This negative trend is in stark contrast to what is happening in the rest of the City, where employment growth and migration are reversing the current apartment supply glut. According to market data from Marcus & Millichap Real Estate Investment Brokerage, citywide apartment vacancy rates are expected to drop 9% this year. In hot areas of the city -- such as the south central area near South Congress Ave, vacancy is expected to drop significantly as more units are absorbed.
Across the city, rents dropped 3% last year as more than 10,000 new units hit the market. This year, rents are expected to increase slightly (2.4%) as only 2,860 new units are expected to hit the market.
In downtown Austin where rents are highest, tight spending is limiting absorption of new units. Central Austin apartment rents average $1,014 -- significantly higher than the citywide average of $864.
According to the firm, "the city is forecast to add 19,100 jobs this year, prompting a rush of new residents and a rise in demand for residential rentals. At the same time, the apartment development pipeline has drastically thinned out, with 2,860 new units expected this year, down from 10,340 in 2009."
With a strong supply of downtown apartments, potential renters will be able to negotiate better rents and more attractive incentives, especially for higher-end units.
Last year alone, more than 1,200 new downtown rental units emerged. Unbelievably, more than 900 of these have already been rented. These units fetch some of the highest rents in central Texas. At the Ashton, a new project in the 2nd street district across from the Dell Discovery Center, rents average $2,500 a month. That will rise to about $3,000 once incentives of two months of free rent ends. The 36-story $110 million project features marble-tiled bathrooms, two-story penthouses, a wine cellar and private movie theater.
Summary: Recent Downtown Austin Rental Projects
|Monarch||800 W Fifth St|
300 N. Lamar
|300 N. Lamar|
Red River Flats
|901 Red River St.|
|201 Lavaca St|
Robertson Hill Apartments
|1000 San Marcos St.|
AMLI on 2nd
|421 W Third St|
|127 E. Riverside Dr.|
Legacy on the Lake
|43 Rainey St.|
Gables on 5th St
|1611 W. Fifth St.|
|300 S. Lamar|
|101 Colorado St|
Gables Park Plaza
|W Cesar Chavez St @ Lamar|
|507 Pressler St.|
While units are being absorbed at a record rate, it's taken lots of incentives to get leases signed. Most projects are offering 1-3 months of free rent to get people to sign leases in this soft, hyper-competitive market. Downtown rents vary greatly, from close to $1,000 per month to more than $6,000 per month.
Here is a summary of incentives from the Statesman:
- At the 29-story, 305-unit Monarch on West Fifth Street, developers are offering two months of free rent on some two-bedroom units, and three months of free rent on the four remaining penthouses. The project is 97 percent leased.
- At Greystar Red River Flats, at Red River and Ninth streets, rents for one-bedroom units have been lowered to $1,250 a month from $1,650, and two-bedroom units are renting $1,850 a month, $575 off the market rate, said Candiss Escobar, regional property manager. The project is 96 percent leased.
- On top of rent discounts, some complexes are offering incentives for tenants who sign a lease within 24 to 48 hours of seeing a unit, said Shannon Sullivan, leasing consultant for Robertson Hill Apartments on San Marcos at East 10th Street. With the three-month rent special, one-bedrooms at the complex now start at about $950 a month, down from $1,260 a month, and two-bedroom units normally priced at $1,800 a month are renting for about $1,400 a month, she said.
- At Cole, 119 new apartments on South Lamar Boulevard just south of Lady Bird Lake, it's been "extremely busy," said Jessica Higgins, a leasing professional with Lincoln Property Co. On average, five new leases a week have been signed since leasing began April 15, Higgins said. With current specials, studios start at $1,202 a month compared with the $1,420 a month market rent; one-bedrooms start at $1,384 a month, down from the $1,636-a-month market rate, and two-bedrooms start at $1,947, down from $2,301 market rent.
Since the vast majority of Austin rental units are outside of downtown, the recent slide most effects large commodity complexes in the areas surrounding the city. In downtown, where there are few units but where prices are much higher, developers are working equally hard to fill large new projects such as the Monarch & Legacy on Town Lake. For these developers, the hardest units to fill are the most expensive. Demand still remain solid for all sorts of affordably priced downtown housing, whether condos or rental units.
Here is a summary from the Austin Business Journal:
The Austin apartment market experienced one of the biggest drops in annual rent growth in the country during the third quarter, a new report shows.
Austin’s annual rents increased just under 1 percent in the third quarter, down from a 5.6 percent increase in the third quarter 2007, according to the report from Dallas-based Axiometrics.
“We’ve seen a big change in Austin from a year ago,” Axiometrics President Ronald Johnsey says. “Austin had been experiencing incredible job growth, and now that’s fallen off the cliff. The apartment vacancy rate has increased from 5 percent to 6 percent in the last year. Meanwhile, developers are delivering 8,000 new units this year.”
