“After COVID-19, nothing ever will be the same,” has become a common refrain these days. Perhaps for the next decade or so, every important life choice will be made with public health and safety concerns in mind — and the most commonly chosen solutions will be meaningfully different than before.
Among the most fundamental life choices subject to this new scrutiny will be where to live, how to make a living and how to safely move about. Many Americans will opt for less densely populated neighborhoods, increased work-from-home opportunities and private transportation options. When the time arrives to put plans into action, however, most will elect to take small steps rather than a giant leap. Perhaps the high-rise apartment and subway ride to a co-working space can be sacrificed, but not at the expense of convenience, access to nightlife and entertainment and career prospects. Urbanity isn’t out of style, but its form will mutate.
Some U.S. metros will struggle to adapt, including a few primary markets. Others seem to be attuned to the times, blessed with all of the now prized attributes already in place. None is more perfectly positioned than Austin.
Austin checks all the boxes. It is less densely populated than its western U.S. rivals but compact enough to afford manageable commutes in private autos. It offers a wide variety of urban and suburban housing options as well as top notch lifestyle amenities. Apartment rents are lower than rivals Denver, Portland and Seattle, and homeownership is not beyond the reach of most young professional households. Moreover, few migrating Millennials will fear that relocating to Austin is a form of career suicide. The employers on their wish lists — Amazon, Apple, Cisco, Facebook, Google – are here in force, supported by a deep supply chain and venture capital infrastructure.
It follows that Austin must be an apartment investor’s utopia. In every critical respect, it is; but Austin will not leave this Annus Horribilis 2020 unscathed. Indeed, the next 12 months promise to be difficult.
Stressed apartment market performance already was evident in the spring after payroll job losses topped 130,000 in March and April. Occupancy among properties stabilized for at least 12 months fell below 94 percent in May for the first time in over two years, according to Yardi data tabulated by RED Capital Research. Neighborhoods in and around Central Austin, which includes the CBD and the University of Texas campus, felt the strongest impact, suffering over-the-year occupancy losses of 1.5 percent or more after classes were canceled and many decamped to weather the plague in their parents’ homes. Many office workers also took shelter away from the city.
Rent levels appeared to be affected to a greater degree. After recording 17 consecutive months of 4 percent or faster year-on-year growth, stabilized sample rent growth decelerated to 2.5 percent in April and 0.9 percent in May, following a -1.4 percent average rent decrease from March to May and a -1.8 percent drop in the Central submarket.
The story of this soft patch will be written by the virus, but we can quantify what may happen. While an increase in June Texas infections is disconcerting, we remain optimistic that that the probability of a repeat of wholesale lockdowns in the fall is low. Rather, the pace of workers returning to the job will build momentum as the U.S. economy recovers. If the economy follows the trajectory mapped by the Fed in June, Austin payrolls should recover to pre-COVID-19 levels by next winter or early spring, according to our models.
Austin’s food service and lodging sector, which proportionately is nearly 20 percent larger than the U.S. average, poses the greatest risk to this forecast. Even a modest increase in infections could lead to a new round of restaurant and bar closings and plunging tourist visits.
Regardless of the pace of recovery, Austin multifamily market performance will deteriorate further. Construction is one area of the economy that has not slowed measurably during the viral recession. Apartment inventory is on track to increase nearly 2.5 percent from April to December, and occupied stock will do well to hold steady at first quarter levels. Sharply lower occupancy and competition from properties in lease-up will exert further downward pressure on rents. Our models expect year-on-year trends to turn negative in June and continue to deteriorate through year-end, producing peak-to-trough losses approaching 4 percent.
Investors shouldn’t lose sight of Austin’s fundamental virtues in the post-COVID-19 world though. Our unbiased, historically specified personal income and payroll models project that the metro economy will recover in 2021 and 2022 at growth rates redolent of the late-90s, when near-7 percent headcount, and 13 percent income growth were recorded. Rent growth approaching the 10 percent threshold reached in 2000 is likely to ensue, and occupancy should return to pre-COVID levels not long thereafter.
Cap rates remain at pre-crisis levels, with institutional-quality gardens trading to mid-4 percent cap rates, and Class B suburban product exchanging hands in the low-5 percent area in April and May. Yet our models suggest that this investor confidence stands on solid Hill Country ground. Indeed, we expect current investments in Austin multifamily real estate to yield returns over the next five years that rank second among the nation’s top 50 metropolitan markets, after the similarly situated Nashville. Saddle up.
— By Daniel J. Hogan, ORIX Real Estate Capital’s Managing Director for Research. RED Mortgage Capital, a division of ORIX Real Estate Capital LLC, is a content partner of REBusinessOnline. The views expressed herein are those of the author and do not necessarily reflect the views for RED Capital Group or of the author’s colleagues at RED. For further analysis from RED Capital Group,
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