Austin Reports - RED Capital Group

Transcription

AUSTIN, TEXAS
MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE
RED Capital Group | 2Q14 | October 2014
2Q14 PAYROLL TRENDS AND FORECAST
PAYROLL JOB SUMMARY
Total Payrolls
895,5.m
Annual Change
31.0m (3.6%)
2014 Forecast
32.9m (3.8%)
2015 Forecast
39.4m (4.4%)
2016 Forecast
33.7m (3.6%)
2017 Forecast
29.0m (3.0%)
Unemployment (NSA)
4.6% (Aug.)
OCCUPANCY RATE SUMMARY
Occupancy Rate (Reis)
95.1%
40th
RED 50 Rank
Annual Chg. (Reis)
-0.5%
RCR YE14 Forecast
93.9%
RCR YE15 Forecast
93.9%
RCR YE16 Forecast
93.1%
RCR YE17 Forecast
92.3%
Mean Rent (Reis)
$913
Annual Change
3.9%
14th
RCR YE14 Forecast
4.9%
RCR YE15 Forecast
5.0%
RCR YE16 Forecast
5.4%
RCR YE17 Forecast
3.4%
TRADE & RETURN SUMMARY
$5mm+ Sales
Approx. Proceeds
Avg. Cap Rate (FNM)
Avg. Price/Unit
Expected Total Return
Seasonally-adjusted data were not entirely consistent. This series
recorded a strong 13,000-job sequential quarter add during 2Q,
up from 3,100 and 11,200 in the prior and year earlier quarters,
respectively. But early summer results were weaker, as Austin
establishments added only 1,200 net positions in July and August.
The education, health and leisure services industries were largely
responsible as growth in these sectors declined to a 4,900-job,
2.4% rate from 1Q14’s 8,800-job, 4.5% advance. Sluggishness in
the higher education and entertainment markets was the primary
culprit. Conversely, the key tech-oriented business services
sector maintained a full head of steam, expanding at a brisk
10,600-job, 8.0% clip, up from 1Q14’s 8,700-job, 6.8% gain.
The RED Research payroll model achieves a 97.9% A-R2 using
U.S. payroll and home price growth, S&P 500 returns, and changes in the Fed Funds rate as independent variables. The model
projects a return to 4%+ job growth in 2015, followed by a gradual
deceleration to the high-2% area in the forecast out-years.
Annual job vintages should remain above 30,000 through 2016,
with gains in the 25,000- to 29,000-job range in 2017 and 2018.
2Q14 ABSORPTION AND OCCUPANCY RATE TRENDS
Spring apartment demand was seasonally strong as renters occupied a net of 1,569 vacant units, according to Reis surveys, representing the largest second quarter absorption level recorded in 14
years and approximately double the net gains reported in each of
the previous three April-to-June periods. But supply levels began to
build in earnest as developers completed projects containing a total
of 2,289 units, over-balancing demand and generating a 40 basis
point sequential decrease of average occupancy to 95.1%.
Axiometrics surveys of 410 stabilized, larger properties found a
95.2% average occupancy rate, up 40 bps y-o-y. Class-A (95.5%)
and class-C (95.1%) properties maintained the highest occupancy
rates. Class-B properties reported 93.9% occupancy, down 90 bps
y-o-y. Submarkets north of Downtown recorded the highest occupancy levels — Far North Central (96.6%), Near Northwest (96.1%)
and Round Rock (96.0%) — while neighborhoods among those
experiencing the fastest new project development — Central
(93.7%) and San Marcos (89.5%) — recorded the lowest levels.
RCR’s absorption modeling finds that supply, payroll, rent, home
price and GDP growth determine 88% of occupied stock growth.
This model projects 4%+ annual growth through late 2015, followed
by gradual deceleration to the mid-2% range. Unfortunately,
supply promises to be faster still, giving rise to higher vacancy.
2Q14 EFFECTIVE RENT TRENDS
EFFECTIVE RENT SUMMARY
RED 50 Rent Change Rank
Austin payroll growth was moderately slower during the second
quarter, decelerating to a still exceptional 31,000-job, 3.6% yearon-year rate, down from 34,000-job, 4.0% performances in each
of the previous two quarters. Although powerful by U.S. standards,
Austin’s rate of job growth was the slowest recorded in two years.
