August 16, 2017
Things have been booming in the Texas Hill Country, specifically in Austin, San Antonio, and areas in between. JLL Managing Director Scott LaMontagne is a Central Texas multifamily expert and, coincidentally, will be one of the panelists at the upcoming Connect Texas Multifamily conference on Aug. 24. Connect Media recently queried LaMontagne about the factors driving the incredible Central Texas growth, and if that growth can last.
Q. What is driving growth in Hays and Comal Counties, between Austin and San Antonio, and how is it impacting the multifamily sector?
A. I think there are many factors contributing to the growth. New luxury units in Austin and San Antonio are driving up the cost for renters. Those are budget conscious and often willing to trade a commute for lower rental structures.
That being said, the Interstate 35 corridor has its own allure. Many companies believe the stretch of I-35 between Austin and San Antonio provides both a geographic and hiring advantage over locations in the Texas primary markets. For example, Amazon has built a 1-million square-foot fulfillment facility in Schertz just north of San Antonio, and an 855,000-square-foot center in San Marcos.
Such companies are providing high-quality jobs, and families are attracted to the Texas Hill Country lifestyle. Many of these folks fall squarely in the renter profile providing the demand to fill additional apartment developments. Finally, land costs are more palatable for developers, which helps their yields. Equity for developers requires a minimum yield threshold and with escalating costs, a lower land basis is often what makes a deal pencil.
Q. How do the multifamily markets differ between Austin and San Antonio?
A. Austin is an urban core-centric city with a constant stream of 18-34-year-olds moving in. Austin’s in-migration is 157 people per day. Employment growth this cycle in Austin has averaged close to 4%, although slowing to 3.2% more recently. These factors allow Austin to absorb new units about 20% faster than the national average. It takes on average four jobs per one unit absorbed. In addition, many domestic and foreign institutions are attracted to Austin’s fundamentals, making it an approved destination for acquisitions, despite the size of the MSA.
And, San Antonio has really come into its own this cycle, in large part due to incentives that both the City of San Antonio and Bexar County have offered to developers to spur residential development in and near the urban core. Until this cycle, San Antonio was largely a suburban development market. Now we are seeing a vibrant high-density sector, not only in the core but also at the Loop 1604 and Interstate 10 corridor as well. Many institutions that used to shy away from San Antonio are entering into the market, as high-quality assets complete construction and stabilize. We are also seeing more institutional interest in development equity, which bucks the historical norm. These trends, along with a growing tech sector, helped San Antonio to become a strong contender for millennial in-migration, which are typically renters by choice.
While both Austin and San Antonio have recently had pockets of over-building, both markets should see sharp declines in deliveries next year. I anticipate we will see strong rental growth in both markets in the back half 2018 and into 2019.
Q. What do you see happening with multifamily in Central Texas in the next 12-18 months?
A. So long as there are no black swan events at the national or international level, it appears as though our local demand metrics will remain robust. As supply pipelines pull back a bit, it should give us a necessary pause to allow our fundamentals to strengthen.
As lenders take chips off the table with dispositions, we should see some loosening in the construction lending sector. For the last 18 months, lenders have struggled with concentration and regulatory issues due to Basel III and specifically HVCRE rules, making capital stacks much harder to form on new construction. It created pressure on new multifamily starts, which is why we should see a dip in supply next year.
Throughout the current cycle, there has been a lot of older assets gentrified via a frothy value-add market. As these assets stabilize, we anticipate that capital sources will form, eager to get enhanced yields on a mid-long term basis on these renovated assets.
For comments, questions or concerns, please contact Amy Sorter