The big question has revolved around location -- what is the best available spot to realize this vision? A new consensus seems to be emerging around a prime lake-front lot between Seaholm and the current site of the Green Water Treatment Plant. The location -- currently an electrical substation -- is adjacent to the beautiful art deco Seaholm power plant structure which is set for mixed use redevelopment over the next few years, The facility is currently being decommissioned in preparation for redevelopment. On the other side, the Green water treatment parcel is in the earliest stages of development -- initial plans have not even been drafted.
Graphic Source: Austin Chronicle
Here is a summary from the Chronicle:
"So many parcels, so many plans! For the new central library, the site now proposed and favored by library advocates and the city is the current site of the Seaholm substation, an Austin Energy facility that fronts on Cesar Chavez, between West Avenue and Shoal Creek. Library advocates are excited about the location, where a stand-alone destination library (envisioned as world-class architecture) would overlook Lady Bird Lake. That signature structure would be flanked to the west by the redeveloped Seaholm Power Plant site and to the east by a four-block, high-rise redevelopment on the Green Water Treatment Plant site. Shifting the library from the Green site proper, said Council Member Brewster McCracken, will accelerate the project's schedule – with a design competition now slated for 2008. "They're a huge winner on this," he said of the library, which also gains parking and site preparation in the deal."
IMAGE: Congress Avenue was the heart of commerce in the 1940s
With the creation of the thriving second street district and the arrival of a new breed of downtown condo residents, Congress avenue may be on the upswing. Over the next few years, the Austonian and a sprawling multi-Marriott complex will link Congress Avenue to the Second street district and the convention center dining district.
Today, a first step towards the revitalization of Congress avenue was announced. After 9 years of closure, the historic Yaring's department store on Congress between 5th and 6th is being redeveloped into retail and commercial space -- bringing new life to a shuttered eye sore on a key downtown block.
Here is the summary from the Statesman:
The historic Yaring's department store on Congress Avenue, which has sat empty for nine years, is getting a dramatic redo.The building at 506 Congress Ave., which was constructed in the late 1880s, is best known for the store Jacob Schmidt opened in 1936. Yaring's, once a pillar of downtown commerce, closed in 1998. A forlorn "For Lease" sign has hung across its pink stucco facade for years.Now, the plan is to renovate it for retail or restaurant use on the first floor and offices on the second and third floors, said Kevin Kimbrough, vice president of Oxford Commercial, which oversees leasing of the building for owner Walter Penn.
IMAGE: Yaring's Department Store on Congress Ave to be Redeveloped
With the development of retail, cultural institutions, office, hotels, and condo units, these developments are likely to shift the center of gravity for downtown Austin further to the West. In fact, the Seaholm development, with the redeveloped shell of the mammoth art deco power plant at its core, may become the new heart of downtown. The Second Street district, which now forms the Western edge of the downtown core, will be much more central once development reclaims the blocks to the West.
Here is a summary from the Statesman:
The city is taking the first steps toward redeveloping two of its high-profile downtown properties by rezoning them.The City Council will vote tonight on rezoning the Seaholm Power Plant site in preparation for a mixed-use project that will include 80 condos, a 160-room hotel, 100,000 square feet of office space and up to 60,000 square feet of retail.The city wants to rezone the property to allow building heights of up to 393 feet. The height is now capped at 120 feet.The City Council could also approve a resolution to begin the process of rezoning the site of the Green Water Treatment Plant.No plans for that site have been formed, but the city intends to release requests for proposals from developers early next year.
There are lots of reasons why investors have stayed away: anti-flip provisions in contracts, credit issues in the mortgage markets, special deed requirements for renting, etc. One likely reason that has not received much attention is that investors may not stand to earn much money in the current condo market.
Let's say that you purchase a 1,200 square foot unit in a new building for $400 per square foot. Your unit would cost $480,000 and you would likely need to put up at least 10% -- $48,000 -- early in the construction process. If you are like many real estate investors, you would likely finance 80% of the purchase price to take advantage of cheap real estate financing. By taking loans, you can increase your total return by buy speading your cash across multiple properties .
Since restrictions would likely prevent you from flipping the unit until after construction is complete, you would have two choices: either trying to earn money by flipping the unit once no-flip provisions have expired, or by holding the unit for a longer period of time. By holding the unit, an investor would hope to capture rental income during the short term and capital appreciation over the long term.