22
$715mm
.%
$126,839
8.1%
RED 46 ETR Rank
11th
Risk-adjusted Index
4.55
RED 46 RAI Rank
23rd
Following 1Q14’s seasonally soft $5 (0.6%) sequential effective rent
increase, rent trends reaccelerated in the spring but were moderately below recent spring season norms. Reis report that average
metro rents rose $8 (0.9%) quarter-to-quarter and $34 (3.9%)
year-on-year. These metrics compare to 1.1% and 1.5% sequential
gains during 2Q13 and 2Q12, and 4.1% to 4.3% y-o-y advances during
the three preceding quarters. Axiometrics surveys found similar
trends; specifically, small sequential gains in 4Q13 (0.4%) and 1Q14
(0.2%) followed by a seasonally stronger 2.4% hike during the
spring quarter. In contrast to Reis, however, stabilized properties
notched a strong 5.9% y-o-y advance during 2Q, reflecting a fourth
consecutive quarter of accelerating Austin y-o-y rent trends.
Several submarkets with below average rent levels recorded strong
y-o-y rent growth; notably, Southeast (11.5%), Far No. Central
(8.3%) and North Travis (7.5%). Conversely, submarkets experiencing increased supply produced slower growth; especially, Central (1.5%), Near South Central (0.9%), and Northwest (3.3%).
RCR’s Austin rent model employs home price, U.S. payroll, supply
and occupied stock growth as independent variables. The exercise
found that home prices have a significant positively correlated
impact on rents. As our forecast for home prices is bullish, so too is
the forecast for rents. The model projects 5% growth through 2016,
followed by deceleration to the high-2% area in 2017 and 2018.
2Q14 PROPERTY MARKETS AND TOTAL RETURNS
Institutional investors, large REITs, opportunity funds and private
equity players were active in Austin property trade during the
second quarter, undeterred by the possible impact on returns of
rising supply pressures. In total, buyers accumulated 22 metro
apartment assets from April to June, up from 18 in the first quarter. The average price of units traded for which price data were
available was $126,839, up from an average of $73,105 over the
course of the previous six months.
Sales slowed moderately during the third quarter, slipping to 17
trades for estimated total proceeds of about $440 million. Trades
were nearly evenly divided among newer construction trophies and
80’s vintage value-add or repositioning trades. To the degree cap
rates could be estimated, the former exchanged hands at prices
producing initial NOI yields in the high-4% area. The latter traded
mostly at per-unit prices in the $75,000—$90,000 range to cap
rates in the 5% to 6% range.
RCR elected to trim the generic institutional investor cap rate to
5.2% from 5.5% to reflect recent pricing trends. Employing this
going-in yield, model derived rent and occupancy trends and a
5.9% terminal cap rate, we estimate an investor would expect to
earn a 5-year, unlevered IRR of 8.1%, ranking #11 among the RED
46, 140 bps above the peer group mean. However, above average
standard errors in the rent and absorption models for this volatile
market inhibit risk-adjusted returns: the RAI ranks RED 46 #23.
MARKET OVERVIEW | 2Q14 | AUSTIN, TEXAS
Austin Occupancy Rate Trends
Source: Reis History, RCR Forecasts
RED 46 AVERAGE
AUSTIN (REIS/RCR)
Average Occupancy
97%
96%
97%
95.1%
95%
94%
93.9%
95%
93.9%
93.0%
92.2%
93%
92%
92.2% 93%
91%
90%
91%
89%
89%
2010
2011
2012
2013
2014
2015f
2016f
2017f
2018f
Austin Absorption and Supply Trends
Units (T12 Months)
12,000
10,000
ABSORPTIONS
COMPLETIONS
8,000
6,000
4,000
2,000
0
2010
2011
2012
2013
2014
2015f
2016f
2017f
2018f
Austin Cap Rate Trends
Source: eFannie.com, RCR Calculations
Average Cap Rate
7.0%
6.6%
WEST SO CENT REGION
6.5% 6.5%
6.5%
AUSTIN
6.5% 6.5%
6.4% 6.4% 6.4%
6.4%
6.1%
6.2%
5.8%
6.0%
5.9%
5.5%
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14
NOTABLE TRANSACTIONS
Property Name (Submarket)
Property Class/Type
(Constr.)
