The declining affordability of housing has become a worsening problem in many areas throughout the country, and Texas is no exception.
Despite talk of a cooling housing market, home prices in both North and Central Texas are hitting
high-water marks, making the dream of homeownership less likely to become a reality for many people. According to the Austin Board of Realtors, median home prices in Austin hit an all-time high in May, topping $400,000.
As for North Texas, a report from ATTOM Data reveals that as of the third quarter, the median home price in Dallas-Fort Worth (DFW) was 73 percent above the market’s pre-recession peak.
Jun Sakumoto, Avanath Capital Management
As home prices skyrocket in the these markets, apartment rental rates are also experiencing upward pressure. The Austin Affordable Housing Corp., a nonprofit subsidiary of the Housing Authority of the City of Austin, reports that Austin is now the most expensive rental market in Texas. In addition, The Dallas Morning News reported in August that while Dallas-area apartment rents are growing at a slower rate than the national average, these figures rose 3 percent from a year earlier.
Rising apartment rental rates in these markets are resulting in a greater percentage of cost-burdened renters in Texas. According to the U.S. Census Bureau’s 2011 American Community Survey, renters with cost burdens are defined as households with housing costs that exceed 30 percent of household income. In Texas, as many as 49 percent of renters are cost burdened.
The combination of decreasing home affordability and an ever-more cost-burdened resident base is creating more housing-related issues for the state.
According to a 2017 article in Texas Tribune, “It’s becoming harder for urban-dwelling Texans to find an affordable home to buy or decent place to rent as house prices outpace salaries, the income gap between renters and owners continues to widen and the number of high-poverty neighborhoods increases.”
With obstacles to housing continuing to rise, the demand for affordable housing in Texas markets is also maintaining growth. Affordable housing provides opportunities for renters who meet the criteria for affordable leases to live in attractive, amenity-laden communities at considerably lower rental rates.
Avanath owns and operates several affordable communities in Texas, including Acclaim at South Congress and Canvas in Austin and Cooper’s Crossing in Irving. The company continues to seek out properties to acquire that are in areas near employment and transportation centers and that have barriers to developing new supply.
In addition to offering housing that qualified renters can afford, affordable housing provides numerous benefits for investors in the sector. These include:
Increased Demand Resulting in Stable Assets for Investors: Austin and many other areas throughout Texas have undergone tremendous growth over the last several years. This growth is partially responsible for the above-mentioned upward pressure on home prices and rental rates, which is driving strong investment demand to the affordable housing sector.
This heightened demand results in stabilized cash flows and downside protection for investors. Affordable housing properties tend to perform well regardless of the economic cycle. They also maintain high occupancies and often have waiting lists of several hundred people.
More Institutional Capital Migrating to the Region: Affordable housing has traditionally been viewed as a niche strategy. That said, we are seeing more institutional capital flow to the affordable housing space. This is because investors are beginning to realize that affordable housing targets one of the largest rental cohorts in the United States, and supply cannot simply keep up with demand.
Markets like Austin are especially attractive to institutional investors as there is strong population and job growth, a migration of top companies to the area and increasing demand for affordably priced housing options.
Many developers are focused on ultra-luxury apartments that target renters who earn upwards of $100,000 per year, resulting in a significant lack of affordable and workforce housing supply and further driving demand for this product type.
Opportunity for Social Impact: While investors continue to track financial performances, many are also demanding investments that are tied to positive social impacts.
Affordable housing fits within this category, creating opportunities for strong risk-adjusted returns while also significantly impacting the lives of residents. This is especially true in Texas, where nearly 50 percent of renters are cost-burdened.
Attractiveness Leading to Value That Rivals Market-Rate Apartments: Today’s affordable housing communities are more aesthetically pleasing and better
managed than they have ever been, which means they retain their value for investors and are often improved-upon by owners and management.
In fact, affordable communities today are often indistinguishable from market-rate apartment communities and offer many of the same amenities. For example, Cooper’s Crossing, our affordable property in Irving, features in-unit washer and dryers and fully equipped kitchens with dishwashers. The property also offers amenities such as a pool, clubhouse and a fitness center.
Additionally, because there is such high demand for affordable properties, there is very little vacancy, reducing overall turnover costs and increasing NOI. An average market-rate apartment community has a turnover rate of approximately 50 percent. This results in lost revenue while the unit is vacant plus increased administrative costs to secure a new resident, complete the lease process and prepare and clean the unit.
With so much upward pressure on home prices and rental rates in the Texas market, the need and demand for affordable housing will only increase. This demand will continue to present strong opportunities to investors and continue to attract capital to the region.
— By Jun Sakumoto, president, Avanath Capital Management. This article originally appeared in the December 2019 issue of Texas Real Estate Business magazine.