Austin Apartment rents rise as supply tightens

The article below appeared last saturday in the Austin American Statesman. It’s good news, but I want to point out a big difference in Austin’s Apartment market and the single family rental home market in Austin.

While new supply of apartments has slowed, creating a tighter supply (the article quotes the 1819 units added this year as the lowest number since 1993), single family homes for rent in Austin continue to be supplied in ample amounts by new investors, which is holding the rents down. Each time an investor buys a home that was previously owner/occupied, or a new home that would otherwise be purchased by an owner/occupant, that adds more supply to the rental home market and gives renters more to pick from. Currently, landlords are still competing for fewer renters than there are homs for rent, which is holding rents down. (October 2005 average single family home rents actually fell from Oct 2004)

Currently we still have about a 3 month supply of rental residential housing, and we need to be at a 30 supply to return to the rental rates we saw in 2000/2001. Currently, homes in Austin still rent for less than they did in 1999.

The good new though is that much of what that Statesman article says about the economy and job growth will eventually bring the Austin rental home market into tighter supply, even as investors continue to pour in and create new inventory. Investors should be prepared for rents for houses and duplexes to hold steady for another year or two before any significant increases can be achieved. Meanwhile, the value of the home you own should be moving up nicely regardless of rent amounts, and appreciation is the real reason to buy in Austin, not cash flow.

Here is the article below:

Saturday, December 24, 2005

Austin-area apartments are harder to find and significantly more expensive to rent than they were a year ago, and a dearth of new construction combined with an influx of new residents likely will send rents and occupancy rates higher in the coming year.

Capitol Market Research reports that the average occupancy rate for Austin-area apartment complexes increased 3 percent from last year to 94.4 percent, the highest rate since 2000.

The average monthly rent jumped 6 percent to $839 for a two-bedroom, two-bathroom unit, the highest rate since 2001, after four straight years of decline.
Developers delivered just 1,819 new units to the market, nearly 450 fewer than were built last year and a small fraction of the nearly 10,000 units added in 2001.

“With the job growth, higher interest rates and lack of multifamily supply, we’re going to continue to see rent growth and occupancy rates increasing,” said Brett Denton, former regional vice president of development and acquisitions with Gables Residential and now a partner in multifamily development firm Ardent Residential.

Apartments are filling up as sales of new and existing houses continue at a record pace.
Capitol Market Research President Charles Heimsath said population growth is fueling growth in the apartment and housing markets.

Central Texas’ 4.3 percent November unemployment rate puts the area essentially at full employment, Heimsath said. Employers adding jobs will have to bring in new workers.
“In addition to migration, you also have household formation from natural increase,” Heimsath said. “We’re now at a population base that’s large enough, at 1.3 million in the region, where the households that are already here are spawning additional households as people grow up and leave the nest.”

The Austin-area multifamily market had been in a free-fall since 2001, when the tech bust wiped out tens of thousands of jobs and population growth stalled. Apartments emptied and rent rates plunged, but multifamily developers continued to deliver thousands of new units to the market.
Because it takes only about five months to build a house, residential developers can quickly put on the brakes when demand slows down, Heimsath said. “But from initial groundbreaking or initial site work to completion of a 300-unit (apartment) project is typically two years. It just takes a while to get things going, and it also takes a while once they are going.”

This year’s addition of just 1,819 units to the market is the lowest since 1993, he said.
Denton said suburban rental rates are now about 85 cents per square foot, but developers need close to $1.10 per square foot to justify construction in light of a 25 percent increase in construction costs in the past two years.

That economic reality is what’s driving most multifamily development into the inner city.
“Close in, the economics of development make more sense than in the suburban areas because of the higher rental rates and higher occupancy rates,” Denton said.

Heimsath estimates that half the projects under construction now are in the West Campus area near the University of Texas, where rents average $1.90 per square foot. He expects between 3,000 and 4,000 apartment units to be added next year, a significant increase but still not enough to give renters more leverage.

“I think everybody can expect their rents to go up next year,” Heimsath said. “The days of widespread concessions and rent specials are rapidly coming to an end.”

Mike Stotts, owner of Austin-based apartment locator service HomePlace Apartment Search, said today’s market is still a far cry from 2000, when rent rates were much higher and renters sometimes resorted to slipping deposits under the doors of apartment managers to rent units they had not even seen.
“This is a slow, steady and somewhat healthy increase,” Stotts said. “It was over the top in 2000.”