Approx. Date of
Transaction
Total Price /
(in millions)
Price /
per unit
Estimated
Cap Rate
Lantana Hills (Far South / Barton Creek)
B+ / GLR (2002)
27-Jul-2014
$40.0
$151,515
4.7% (FNM)
Oaks at Techridge (North Travis County)
B / GLR (2012)
25-Aug-2014
$36.6
$108,905
4.5% / 5.3% p.f.
Hillside Villas (Southeast)
B- / GLR (1985)
27-Aug-2014
$25.5 (Allocated)
$102,410
6.2%
Audubon Square (Hwy 183 / Anderson Mill)
C / GLR (1985)
27-Aug-2014
$11.7
$71,278
6.9%
C / GLR (1986)
29-Aug-2014
$23.5
$77,303
6.3%
B-M.I./GLR (1983)
29-Aug-2014
$21.5
$70,724
6.0%
Terrace Cove (Southeast /Franklin Park)
Club at Summer Valley (Far South/Sweetbriar)
RED Capital Research | October 2014
Austin Effective Rent Trends
Sources: Reis, Inc., Axiometrics and RCR Forecast
7%
7%
RED 46 AVERAGE
YoY Rent Trend
6%
AUSTIN (REIS/RCR)
4.9%
5.0%
6%
5.4%
3.9%
5%
5%
3.4%
4%
4%
2.9%
3%
3%
2%
2%
1%
1%
2011
2012
2013
2014
2015f
2016f
2017f
2018f
Austin Home Price Trends
Source: FHFA Home Price Indices and RCR Forecasts
YoY Growth Trend
15%
15%
12%
13.1%
9%
12%
13.5%
9%
11.2%
8.6%
6%
6.1%
3%
0%
6%
4.6% 3%
0%
-3%
US FHFA HPI
AUSTIN FHFA HPI
-6%
-3%
-6%
2011
2012
2013
2014
2015
2016
2017
2018
Austin Payroll Employment Trends
YoY Growth Trend
US GDP GROWTH
Source: BLS, BEA Data, RCR Forecasts
5%
3.6%
4%
4.0%
4.2%
5%
US JOB GROWTH
4%
METRO JOB GROWTH
3%
3%
3.4%
2.7%
2%
1%
3.1%
2%
1%
0%
0%
2011
2012
2013
2014
2015
2016
2017
2018
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been
independently verified or accepted by RED Capital Group. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information
gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to
participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED Capital Research | October 2014
SUBMARKET TRENDS
Effective Rent
Submarket
Physical Vacancy
2Q13
2Q14
Change
2Q13
2Q14
Change
Central
$1,115
$1,161
4.1%
5.3%
8.5%
320 bps
East
$703
$778
10.7%
4.2%
6.6%
240 bps
Far North Central
$622
$651
4.6%
5.4%
5.7%
30 bps
Far Northwest
$955
$979
2.5%
4.1%
3.1%
-100 bps
Far South
$968
$1,008
4.2%
3.5%
4.7%
120 bps
Highway 183 / Cedar Park
$801
$840
4.8%
2.7%
4.5%
180 bps
Near North Central
$777
$804
3.4%
3.2%
2.0%
-120 bps
Near Northwest
3.0%
1.6%
-140 bps
$1,009
$1,035
2.6%
7.0%
8.6%
160 bps
North Travis County
$818
$854
4.4%
4.4%
4.4%
0 bps
Ranch Rd 620N / FM2222
$1,107
$1,149
3.8%
2.8%
5.4%
260 bps
Round Rock / Georgetown
$865
$890
2.9%
4.2%
3.0%
-120 bps
San Marcos / North Hays Co.
