want a risk-adjusted cash return. But long-term, never bet against Austin, Texas. In five to 10 years, we will undoubtedly be in a better spot, and all the haters out there will have made a mistake.”