Johnsey predicts the market’s vacancy rate will rise to 8.1 percent in 2009. But developers have recognized the need to curtail new product. New multifamily permits dropped nearly 30 percent in the last year, and that leveling of product against demand should help stabilize the market in coming years, he says.
“That makes me a little more optimistic for Austin going forward,” Johnsey says.
Austin is likely to fare better than the rest of the country in the rental realm. Nationwide, rent growth is the slowest its been since early 2004, the report shows. The apartment vacancy rate increased to 6.5 percent last quarter, up from 5 percent a year ago.
Johnsey attributes both factors to the slowing economy and lack of new jobs. He says the significant inventory of unsold houses and condos has put pressure on housing prices nationwide and made it more difficult for apartment companies to raise rents.
The project is expected to contain 220 units and 15,000 square feet of retail on the 1/2 acre site. The project is scheduled to begin construction next year and to open to residents in late 2010 or early 2011.
Gables, a large national apartment developer with 63 communities and more than 50,000 units under management, is also working on a new 168 unit project on 5th street near Mopac which will rent for $1,300 to $1,800 per month. Gables also developed the Gables West Avenue Apartments, their first downtown project, at 3rd & West Avenue near Whole Foods.
Gables West Avenue Apartments at 3rd & West
Here is a summary from the Austin Business Journal:
A high-rise apartment tower is being planned for downtown's Warehouse District in an area teeming with new residential activity.Gables Residential plans to build a roughly 200-foot tower with about 220 units and 15,000 square feet of retail and commercial space at Fourth and Guadalupe streets. Gables bought the nearly half-acre site of former Fox & Hound Smokehouse and Tavern, east of Republic Square Park, from a group of local investors last year. The 15-year-old Gingerman Pub, also on the site, will move, general manager Kristin Jacobson says.The pub's original facade will be preserved as a historical feature of the new building, says Jennifer Wiebrand, spokeswoman for Gables Residential. The project will be able to support up to 70,000 square feet of parking.Construction is expected to begin in late 2009 and be completed in 18 to 24 months.
Over the last couple of months, the AMLI apartments downtown have been offering tenants who renew an unprecedented 30% discount. This is strong evidence that the downtown rental market -- with many new units arriving this year -- is going to see a new level of competition for tenants. This is good news for anyone who wants to live downtown as lower rents make units accessible to a broader population. It’s bad news for investors and developers who will see rental incomes decline.
Here is what is happening:
- June rental occupancy in the broad Austin market has declined 1.5 points to 93.4%.
- There are 1,000 fewer untits being occupied today than at the beginning of the year
- Nearly 13,000 new units are being completed in greater Austin in 2009
- The new AMLI tower, the Monarch, and Legacy on Town Lake will add a signigicant number of downtown units in 2009
- The Monarch -- one of the first downtown rental projects to open this year -- is 45% leased and 25% occupied today. That leaves a lot of units looking for tenants.
Here is an excellent analysis from the Statesman:
"The market remains in decent shape for the moment, but it's concerning that the loss of momentum is so pronounced," Willett said. "Plus, with so much additional product now under construction, it's pretty easy to see the headlights of that train bearing down on you."
Austin is on track to add 12,810 apartment units through the end of 2009, according to M/PF. That's the third biggest block of new supply on the way anywhere in the country, trailing only the 19,217 units under construction in Dallas/Fort Worth and the 18,848 units under way in Houston, M/PF reports.
Willett said the Austin area needs about half as many units as are now under construction based on current demand, which he says has been sluggish. He said there are 1,070 fewer occupied apartments now than at the start of this year. He predicts it will take two years for Austin to burn off its excess supply "if you stop building right now."
Willett says his forecast of a glut applies citywide, from downtown to the suburbs.
But Spencer Stuart, an executive with the developer building the 31-story Legacy on the Lake apartment tower on downtown's eastern edge, said leasing activity is strong in and near downtown, as well as areas closer in.
"We're seeing strong demand in the urban cores of all the markets we're in," said Stuart, senior managing director of Legacy Partners Residential Development Inc., a Foster City, Calif., firm with upscale apartments in states including California, Arizona, Colorado and Washington.
Legacy entered the Austin market in 2006 with it and Capmark Financial Inc.'s acquisition of the 2,044-unit Riata apartment community in Northwest Austin.
Riata was 97.1 percent occupied by the end of June, up from 89.8 percent as of Jan. 1, Stuart said.
Stuart predicts properties like Riata and the upscale apartments at the Domain in North Austin and in the downtown market are "going to do very well."
