In the 1990s, a seemingly unstoppable economic upswing made Austin, Texas, a magnet for the upwardly mobile. According to the city's planning department, the population soared between 1990 and 2000, when Austin's 656,562 residents made it the 16th-largest city in the nation, according to the U.S. Census.
In this boom time, businesses grew and multifamily investors prospered. Apartment vacancy rates stayed at a low of just under 4 percent. Rents were 93 cents per square foot and rising, and concessions were virtually nonexistent. Then the decade ended, and the uneasiness began. Dell Computers laid off 1,700 workers in a single day in February 2001, and the tech-bubble burst that followed caused a ripple effect that is still in motion.
The Austin of today remains a city with a cult-like following of people who will do just about anything to stay. Its mix of culture and cutting edge has attracted residents the likes of Sandra Bullock and Lance Armstrong and delivered recognitions such as a spot on Forbes magazine's "Best Places to Live for Singles" list. Austin also is the "Live Music Capital of the World," with the South by Southwest music festival (the nation's second-largest festival of its kind) and the annual Austin City Limits music festival, which attracts 80,000 people a day. On Thursdays, Fridays, and Saturdays, you can even hear local bands playing live music in the city's new international airport.
In the real estate investment market, Austin is equally well known for dramatic ups and downs that rival the most hair-raising bull ride. Those that time it right and stay on for their allotted eight seconds usually win big.
Get a Job Since the tech meltdown, the lack of jobs has proven a particular challenge for this Texas city. Even those accustomed to Austin's trademark shifts feel that the employment scenario has made this downturn a particularly long and painful one. By most accounts, in fact, job growth remains the primary barrier to a healthy Austin economy and a hospitable multifamily investment market.
"Austin is one of those acutely cyclical markets where timing is critical," says Ray Sperring, an acquisition officer with Dallas-based TriVest Residential, a fully integrated operating company specializing in the acquisition, redevelopment, and management of middle-market multifamily communities. "When Austin has the jobs and the economy, it's a great placeto be, but it's a roller-coaster ride the rest of the time.”
Austin's local annualized growth rate of 3.5 percent recorded at the start of 2000 was just one illustration of the market's strength. This figure fell to .64 percent by mid-2004, illustrating its current struggle. According to the Texas Workforce Commission, Austin in 2000 added 37,200 new jobs and had just a 2 percent unemployment rate. Two years later, unemployment hit a high of 5.9 percent. As of mid-2004, it has recovered slightly, to 4.7 percent.
The good news is that the young, educated, active, and diligent still love to work and live here, if they can. Developers and investors feel the same.
Austin Rising “In the years of the 1970s and 1980s, Austin relentlessly pursued job creation,” says Sperring. “The city got major companies to adopt an Austin address and built a corporate base that now powers the community.” They include Applied Materials, Dell Computers, and Motorola.
The biggest thing going for Austin, however, may be the stabilizing effect of being both a capital city and a college town. Austin is home to the University of Texas, which has the all-important employment base and one of the largest student populations in the nation. Growth in these public and private sectors carried Austin's economy into its golden years of the 1990s.
Then, in typical Austin style, the market shifted.
It took awhile for multifamily owners to feel the pinch, though. In 2000 and 2001, the multifamily pipeline was still roaring, with 12,000 new units built in Austin annually. By 2001, both occupancy and rental rates were declining. The average apartment in Austin was renting for $743, and occupancy was 88 percent. New product was giving three months' free rent on a 12-month lease.
Austin Today Most experts speculate that while current conditions may not be the absolute bottom of the Austin multi-family market, they are very close. As of mid-2004, Austin rents still suffered from pent-up concessions, but construction had slowed to 2,319 new multifamily units. By late 2004, local apartment owners were witnessing their first signs of stabilization in years.
According to the Austin Multi-Family Trend Report, which is published by Austin Investor Interest, occupancy in the third quarter 2004 rose a full 2 percentage points to 90.81 percent, reaching its highest level since 2002. Effective rents also ended an 11-quarter decline, rising to 81 cents per square foot. The average rent was $669 for 825 square feet. The average sale price per unit was $66,852, or $71.70 per square foot.