$815
$835
2.5%
4.1%
5.2%
110 bps
Southeast
$775
$845
9.0%
6.0%
5.7%
-30 bps
$879
$913
3.9%
4.4%
4.9%
50 bps
8%
6%
4%
2%
Austin Metro
14%
2.5%
12%
$873
10%
$852
Near South Central
FOR MORE INFORMATION ABOUT RED’S RESEARCH CAPABILITIES CONTACT:
Daniel J. Hogan
James P. Hensley
Director of Research
djhogan@redcapitalgroup.com
+1.614.857.1416 oﬃce
+1.800.837.5100 toll free
Senior Managing Director
Head of Multifamily Originations
jphensley@redcapitalgroup.com
+1.770.753.6472 oﬃce
+1.800.837.5100 toll free
THE FACE OF LENDING
RED Capital Group, LLC  RED Mortgage Capital, LLC  RED Capital Markets, LLC (Member FINRA/SIPC)  RED Capital Partners, LLC
Two Miranova Place, Columbus, Ohio 43215
 redcapitalgroup.com  +1.800.837.5100
© 2014 RED Capital Group, LLC
RED CAPITAL GROUP® | MARKET OVERVIEW
Austin, Texas
Multifamily Housing Update 4Q13 February 2014
Payroll Job Summary
Total Payrolls
863.1m
Annual Change
23.6m(2.8%)
2014 Forecast
26.6m
2015 Forecast
26.7m
2016 Forecast
26.7m
2017 Forecast
23.9m
Unemployment
4.5% (Dec.)
4Q13 Payroll Trends and Forecast
Year-on-year comparisons suggest that Austin’s
labor market continued to undergo a moderate
deceleration from the blistering pace observed in
the fall and winter 2012-13. Establishments added workers at a 23,600-job, 2.8% pace in 4Q13,
down from 4Q12’s peak 31,200-job, 3.9% advance and 3Q13’s 25,800-job, 3.1% performance.
Key private employment sectors thrived, most
notably professional, scientific and technical services and construction, which grew by 9,600
(8.6%) jobs over the year, up from 7,800 in 3Q13.
Seasonally-adjusted data were more constructive,
Occupancy Rate Summary
4Q13 Absorption and Occupancy Rate Trends
Reis report that households net leased 1,622
vacant units during 4Q13, up from 1,253 during
the seasonally stronger third quarter and 1,205
during the year earlier period. The surge was in
part due to delivery of 1,870 mostly luxury units by
developers. Average occupancy slipped 10 basis
points sequentially and year-on-year to 95.5%.
RED 50 Rank
95.5%
31st
Annual Chg. (Reis)
-0.1%
RCR YE14 Forecast
93.0%
RCR YE15 Forecast
91.5%
RCR YE16 Forecast
91.0%
RCR YE17 Forecast
91.0%
Effective Rent Summary
Mean Rent (Reis)
$899
Annual Change
4.2%
RED 50 Rank
9th
RCR YE14 Forecast
3.9%
RCR YE15 Forecast
3.4%
RCR YE16 Forecast
3.7%
RCR YE17 Forecast
4.1%
Trade & Return Summary
120-unit+ Sales
21
Approx. Proceeds
$418mm
Avg. Cap Rate (FNM)
Avg. Price/Unit
6.5%
$75,327
8.1%
RED 46 ETR Rank
19th
Risk-adjusted Index
3.41
RED 46 RAI Rank
11th
Axiometrics surveys of 410 larger stabilized samestore properties found a 95.3% average occupancy rate, also down 10 bps from 3Q13. Class-C
properties enjoyed the highest average occupancy
showing a net gain of 10,900 jobs in 4Q13, up
from 5,000 in 3Q13. Net job creation was the 4th
highest one-quarter add recorded since 2000.
RCR’s Austin payroll model finds that 97% of the
change in metro employment can be explained by
lagged movements of metro and U.S. payroll and
metro personal income growth; the S&P500 index; and changes in the Fed Funds rate. This model indicates that 3%+ growth should continue
through mid-2015, and then give way to gains in
the mid–2% area for the remainder of the fiveyear forecast period.
(96.0%), followed by class-B (95.2%) and class-A
(94.9%). Same store absorption was strongest in
class-A (1.0%), and the Central and Near Northwest submarkets, while weakest in class-B (-0.3%)
and Far Northwest and San Marcos submarkets.
Supply of 10,400 units is projected for 2014, and
demand will not keep pace. Reis expect deliveries
to diminish in 2015, but our models indicate that
the slowdown will be gradual. Rising home prices
also will dull demand, leading to a material risk for
occupancy declines over the next 2—3 years.
