In recent years, Austin, Texas has become a prime destination for individuals and businesses alike, driven by its appealing mix of affordability, job opportunities, and vibrant lifestyle. The city has witnessed an unprecedented housing boom, with new developments springing up to meet the high demand.
This swift construction led to an oversupply of apartments, creating a complex landscape for investors and developers alike. Austin has the lowest occupancy rates in the Sunbelt, currently sitting at 86%. In 2023 alone, average rents nosedived 12.5%. These high vacancy rates and declining rents present a huge challenge for investors and developers
In this newsletter, we dive into how Austin’s population surge has shaped its housing market, the impact of recent developments, and how rent uncertainty creates a challenging environment for owners and investors.
Austin has become a popular destination for people relocating from other states, particularly from high-cost areas like California and New York. The COVID-19 pandemic accelerated migration trends, with many individuals and families seeking more spacious living environments and flexible work arrangements.
Notable tech giants such as Tesla, which moved its headquarters from California to Austin, have significantly impacted the local economy. Apple has expanded its presence with a new campus in North Austin, while Oracle moved its headquarters to the city, joining established companies like Dell, IBM, and Google, which continue to grow their operations. The influx of these companies has created thousands of jobs and played a huge hand in driving migration to Austin.
Apartment Boom and Oversupply
With so many new residents calling Austin home, housing soon became in short supply. The high demand for housing pushed apartment building values and rents to record highs. Austin experienced double-digit rent growth in both 2021 and 2022. New multifamily developments sprouted across the city, from high-rise buildings in downtown Austin to sprawling suburban complexes in surrounding areas.
Developers, anticipating continued high demand, built a record number of multifamily units, especially in downtown and other high-demand areas. 28,000 units have been delivered over the last 12 months, more than double the 14,000-unit average between 2017 and 2019. Today, Austin faces an apartment oversupply issue. The surge in construction has outpaced the actual demand, leading to a surplus of available rental units.
Vacancy rates have risen upwards of 14%, and landlords are offering incentives such as reduced rent, waived fees, and other perks to attract tenants. The immediate outlook is not set to improve any time soon. Currently, 10,000 units are in initial lease-up in Austin. Another 41,0000 units are under construction and set to come online in the next 2 years.
While this oversupply has provided renters with more options and potential bargains, it poses challenges for multifamily operators and investors who are struggling to achieve desired occupancy levels and rental income.
High vacancies and underperforming investments
Apartment owners in Austin are facing significant challenges due to high vacancies. Management needs to spend more on marketing and offer incentives to attract tenants. High vacancies mean reduced rental income, and some owners are finding it challenging to cover essential costs such as mortgage payments, property taxes, insurance, and maintenance, often leading to an increased risk of loan defaults.
The pain is mostly being felt by those who built or purchased an asset in 2021 and 2022, when rents were at their peak. At that time it looked like rents were going to continue their upward trajectory, and many investors banked on rising rents when they bought properties. What they then experienced was the opposite, rents and occupancy soon went into free fall. The combination of missed rental income projections and increasing debt costs is putting these recent acquisitions in a precarious position. In a recent example, Tides Equities defaulted on a $100M multifamily loan for an Austin asset bought in 2022.
Developers have hit the brakes. A declining occupancy rate, stringent underwriting standards, and rising costs of capital have caused many developers to shelve projects over the past year. As a result, construction starts dropped significantly from 11,400 units in the first half of 2023 to just 1,800 units in the first half of 2024.
Unique challenges for investors
Investing in a market like Austin with declining rents requires some speculation. Rent comps and rent growth trends are a core component of underwriting a property. In an oversupplied market like Austin, that data may no longer be viable 3 months from now. Austin investors are finding themselves speculating on how rents will decline, and when the new supply will be absorbed.
Tens of thousands of units are currently being built, and investors are closely monitoring new apartments being added nearby. After all the addition of one newer, more modern apartment building down the road will significantly impact the occupancy rate of another building.
The lending environment in Austin is also challenging. Investors might face stricter lending conditions, higher interest rates, or challenges obtaining loans altogether. Lenders are skittish about providing loans in a market with declining rents; they view it as a higher risk.
Austin’s outlook
In the short term, Austin’s oversupply issues present massive problems to both investors and developers. Some may have to give the keys back to their lenders. The city's rapid growth sparked an unprecedented housing boom, but this swift development has led to an oversupply of apartments, creating a challenging environment for investors and developers. The combination of high vacancy rates and declining rents poses significant challenges, requiring strategic adaptation and careful market analysis.
All is not lost for Austin multifamily owners, however. The city continues to attract a large number of new residents each year, and this trend shows no signs of stopping. A bright future likely awaits the investors and developers who are able to weather the storm.
-Ben Michel
Ben Michel is the founder of Ridgeview Property Group, an investment firm specializing in acquiring multifamily real estate. Register Here to be notified of available investment opportunities.
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