Here is the problem, downtown Austin rental rates won't cover the costs of the unit. Let's review the math:
Monthly Revenue Received From Renter
$2,700 (Rent @ $2.25 / SF)
- $ 540 (20% Allowance for unrented months / leasing costs)
$2,160 Total Income
Monthly Costs Paid by Owner:
$1,920 (Interest-Only Mortgage @ 6%)
$ 504 (Condo Association Fee @ $0.42 / SF)
$ 878 (Monthly Property Taxes @ $2.20 / $100 Assessed Value)
$3,302 Total Costs
Monthly Loss from Renting: - $1,142
So, on a $480,000 unit, an invest-and-rent strategy would likely loose $13,704 per year on a $96,000 (plus fees) cash investment: a rate of return of (-)14.3%. In order to break-even on paper, a unit would need to appreciate at 2.5% per year. While this is possible, that just gets the investor to break-even, which is not a very exciting return. One important thing to note is that the economics change over time for investors that plan to hold for a decade or more. While mortgage payments stay level, and may even go down if the owner refinances, rents will likely continue to rise over time. Although property taxes and condo association fees also rise, they are only 40% of the cost equation in the first year.
But that's not all! If you are buying a unit in a new project, you will likely have to put money down --$48,000 in this case -- at least a year before project completion and sometimes even earlier. This money doesn't begin earning a return until a renter occupies the unit, adding to the start-up costs required to invest in a downtown condo.
Finally, one more issue for investors is that the Austin condo market is new. Nobody knows what the demand will be for the planned supply of units. It is a market that doesn't exist today, and there is always a risk of under or over-building. For investors, returns must be weighed against the risks of the individual investment. Since market uncertainty raises the perceived risk, investors will only put money on the table if they believe that they can achieve an appropriately high return.
These economics explain why there has not been much of an investor market for downtown condos. At this time, it is important to note that these economics don't really apply to buyer who plan to live in their units. For one, the economics of buying are very different as mortgage interest and property taxes are fully tax deductible. In addition, buyers get value out of their owner-occupied unit every month that they live there without the costs of finding and keeping renters.
These economics are not permanent, three variables can change the math at any time. If prices go down, rental rates go up, or interest rates go down, the economics can look very different. In the current market, rental rates are going up as interest rates continue to drop, making investor returns more attractive everyday. While construction costs are unlikely to drop significantly, oversupply could possibly lead to a drop in purchase prices. More likely, new unit costs will continue to inch upward. So if you are thinking of investing and can get the right deal, it may be possible to make the numbers work.
In the 10-years prior to the Miami condo boom, 7,000 condo units were built. At the peak of the boom, a total of 55,000 new units were announced. This is a LOT of units: enough apartments to fill 275 separate buildings with 200 units each for a city about twice the size of Austin. When the bubble burst, 22,000 were still under construction. The bubble ended badly with steep price declines, a lack of market liquidity for condo owners, and bankruptcy for some large-scale projects.
Will the same thing happen in Austin? The answer is that it is very unlikely. While future condo demand, prices, and appreciation (or depreciation) remain an absolute mystery, the market forces in Austin are very different from the market forces that drove the Miami condo bubble.
The problem in Miami was that prices were driven up by speculators who had no intent to live in the units they owned. Their hope was to sell the contract for a profit as soon as possible to another buyer. With too many investors and not enough real buyers, the cycle eventually ended. As investors pulled out and prices started to drop, speculators stopped investing in condos, significantly lowering demand. With a large supply of units and relatively few real buyers, prices continue to drop today. Like all declining real estate markets, many real buyers wait out the fall, waiting for the bottom to buy again.
So why won't the same thing happen in Austin? Developers have learned from the Miami example and put significant protections in place to protect themselves from speculators. When someone buys multiple units and goes bankrupt, developers are often left to pay the price -- as a result, they have a strong incentive to carefully screen investors.
For example, most major projects in Austin include the following investor safeguards:
- No flip provisions that prohibit owners from selling their contracts or units until after construction is completed. At projects like 360, some contracts limit owners from selling until 6 months after closing.
- Limitations on leasing units: Many projects require special deeds for investors who plan to rent their units to others. In some projects, these deeds are limited to 25% of the buildings units.
- Most projects that offer special deeds for investors that permit renting also require higher deposit requirements. Often, initial deposits are twice as high for investors as they are for owner occupants.
Together, these requirements make it less attractive for investors to speculatively invest on downtown Austin condo units in the same way that they did during the southern Florida condo bubble. In addition, the condo financing market has also changed significantly in the last 6 months, making it much harder for investors to borrow money for speculative units that they do not intend to occupy. Finally, while the rate of condo development in Austin is unprecedented by historical standards, it is far below the rate of development in Miami. During he Miami boom, 24.4 units were planned per 1,000 population. In Austin, the equivalent rate is 5.6 per 1,000 population, including thousands of units in projects that may never be built.
While nobody knows if Austin condo units will be a good or a bad investment, it's a healthy fact that many of the larger projects have protections in place to protect against Miami-style speculation.