4Q13 Effective Rent Trends
Reis surveys found that Austin rents increased $8
(0.9%) sequentially and $36 (4.2%) year-on-year,
suggesting a moderate degree of cooling after
3Q’s white hot $12 (1.4%) quarter-to-quarter advance. Axiometrics report a more dramatic slowdown as sequential rent growth fell from 2.5% in
3Q13 to 0.3% in 4Q. Nevertheless, the y-o-y comparison in this series was above 5% for the 13th
consecutive quarter, up 5.6% to a $1,039 mean.
Class-C properties chalked down the strongest
sequential gains (0.8%), followed by class-A (0.6%)
and class-B (0.0%). Following some discounting in
the 3Q college leasing season, Central submarket
rebounded with a 2.9% sequential gain to lead all
submarkets. East (1.9%) and Southeast (2.2%)
also reported vigorous growth. Moderate declines
were posted in the periphery: Round Rock (-0.1%);
Far South (-0.1%); and San Marcos (-0.3%).
Higher vacancy notwithstanding, the RCR rent
model projects solid rent growth for the forecast
period. Gains should approach 4% this year, moderating to the mid– to high-3% area in 2015 and
2016. Rents may break out to the high side in the
out-years as supply pressures ease.
4Q13 Property Markets and Total Returns
Property market activity gained momentum in the
second half 2013 as 44 properties of 120 units or
more exchanged hands, up from 26 transactions
in the first half (21 transactions closed in 4Q).
Based on limited pricing data, the average price of
a sold unit was $75,327, implying that total quarter four proceeds exceeded $400 million.
Private equity and fund managers were the most
active buyers, reflecting increased risk appetite
among diversified portfolio investors. Austin’s
higher cap rates relative to other tech and growth
markets was the primary draw. Investment sales
were transacted mostly in the high-5% to low-6%
range, 25 bps to 75 bps higher than comparable
Denver and Portland assets. Class-B– and -C properties traded in the low-7% to low-8% area.
Recent trade leads RCR to bump up our cap rate
assumption 25 bps to 5.75%. Using this figure and
moderately upwardly biased absorption forecasts,
we estimate that an investor would expect to
achieve an 8.1% annual IRR, R46 #19. Riskadjusted returns are better still, ranking #11.
MARKET OVERVIEW 4Q13 | AUSTIN, TEXAS
Austin Occupancy Rate Trends
RED 46 AVERAGE
Average Occupancy Rate
97%
A USTIN (REIS/ RC R)
95.5%
96%
95%
94%
93.0%
93%
91.3%
92%
91.0%
90.9%
91.1%
91%
90%
89%
4Q08
4Q09
4Q10
4Q11
4Q12
4Q13
4Q14f
4Q15f
4Q16f
4Q17f
4Q18f
Austin Absorption and Supply Trends
Units (T12 Months)
12,000
ABSORPTIONS
COMPLETIONS
10,000
8,000
6,000
4,000
2,000
0
4Q08
4Q09
4Q10
4Q11
4Q12
4Q13
4Q14f
4Q15f
4Q16f
4Q17f
4Q18f
Austin Cap Rate Trends
Average Cap Rate
7.0%
WEST SO CENT REGION
6.6%
6.5%
6.5%
6.5%
6.4%
A U STI N
6.4%
6.4%
6.5%
6.5%
3Q13
4Q13
6.4%
6.2%
6.0%
5.8%
5.5%
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
1Q14
Park at Crestview (Near North Central)
Vantage at Plum Creek (Far South)
Northgate Hills (Far North Central)
Arbors of Austin (Far North Central)
Class-B Garden Apt. (Far South)
Property Class/
Type (Constr.)
Approx. Date of
Transaction
Total Price /
<Appr. Value>
(in millions)
Price /
<Appr. Value>
per unit
Estimated
<Underwritten>
Cap Rate
B-/GLR (1970)
B+/GLR (2010)
C-/GLR (1984)
C/GLR (1984)
B/GLR (84/01)
15-Oct-2013
7-Nov-2013
4-Feb-2014
12-Feb-2014
Nov-2013
$17.6
$24.5
$21.2
$11.5
<$17.5>
$70,968
$92,803
$50,937
$50,884
<$95,109>
7.7%
7.5%
8.2%
8.4%
<6.5%>
RED CAPITAL Research | February 2014
Austin Effective Rent Trends
Sources: Reis, Inc., Axiometrics, RCR Forecast
12%
RED 46 AVERAGE
AUSTIN AXIOMETRICS SAME-STORE
AUSTIN (REIS/RCR)
YoY Rent Trend
9%
5.6%
6%
3.9%
3%
3.1%
4.2%
3.7%
3.2%
4.2%
0%
-3%
4Q08
4Q09
4Q10
4Q11
4Q12
4Q13
4Q14f
4Q15f
4Q16f
4Q17f
4Q18f
Austin Home Price Trends
Y-o-Y % Change
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
10.4%
9.0%
U.S.A.
