REGIONAL MARKETS: SOUTH CENTRAL

APARTMENT FINANCE TODAY • NOVEMBER/DECEMBER 2007

Austin City Limits

Apartment investors can expect good returns in Austin if they play their cards right.

By Dana Enfinger

Austin’s booming economy is supporting a positive outlook for the multifamily market, even though there has been an uptick in vacancies through the first three quarters of 2007.

The city restricts development much more than Houston or Dallas, said Steve Hollingsworth, investment associate in Marcus & Millichap’s Austin office. Additionally, far fewer multifamily units were submitted to the city for review this year than in the previous six quarters, likely due to “shockwaves from the national real estate and mortgage financing meltdown,” said Ryan Robinson, a demographer for the city of Austin, in a multifamily market report.

As developers buy older properties and replace them with higherend complexes, they price tenants out of apartments, especially many students, who have had to seek housing in nearby areas, said both Hollingsworth and Robinson. This move is the most important trend in the city’s multifamily market, said Robinson. “Not only will the new units have much higher rents, there will be many more of them,” he said. In some areas of Austin, the number of new units will be three to four times more than the number of destroyed units. That illustrates the depth of apartment demand in Austin’s urban core, Robinson noted.

For now, both apartments and condominiums are performing well.

“Prices for buyers are a little high right now,” said Hollingsworth. “But it’s a good investment, especially if you can get into the downtown area or near the University of Texas. Those properties are always going to perform. The market is not going to slow down anytime soon. Now, will we see a glut in the condo market? I don’t know. I do know that condos are still going strong.”

Employers have added 28,700 positions during the last 12 months, expanding payrolls 4 percent, according to a report from real estate brokerage firm Marcus & Millichap. Austin employers are expected to expand payrolls at one of the fastest rates in the country this year, adding 23,500 jobs, for a 3.2 percent annual increase.

Since the subprime mortgage industry collapse, the Austin for-sale housing market has become less affordable for many residents. That trend will continue to support demand for local apartments, said Spencer Stuart, senior vice president and partner with Foster City, Calif.- based Legacy Partners. Stuart works in the developer’s Dallas office and is involved with a number of Legacy’s projects in Austin.

“Housing prices have gone up here modestly, but more so than in Dallas,” said Stuart. “In Dallas, it’s like 1 to 2 percent in home prices. In Austin, it’s double that.”

On the construction front, developers have completed 4,500 units in Austin’s metro so far this year, making 90 percent of the annual expected deliveries to the market. Currently, 2,700 units are under construction, 23 percent fewer than a year earlier. Developers are forecast to bring 4,800 units online this year, according to Marcus & Millichap, increasing the apartment stock by 3.6 percent from 2006. A similar number of additions is expected in 2008.

Asking rents finished the third quarter of 2007 at $817 per month, a year-over-year increase of 3.7 percent. They are expected to hit $822 at the end of this year, driven in part by the higher rents that newly developed properties are commanding.

One opportunity for apartment investors in Austin is student housing. “If these properties are run correctly, you are going to have 100 percent occupancy here, no question,” said Hollingsworth.

What has made housing tough for students here is the city’s Urban Neighborhood Development Overlay plan, which allowed developers to tear down small existing complexes near the western side of the campus. The city wanted developers to build higher density projects to combat sprawl.

“Those new units now command higher rents than the old product,” said Hollingsworth. That’s allowed landlords operating existing complexes to raise rents as well.

Luxury rentals are also hot in Austin. Legacy Partners, along with partner Capmark Financial will soon be at work on the ninth and final phase of the Riata, a 2,044-unit luxury complex in northwest Austin, which the duo and two of Capmark’s public pension fund clients acquired last year for more than $150 million. The ninth phase is named ClearWater and is expected to be completed in 2009. Each of the development’s so-called villages (ClearWater is the ninth village) has its own residents’ services manager.

Legacy is also beginning work on a luxury high-rise known as Legacy On The Lake which fronts Austin’s Lady Bird Lake (formerly known as Town Lake). The 187-unit building is going up as a planned luxury rental property, said Stuart. Average rents are expected to be about $2,200 per month.