Also, rising gas prices "bode very well for the downtown market and for properties that are clustered in around a lot of the jobs, like the Arboretum," Stuart said. "If you can walk to your job, you can pay more for rent, and your lifestyle got better because you're spending less time commuting and more time working or playing."
But Willett stands by his forecast, contending that the Austin metro area, which "ranked as the star apartment market performer in Texas over the past few years ... is losing its luster."
He thinks the market will bottom out by the end of 2009 before occupancy begins ticking back up.
"As more and more of this product gets completed, you're going to start seeing the rent discounts kick in, and we're going to be in an incredibly competitive leasing environment in Austin," Willett said.
Rent growth already is slowing. Rents rose 3.6 percent from June 2007 to June 2008, compared to a pace as high as 6.1 percent during 2007, according to M/PF. The average monthly rent is now $839, up from $787 in June 2007, M/PF said.
Willett expects rents to be flat this year, as occupancy dips another 1.5 percentage points during the next 12 to 18 months. By year's end, he said, close to half of the apartment communities will be offering anywhere from a month to a month and a half of free rent.
"The leasing environment looks like it will be especially competitive at the top end of the market," Willett said. "Discounting probably will be rampant at the new communities in initial lease-up, and that seems apt to preclude any rent growth for the market as a whole."
Stuart thinks Willett will be proved wrong about the Austin market. He said he isn't worried about leasing up the 187-unit Legacy on the Lake, formerly Legacy@Town Lake. And the company is looking for a site for a second project, perhaps four stories tall, "as close to downtown as possible."
"We know there's a strong demand for the downtown lifestyle," Stuart said, adding that demand has been well-
established in the Rainey Street area, where the Legacy project is rising, with the selling out of nearby condominium projects like Milago and the newly built Shore.
Rents at Legacy on the Lake will range from $1,331 a month for a 659-square-foot unit to $6,931 a month for the four penthouses with 2,876 square feet, Stuart said. Leasing is expected to begin in August, with the first tenants moving in in October.
Stuart said Legacy could command — and get — higher rents for its downtown project but is sticking with the ones it initially projected in order to lease the building quickly.
At the new 29-story Monarch apartment tower on downtown's west side, 25 percent of the 305 units are occupied, and the building is 45 percent leased, representatives say.
Units rent from $1,333 a month for a 681-square-foot unit to $12,935 for the largest penthouse, with 3,530 square feet.
Monthly rents average $2,100 to $2,300 for the most popular one-bedroom, with about 1,100 square feet, and rents start at $2,630 for the most popular two-bedroom, with about 1,400 square feet.
Tenants include young professionals, entrepreneurs, executives, professors, a state senator, and transplants from New York and the West Coast, as well as people who plan to buy units in condominium projects now under construction downtown, representatives said.
As part of the initiative, the City is building a comprehensive affordable housing program around the large-scale development of the Green Water Treatment Plant between Seaholm and the second street district. The program has two primary components. First, to ensure that at least 10% of units are affordable to households earning less than $42,000 for a 1-2 person family (80% of the area median income), the City is reducing land prices and requiring developers that developers who want to participate in the project include affordable housing units. Second, the city will dedicate 40% of property taxes generated by the project to a housing fund which will provide subsidies to make additional units affordable.
The City plans to choose a developer in June.
Here is a summary from the Statesman:
City leaders have urged developers to build more affordable housing downtown with little success. Now, Austin plans to put its money where its mouth is with the upcoming sale and redevelopment of the Green Water Treatment Plant and nearby Austin Energy property.Blunting the developers' argument that land and building costs downtown are just too high, city officials plan to give them no choice but to include low- to moderate-priced housing in the redevelopment of the nearly four city blocks and as a result almost certainly will make less on the land sale."We're not in the business of making money," Council Member Brewster McCracken said. "We're in business to achieve public values and goals."The city also plans to directly subsidize additional units for even lower-income families and dedicate 40 percent of the property taxes generated by the redevelopment project to its affordable housing fund."I just think it's an opportunity to have much of both worlds: a lot of tax base delivered, hopefully a significant measurable one-time capital gains in the land sale and then a series of other community goals," Mayor Will Wynn said.
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.
Despite the strong rental market, plans for hundreds of planned downtown rental units have recently been abandoned to make way for condos. At the both the Four Seasons Residences and the Monarch, no rental units remain even though hundreds were originally planned. The Monarch, in fact, was originally proposed as an all-rental project before switching to an all-condo design during construction.
What is driving the change? The answer is simple: cost. The downtown condo boom has driven up both land costs and construction costs for downtown projects. As the cost of building downtown goes up, property taxes have also risen at a rapid rate. As these costs go up, developers are forced to pass on the increases to renters or buyers to maintain the viability of the project. So far, the condo market has shown strong resilience --- units continue to sell well even as prices increase. The rental market, however, is very different.