2011
2012
2013
2014f
2015f
10.4%
9.8%
9.4%
9.2%
AUSTIN
2016f
2017f
2018f
Austin Payroll Employment Trends
Source: BLS, Institute for Economic Competitiveness at UCF & RCR
4.5%
U.S.A.
Y-o-Y % Change
4.0%
AUSTIN
3.5%
3.0%
3.3%
2.5%
3.0%
3.1%
2.9%
2.4%
2.0%
2.5%
1.5%
1.0%
0.5%
2011
2012
2013
2014f
2015f
2016f
2017f
2018f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or
financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been
gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report.
RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party
sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to
SUBMARKET TRENDS
Effective Rent
Submarket
Central
East
Far North Central
Far Northwest
Far South
Near North Central
Near Northwest
Near South Central
North Travis
Ranch Road 620N / FM 2222
San Marcos / North Hays
Southeast
Metro
Physical Vacancy
4Q12
4Q13
Change
4Q12
4Q13
Change
$1,105
$696
$613
$930
$938
$779
$754
$840
$994
$798
$1,084
$851
$802
$756
$863
$1,167
$727
$641
$968
$989
$829
$800
$865
$992
$840
$1,133
$883
$831
$831
$899
5.7%
4.6%
4.5%
4.1%
5.5%
6.5%
6.1%
3.0%
-0.2%
5.3%
4.6%
3.8%
3.7%
10.0%
4.2%
3.9%
5.8%
5.6%
4.2%
3.4%
3.1%
3.1%
3.7%
3.7%
3.8%
3.0%
4.1%
5.4%
4.4%
4.4%
5.9%
4.3%
5.1%
3.1%
4.4%
4.3%
2.3%
2.2%
7.2%
4.6%
2.3%
3.5%
6.1%
6.4%
4.5%
200 bps
-150 bps
-50 bps
-110 bps
100 bps
120 bps
-80 bps
-150 bps
350 bps
80 bps
-70 bps
-60 bps
70 bps
200 bps
10 bps
RED CAPITAL GROUP
For more information about RED’s research capabilities contact:
Daniel J. Hogan, Director of Research
614.857.1416
James P. Hensley, Senior Managing Director
Head of Mortgage Origination
jphensley@redcapitalgroup.com
770.753.6472
Austin, Texas
Multifamily Housing Update 2Q13 September 2013
Payroll Job Summary
Total Payrolls
852.1m
Annual Change
29.8m(3.6%)
2013 Forecast
28.0m
2014 Forecast
30.3m
2015 Forecast
33.5m
2016 Forecast
33.9m
Unemployment
5.6% (July)
Austin remained among America’s job growth
leaders during the second quarter as metro establishments expanded at a 29,800-job, 3.6% annual
rate, in line with the 29,900-job average recorded
over the nine months ended in March. Business
services remained the principal source of momentum, hiring at an 8,400-job, 6.8% pace during
2Q13, up from 1Q’s 6,700-job performance. Faster growth also was recorded in the health care
and education services sector, balanced by weaker conditions in retail trade and leisure services.
Seasonally-adjusted data hinted at a moderate
Robust tenant space demand persisted during the
second quarter, but supply pressures continued to
mount, sending occupancy lower. Reis report that
renters occupied a net of 825 vacant units, up
from 741 units during the comparable period of
2012, but developers delivered a four-year high
1,460, yielding a 30 basis point sequential quarter occupancy rate decline to 95.7%. By contrast,
Axiometrics surveys of large properties recorded a
95.3% occupancy rate, up 30 bps (same-store)
sequentially and 50 bps year-over-year.
