Austin, Texas – The leasing office at the Triangle has been busy since the first apartments in the project’s 335-unit first phase opened their doors in fall 2005.
Tenants have rushed to sign more than 30 leases a month at rents averaging $1.65 per square foot – 10% above the rents predicted on the project’s pro forma. Workers finished the first phase of the mid-rise project in January, and apartments are now 80% leased with few or no concessions. The Triangle’s popularity is just one sign that the Austin apartment market is on the mend after years of high vacancies and low rents. The percentage of vacant apartments is expected to hold steady at 7.6% in 2006, a decline from 2004’s 10.2%, according to Reis, Inc., an apartment research firm based in New York City.
The development is one of only a few apartment projects now leasing up in Austin. Developers completed just 1,280 conventional apartments here in 2005, almost 75% less than the annual average of 4,563 over the previous 10 years, according to Reis.
Many institutional investors stopped making new investments in Austin’s apartment market after the dot-com crash slammed the city in 2001. The total number of jobs in Austin dropped from a peak of 683,960 in 2000 to a low of 654,230 in 2003.
Unfortunately for investors, many apartment projects that had started construction during the tech boom were finished just after the bust. A total of 8,447 conventional apartments came on line in 2001, according to Reis.
As massive job losses combined with the flood of new apartments, the percentage of vacant apartments soared to a high of 12.5% in the second quarter of 2003 from a low of 2.5% in 2000, Reis said.
Simmons Vedder & Co., the developer of the Triangle, began looking for an equity partner for its project in the summer of 2003. “A lot of people said, ‘Are you crazy?’” remembered Dudley Simmons, project manager for the developer. In fact, Simmons Vedder only came to the project after Post Properties, Inc., a national real estate investment trust, backed out of the deal.
A 115-unit second phase is expected to begin later in 2006.
Recovery encourages developers
But three years later, as Austin’s apartment market firms up, many more developers are following in Simmons Vedder’s footsteps and starting construction. Developers are scheduled to finish 4,011 conventional rental apartments in Austin in 2006, increasing the area’s existing inventory of 135,402 market-rate rental apartments by a little less than 3%, according to Austin Investor Interests, LLC (AII), a local market research firm.
The push to add units is built on hopes that further rent growth will help pay for developers’ increased construction costs. “Many of them, especially in the suburbs, are counting on rents to move,” said Robin Davis, an analyst for AII.
But apartment rents still have not fully recovered in the Texas capital, averaging just 87 cents per square foot in the first quarter of 2006. That’s significantly better than the average of just 81 cents in 2004, but it’s still a long way from the high of 98 cents recorded in 2001.
At today’s rent levels, “it’s not feasible to do a lot of these deals,” Davis said. The cost of construction has risen significantly since 2001, growing by 15% to 20% in Austin in just the last year.
More than 7,000 units in pipeline for 2006
Developers are expected to start another 7,396 units in 2006, according to AII. Many are going ahead with construction even though the market is still much weaker than it was when they first bought the land for their projects.
“There are a lot of developers that have had projects on hold for three years,” said Davis. These builders are no longer willing to wait.
Developers will start work on 1,186 new garden apartments in 2006 in the Far Northern submarket, where the average rent per square foot was just 82 cents in the fourth quarter of 2005. They will start another 1,226 new units, including many mid-rise projects, in Austin’s central submarket, near the city’s universities, where rents averaged $1.10 per square foot.
Although these developers are certainly pushing their luck, rents might continue to grow for these projects, according to Davis. The apartment market absorbed 3,868 units in 2005, about 24% more than the previous year’s total, Davis said. If the current level of job growth continues, Davis thinks the market can “easily absorb 5,000 to 6,000 units a year.”
The Austin apartment market might also get some help from condominium conversions that take rental units off the market: 700 apartments left the rental inventory in 2005, and most of these units were converted into condominiums.
Though investors hesitated to fund new construction in recent years, they have enthusiastically purchased existing properties. Almost 18% of the conventional apartments in Austin have been sold in the last 24 months, according to Davis. That’s 134 out of 754 properties.
And prices have been on the rise. In 2005, 50 garden apartment projects sold for an average of $70,156 per unit, or an average capitalization rate of 6.2%. That’s up from roughly $60,000 per unit, or a cap rate of nearly 9% in 2002, according to a report by Real Capital Analytics, an apartment research firm based in New York City. A cap rate represents the net operating income of a property as a percentage of the purchase price. Meanwhile, only three mid-rise and high-rise buildings sold in Austin in 2005 for an average price of $97,629 per unit, or an average cap rate of 5.3%.