Rental rates are expected to move upward, but not until Austin is able to burn off a ton of giveaways. On the investment front, buyers and developers are looking forward with great promise. Five new properties have recently broken ground, and nine have been submitted for permit, says the report. A number of large and recent multifamily deals in Austin indicate that there are investors looking to get back into this market as well.
Money Matters “Investors continue to have a strong appetite for multifamily,” says Matt Counts, associate producer for GMAC in Austin. He sees investors very willing to be aggressive in their multifamily buys. “This is a good time to buy,” he says. “Austin's multifamily pipeline has settled and it's just a matter of time before jobs pick up and rents turn around.”
On the lending side, Counts says lenders are always looking for multifamily product to finance. “Interest rates have been at all-time lows over the last 18 to 24 months, so this is a very good time to borrow money at great rates,” he says. “Loan structures range from three-, five- and 10-year terms with 30-year amortizations to 20-year fully amortized product. Whether it's a refinance or acquisition placement, they can't seem to get enough.”
Site By Site Among all areas of the city, Austin's northern suburbs are rebounding the fastest, even though they were hit the hardest by the tech decline. Predominantly young, professional renters in areas such as Lakeline are attracted to newly built Class B+ and A-units. Average rents in this area range from 79 cents per square foot to 88 cents per square foot. Occupancy is between 92.5 and 93.5 percent.
The northwest submarket, which is located near the intersection of Highway 183 and Loop 360, offers shopping and employment opportunities that rival downtown. Also in the northwest segment is the major highway intersection near the Lakeline Mall, which is a sector expected to be a major growth area with significant new single-family and multifamily development.
Due north on MoPac (the Missouri Pacific thoroughfare) is the La Frontera mixed-use development, one example of residential lifestyle available to Austin renters. With easy access off I-H 35, La Frontera totals 328 acres of commercial, retail, and residential development that sits adjacent to Dell's corporate world headquarters, Farmer's Insurance regional headquarters, and numerous big-box retail centers. La Frontera and the land surrounding it will soon become even more accessible with the widening of MoPac Boulevard from Parmer Lane to I-H 35.
In this submarket, newer Class A complexes prevail, as do larger transactions by significant investors. The sale of the Enclave at La Frontera and the Preserve at Rolling Oaks helped solidify investor belief in the future upside of Class A properties. Both of these properties were built in 2002 and sold for $81 per square foot and $78 per square foot, respectively.
Downtown Austin is an equally prime landing spot for buyers. According to a recent article in the Austin Business Journal, the downtown market “offers a glimmer of hope for multifamily rental properties.” The Multi-Family Trend Report quoted third-quarter downtown occupancy at 92 percent, with an average rent of $1.12 per square foot. In the campus area, some efficiencies are renting for as much as $1.20 per square foot, with smaller 30- to 60-unit properties that remain attractive to the smaller individual investor.
Also part of downtown is the South Congress market—known to the locals as “SoCo.” Less than a decade ago, SoCo was dilapidated and full of empty retail, with apartment rents in the 68-cent-per-square-foot range for mostly 25-year-old, less-than-100-unit properties. However, revitalization efforts during Austin's latest real estate boom helped transform SoCo into a destination for the trendy and famous. The area is now thriving with boutique shops, restaurants, and live music venues. SoCo's mostly high-end apartments are marketed to the downtown worker, the young and affluent, and renters that desire to be close to the entertainment and dining of the 6th Street Music and Warehouse districts.
One of these projects is the Alexan Congress, a 253-unit gated apartment property built by Trammell Crow Residential in 2000. Alexan Congress has all of the amenities expected in a Class A urban project, such as Berber carpet and hardwood floors, 9- and 10-foot ceilings, fireplaces, garden tubs, pool, fitness center, business center, and a Starbucks gracing the community entrance. Other retail shops occupy the building's first floor. Units range from 579 to 1,461 square feet, and rent from $895 to $1,955 per month.