95.7%
RED 50 Rank
30th
Annual Chg. (Reis)
0.0%
RCR YE13 Forecast
95.4%
RCR YE14 Forecast
93.8%
RCR YE15 Forecast
94.6%
RCR YE16 Forecast
94.7%
Mean Rent (Reis)
$874
Annual Change
2.9%
RED 50 Rank
19th
RCR YE13 Forecast
2.6%
RCR YE14 Forecast
2.1%
RCR YE15 Forecast
3.6%
RCR YE16 Forecast
3.5%
$5mm+ Sales
Approx. Proceeds
Avg. Cap Rate (FNM)
Avg. Price/Unit
25
$370mm
5.8%
$69,965
6.2%
RED 46 ETR Rank
33th
Risk-adjusted Index
1.74
RED RAI Rank
42rd
degree of summer slowing. This series suggests
that headcounts declined by -600 between May
and August after an 8,000-job advance during the
first four months of 2013. Likewise, unadjusted
data show a 23,800-job gain over the 12 months
ended August, smallest y-o-y gain in 16 months.
The RCR payroll model projects a brief period of
slower growth during 2H13, followed by a return
to form in 2014, when payrolls are expected to
expand at rates mid– to high-3% rates. Indeed,
growth faster than 3% is anticipated for the duration of the forecast, unique among RED 46 peers.
Sequential quarter occupancy gains were recorded in three submarkets (East, Far North Central
and San Marcos), while ten posted declines. The
largest decline was observed in infill Central Austin (1.7%), due entirely to 260 units of new supply.
As illustrated in the graph on Page 2, heavy supply
is anticipated for the next eight quarters. RCR
models project that demand will fall -729 and
3,466 units short during 2H13 and 2014, respectively, generating a 190 bps occupancy decline to
93.8% by YE14. Reis forecast a 95.1% rate.
Effective rents increased $6 (0.7%) sequentially
to $874, according to Reis, moderately faster than
1Q13’s $5 (0.6%) quarter-to-quarter gain. Yearover-year comparisons continued to decelerate,
however, falling from 2Q12’s 4.5% cycle peak and
1Q’s 3.7% metric to 2.9%. Axiometrics surveys of
larger properties uncovered stronger results. This
service reports that property rents averaged $966,
up 2.2% q-o-q and 5.0% y-o-y. Indeed, 13% of
properties in a 287-asset same-store sample posted 10% or faster y-o-y gains, 32% greater than 7%.
Reis report that 13 of 14 submarkets notched
sequential quarter rent increases, led by Round
Rock (1.5) and Far Northwest (1.5%). Southeast
was the exception, falling –0.6% to $775.
Variables in RCR’s 97.3% adj-R2 rent model include metro income, payroll, supply and demand
growth rates. Rent momentum and supply levels
play key roles, with the latter bearing a negative
sign. Hence, the model foresees relatively weak
rent growth (2.3%-2.6%) until supply subsides in
2015, when growth recovers to the mid 3% area.
Property market velocity bounced back in the
spring as investors closed on 25 Austin properties
valued at $5 million or more for total proceeds of
about $370mm. Among trades for which pricing
data were available, the average price of each
traded unit was $69,965. These data compare to
15 sales for total proceeds of $365mm and average price/unit of $88,783 during the first quarter.
Two related early-2000s vintage class-A- properties exchanged hands over the summer at prices
equating to $125,000 and $160,000/unit. We
estimate the Round Rock asset was priced to yield
about 6.2%, the Northwest Austin property, 5.3%
RCR believe that 6.0% represents an appropriate
generic cap rate, up from 5.5% last quarter. With
this going-in yield and model derived rent, occupancy and terminal cap rate (7.2%) forecasts, we
estimate that an Austin investor would expect to
generate a 6.2% annual return over a 5-year hold,
(RED 46 #33) hindered by the projected decline in
average occupancy. High volatility also has a depressing effect, reducing the RAI to R46 #42.
