June 29, 2017
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Connect Media recently ran a report about the Texas apartment markets, which showed that vacancies remain low, as effective rent continues increasing. To get a better idea of Texas apartment trends, Connect Media spoke with ARA Newmark’s Vice Chairman Pat Jones, who is based in Austin.
Q. Is the Texas apartment market slowing down?
A. Not at all. Apartment fundamentals are steady and healthy: 2.2% employment growth in Texas versus 1.6% nationwide, population growth of 10.8% since 2010, 94.3% statewide apartment occupancy, and the Texas Business Outlook survey administered by the Federal Reserve Bank of Dallas, a recurring survey of over 900 business executives in various industries across Texas, indicates increased expectations of a positive environment for general business activity.
Now, having said all of that, investment sales volume has slowed. At this point in the real estate cycle, many of the core newly-built properties are not ready for sale as they are in late stage lease-up, and/or the developer is waiting for the rent roll to mature. In the B/C product space, owners are experiencing organic and upgraded rent growth, and are finding it hard to identify good buying opportunities.
Q. What is going on with the investors?
A. Buyers outnumber sellers, so cap rates remain low in the 4.5% to 5.5% range for Class A and 5.25% – 6.25% for Class B / C product. The core investment sales category is seeing bidders composed of private wealthy family offices, private fund buyers and private REITs. Public REITs and pension fund advisors have not been buying and/or have not been competitive in the last 12 months. Value add remains the most popular bucket of investment capital resulting in a scarcity premium that is generating aggressive low cap rates. This buyer pool is IRR driven as opposed to buying off the trailing three-month cash flow. Investors are implementing a five-year upgrade program, increasing rental rates and selling post-renovation.
Q. What is your crystal ball telling you?
A. Well, new construction will slow in 2019 and beyond. Equity providers across the country, in general, have become very cautious, as they take note of the high delivery levels that took place from 2015-2017. Debt and equity aren’t as readily available, either, meaning it will be a challenge to get any new multifamily construction project financed.
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