Education. Technology. Government. Austin, Texas, has it all, so it's no wonder the city continues to thrive as one of the most desirable places for corporate relocation and new business expansion.
Earlier this year, Austin was ranked No. 1 on Forbes' list of “The Best Cities for Jobs" among the top 100 major metros in the country. In addition, Kiplinger's Personal Finance rated Austin the No. 1 city to live in for the next 10 years. It's no surprise, then, that companies like Dell, Whole Foods, and Samsung choose to call Austin home.
In fact, Austin has added approximately 13,000 jobs in the past 12 months, and about 30,000 people moved to Austin in 2010. The Austin metropolitan area grew a staggering 41.9 percent from 2000 to 2011, compared with the population growth for the entire state of Texas, at 21.9 percent, and the United States, at roughly 10.3 percent, for that same period, according to the U.S. Census Bureau.
With almost 40 percent of the metro's population falling in the prime working-age range of 18 to 44, Austin is a great market for apartments. Approximately 41 percent of Austin's residences are renter-occupied, and with tightened standards on single-family mortgage loans, the rental population is only expected to increase.
As a result of tightening supply, the Austin metro area has experienced 9 percent annual rent growth in the past year. In some submarkets, including the Central Business District, annual rent growth has been dramatic, reaching approximately 14 percent, according to market research firm Austin Investor Interest. And occupancy has reached 95 percent.
In fact, Austin is experiencing its highest rents since the tech employment boom of 2001—rental rates reached a historic high of $1.03 per square foot this year. Which is why the Lone Star State's capital looks to be gearing up for gargantuan apartment-sector growth.
Transaction Velocity
Austin remains one of the most popular destinations for institutional and private investors. It's common to receive more than 10 offers from private investors and syndicators for a suburban garden-style community, and more than 20 off ers from REITs and pension fund advisors for an urban mid-rise community. While there is very little distressed product available in the market, when a distressed asset does come on line, interest is incredible.
Driving the investment frenzy is the double whammy of falling interest rates and compressed cap rates. Urban Class A cap rates are around 4.75 percent, while suburban Class A is roughly 5.25 percent. Class B product has recently traded at 5.75 percent for a distinctive infill location and 6.75 percent for the suburbs.
The highest conventional apartment sales prices have occurred in and around the Central Business District, where mid-rise Class A product has traded in the $175,000-per-unit range and high-rises have traded around $325,000 or more per unit.
The most popular investment trend in Austin today is in value-add. Investors are targeting '80s- and '90s-era properties and upgrading their interiors with faux hardwood flooring, new appliance packages, and lighting and hardware fixtures. In many cases, the buyer is also updating the clubhouse interior for a more modern, sleek environment.
Back in 2005, it was common to see major upgrade programs in which the investors spent $7,000 to $10,000 per unit in an eff ort to receive a $150-plus rent increase per month. In 2011, investors have scaled that back, conducting a “light value-add” business plan in which they spend $3,000 to $5,000 per unit in hopes of getting an average rental rate increase of $50 to $100 per month.
Recent Trades
An example of a recent Class A suburban trade is Alexan Swenson Farms. The 336-unit property, located in Pflugerville, received 16 offers, primarily from private investors. The winning bidder was a California-based syndicator with years of investment experience.
Despite being a beautiful community, Alexan was in a submarket that experienced oversupply in 2008 and 2009 and thus had more than 20 percent concession at the time of sale. The property traded at an aggressive year-one cap rate, but the investor focus was on the opportunity to burn off concessions and rapidly grow net rents over three to five years.
A recent Class B infill trade is the 276- unit Park at Allandale in the central submarket. Its location has zoning restrictions and very little buildable land, allowing the locally based private operator/owner buyer to rehab, reposition, and generate higher rents for years to come.
Supply Chain
Austin is well-known for its roller-coaster development cycle. The recent boom-to-bust apartment supply cycles in the city were from 2000 to 2003 and 2006 to 2009. Today, Austin is delivering apartments at a historically low pace while experiencing record high absorption.
There are about 2,500 conventional apartment units breaking ground in 2011 and roughly 5,000 units planned for 2012.
Due to Austin's rapid growth, it's not possible to make blanket assumptions about the entire metro area. Rather, it's important to dissect the city by submarket to gauge supply's eff ect on a particular area.
Absorption was roughly 7,700 units in 2010 and slightly more than 2,300 units in the first half of 2011. And absorption rates should remain strong, driven by the metro's phenomenal demographics.
Patton Jones is the managing principal of the Austin office of Apartment Realty Advisors.