In southwest Austin, Trammell Crow Residential and Phoenix-based developer Opus West Corp. are now building the Alexan Miramont, a 276-unit property slated for completion in spring 2005.
“When we selected the Miramont site, the multifamily occupancy rate in that submarket was around 88 percent,” says Joel DeSpain, an Opus West director of real estate for the market. “By the time we closed on the land [in 2002], occupancy was up to 90 percent. When the Miramont comes on stream next spring, we expect the neighborhood to be at or above 95 percent occupancy.” As of third quarter 2004, overall multifamily occupancy in the southwest area was 94 percent with an average rent of $0.91 per square foot.
As with all large development deals, DeSpain says, there was some speculation involved. “But it all still had to fall on sound strategy,” he says. “We studied the numbers and trends. We talked to people on the street. Then we made our commitments. We feel excellent about what we've anticipated for Austin.”
Austin's eastern submarket is equally promising. The community is built largely around the Robert Mueller Municipal Airport site, Austin's former airport. About four years ago, the city relocated the airport to the closed Bergstrom Air Force Base. The move left the 709-acre Mueller site vacant and the multifamily construction surrounding it in limbo. With properties that were primarily built in the 1960s, 1970s, and 1980s, the submarket had no major prospects on the horizon and still carried the stigma and values of a tough location, thanks to former airport noise.
But now Catellus Development Corp. has stepped in to revitalize the site. The San Francisco-based company plans to build a 30-acre children's hospital, commercial development, multifamily and single-family homes, and more. During the eight years it will take to build the project, investors have a prime opportunity to purchase multifamily property surrounding this development at reasonable rates and pursue the upside of infill and rehab.
Austin Tomorrow Austin is smart, aesthetic and always promising. As such, its high peaks and low valleys generate great interest, particularly because investors realize how high this city can rise. When it's at or near the bottom—like now—the best advice may be to grab as much as you can, because once giveaways burn off in the next 12 to 18 months, smart investors will be in for a great ride.
Tarnished Gold? California renters don't sound happy. The statistic sticks out like a C-minus on an A-student's report card. While California homeowners are delighted with their houses (75 percent report being “very satisfied”), far fewer renters (34 percent) feel the same about their apartments, according to the findings of a statewide survey conducted by the Public Policy Institute of California.
But Michael Hayde, CEO of Western National Group in Irvine, Calif., sees more than simple customer satisfaction at work. “If only 34 percent of our residents were happy, it seems like it would have a financial impact. We're not seeing that,” says Hayde, whose company owns and manages 20,000 apartments in Southern California.
Instead, Hayde sees another force at work: homeownership and real estate appreciation. “We're still in a rising market, so homeowners are really happy because of the appreciation they're seeing,” he notes. “Renters, conversely, are frustrated with the process. ... When they look over the fence, it seems to them like they're not getting a lot of bang for the buck. But rents are one heck of a buy compared to where we've been in the business.”
Renters do acknowledge that their monthly housing costs have been relatively stable; 38 percent say their rent has stayed about the same in the past few years, according to the survey findings.
Job Search Companies aren't hiring enough new workers. Forget lucky number seven. What the country needs right now is a magic 150,000. Why? That's the number of jobs the American economy needs to produce each month to keep up with the growing labor force—and it's not happening, as the chart above shows. Instead, the monthly employment numbers have drifted above and below 150,000, a level that hardly represents the type of ongoing job creation that apartment firms want. “It's just been a very difficult time,” says Mark Obrinsky, chief economist for the NMHC.
It also represents a change from past recession recoveries. “When we were looking at apartments in the 1990s, it was always a given that yearly job growth would be 2 percent,” says David Schwartz, managing member of Waterton Associates, a Chicago-based multifamily owner and manager. “This time, it's been half that. It's definitely had an impact on the recovery of the multifamily industry.”
Even if the job numbers do improve, both Schwartz and Obrinsky suggest those stats won't translate into higher apartment rents and occupancies for awhile. “It's not just about people having jobs,” the economist says, “but people having a better feeling about the economy.”