Today, there is only a small high end rental market in Austin. For rentals in the $2,000 - $5,000 / month range, the market is relatively limited. Today, the downtown premium for rentals is very steep -- downtown rents are as much as twice the rents for comparable luxury units in other parts of the city.
Unlike other cities, affluent Austin buyers prefer to buy houses or condos, they do not seem as inclined to rent big dollar downtown rental units. As costs have driven the required rental rates higher, developers have become concerned that they will not be able to rent all of their units at a high enough rate to make their projects financially viable.
While many units have been redirected from rentals to condos, there are still a few projects such as the new AMLI tower that are still slated to be 100% rental projects. As future downtown rentals do come to market, developers will likely focus on smaller unit sizes in order to keep rates competitve in the face of rising construction costs.
Here is the sumary from the Statesman:
Developers of the Monarch, a 305 unit residential tower under construction on West Fifth Street, have decided to switch the project from apartments to condominiums . . . Officials with ZOM Texas Inc. said their investors this week approved the decision to sell rather than rent the units in the 29-story building, based on what they say is continued strong demand for downtown condominium living. . .Some observers said the change renews questions about whether Austin's downtown residential market might be at risk of being overbuilt. But Charles Heimsath, whose consulting firm does research for many developers about demand for their proposed projects, says healthy sales and reservations at various projects are prompting him to raise his estimates on how many units the market can absorb annually, and he said he expects demand to remain strong for the next two to five years.
And the developer and broker seem very optimistic about the projects sales potential:
Kevin Burns, principal broker of Urbanspace Realtors LLP, the Monarch's exclusive listing agent, said that, without any marketing efforts until now, there already are prospective buyers for at least half the building. From the start, the Monarch's units were built to condominium standards and specifications — larger units with features such as hardwood floors, granite counters and wood cabinetry, for example, with the long-term goal being to sell them, said John Faulk, development manager for ZOM Texas Inc., a subsidiary of Orlando-based ZOM Inc.
The Monarch has a great advantage which is that they will beat many of the other planned projects to the market. With dozens of projects in the early phases of construction or still in the pre-construction planning phases, Monarch will have the advantage of marketing units that are very close to completion, and to target the pent-up demand for new projects.
The Monarch — billed as the city's first luxury rental high rise tower — is now very far along in the construction process. Developer ZOM Austin is constructing what was supposed to be a 27 story rental project on 5th just East of Lamar with 297 rental apartments and 8,500 square feet of ground floor retail.
The confusing part of the project is it's website which now bills the project as the Monarch Condominiums and refers to the upcoming opening of the project's "sales center". It's hard to find any interpretation other than that the project will be largely, if not entirely, converted from a rental to a condo project. There is not currently any websites promoting rentals at the Monarch.
Current sales of downtown Austin condo units are reported to be quite strong. While rental rates are rising, the market for very expensive downtown rental units is very very small. Given hat the Monarch will beat many of the other planned projects to the market, the switch is probably a smart decision. What remains to be seen, is what percentage of the building will be rental and which units will be condos. If anyone has additional information, send us a note!
According to the developer, rents are expected to range from $1,330 to $6,930 (average rent will be $2,298) for units that range in size from 659 square feet to 2,876 square feet. I'm not sure how many people are looking for a $7K / month for a 2,900SF rental unit, but I am very curious to find out.
Here is the summary from the Statesman:
Construction has started on Legacy@Town Lake, a 31-story luxury apartment tower that is the latest high-rise to break ground amid downtown Austin's residential building boom. . . Legacy Partners Residential Development Inc., based in Foster City, Calif., is building the 187-unit project at Rainey and Cummings streets. . . Construction has started on Legacy@Town Lake, a 31-story luxury apartment tower that is the latest high-rise to break ground amid downtown Austin's residential building boom. Legacy Partners Residential Development Inc., based in Foster City, Calif., is building the 187-unit project at Rainey and Cummings streets. . . Legacy@Town Lake is due to open in September 2008, said Spencer Stuart Jr., a senior vice president and partner. . . The project will include a 265-car garage. . . Other apartment projects under construction downtown include AMLI Residential Properties Trust's 18-story, 232-unit complex on Second Street between Guadalupe and San Antonio streets, and Phoenix Property Co.'s complex at the former Goodwill site near West Fifth Street and North Lamar Boulevard. In addition, several condominium towers are under way, with scores more planned in and around downtown.
How does it look? Needless to say, the rental projects in Austin are rarely as architecturally interesting as the major condo projects. This project is no exception. In fact, it almost looks as if the garage is falling over.