Metro Occupancy Rate Trends
Average Occupancy Rate
98%
RED 46 AVERAGE
96%
A USTIN (REIS/ RC R)
95.7%
94%
93.9%
92%
94.6%
94.3%
94.5%
90%
88%
86%
2Q 07
2Q 08
2Q 09
2Q 10
2Q 11
2Q 12
2Q 13
2Q 14
2Q 15
2Q 16
2Q 17
2Q 16
2Q 17
Metro Absorption and Supply Trends
Units (T12 Months)
14,000
ABSORPTIONS
COMPLETIONS
12,000
10,000
8,000
6,000
4,000
2,000
0
2Q 07
2Q 08
2Q 09
2Q 10
2Q 11
2Q 12
2Q 13
2Q 14
2Q 15
Metro Cap Rate Trends
Average Cap Rate
7.0%
WEST SO CENT REGION
6.5%
6.0%
6. 6%
6. 5%
6. 2%
5.5%
6. 5%
6. 4%
6. 4%
AUSTIN
6.5%
6. 4%
5. 8%
5.0%
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
Property Class/
Type (Constr.)
Date of
Transaction
Total Price /
<Appr. Value>
(in millions)
Price /
<Appr. Value>
per unit
Estimated
Cap Rate
Landmark at Prescott Woods (South)
Monterone Round Rock (Hwy 183)
Monterone Steiner Ranch (Northwest)
C / GLR (1985)
A- / GLR (2000)
A- / GLR (2001)
25-Jul-2013
26-Jul-2013
11-Aug-2013
$30.6
$74.0
$80.0
$83,985
$126,960
$159,363
5.2%
6.2%
5.3%
Capella Apt. Homes (Far North Central)
Winflo Apts (Central/Old West End)
C / GLR (1982)
B- /GLR (1973)
20-Aug-2013
July-2013
$15.3
<$2.0>
$45,535
<$98,750>
6.9%
6.4% FNM Refi.
RED CAPITAL Research | September 2013
YoY Rent Trend
Metro Effective Rent Trends
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
2Q 07
2. 4%
2. 5%
3. 5%
3. 7%
RED 46 AVERAGE
AUSTIN AXIOMETRICS SAME-STORE
AUSTIN (REIS/RCR)
2Q 08
2Q 09
2Q 10
2Q 11
2Q 12
2Q 13
2Q 14
2Q 15
2Q 16
2Q 17
Metro Home Price Trends
10%
7. 7%
Y-o-Y % Change
8%
6%
3. 4%
4%
2%
0%
-2%
U.S.A.
-4%
AUSTIN
WEST SO CENT REGION
-6%
2011
2012
2013f
2014f
2015f
2016f
2017f
Metro Payroll Employment Trends
Source: BLS, Institute for Economic Competitiveness at UCF & RCR
Y-o-Y % Change
4.5%
4.0%
3.5%
3.0%
2.5%
U.S.A.
AUSTIN
2.0%
1.5%
1.0%
0.5%
0.0%
2011
2012
2013f
2014f
2015f
2016f
2017f
RED CAPITAL Research | September 2013
SUBMARKET TRENDS
Effective Rent
Submarket
Central
Physical Vacancy
2Q12
2Q13
Change
2Q12
2Q13
Change
$1,098
$1,115
1.5%
4.1%
5.3%
120 bps
East
$693
$703
1.5%
7.1%
4.2%
-290 bps
Far North Central
$607
$622
2.5%
5.4%
5.4%
Unchd
Far Northwest
$934
$955
2.2%
3.6%
4.1%
50 bps
Far South
$927
$968
4.4%
2.9%
3.5%
60 bps
Hwy 183 / Cedar Park
$773
$801
3.7%
3.5%
2.7%
-80 bps
Near North Central
$751
$777
3.5%
3.9%
3.2%
-70 bps
Near Northwest
$839
$852
1.6%
4.4%
3.0%
-140 bps
Near South Central
$986
$1,009
2.3%
3.6%
7.0%
340 bps
North Travis
$795
$818
2.9%
4.0%
4.4%
40 bps
$1,071
$1,107
3.3%
3.9%
2.8%
-110 bps
$845
$865
2.4%
4.7%
4.2%
-50 bps
$792
$815
2.9%
7.4%
4.1%
-330 bps
Southeast
Metro
$751
$775
3.2%
5.4%
6.0%
60 bps
$849
$874
2.9%
4.3%
4.3%
Unchd
Total Return Distributions
Source: RED CAPITAL Research
Total Return
12%
10%
8%
A U ST (R AI =1. 74)
R ED 46 A VG. (R AI =4. 03)
5.9%
6%
8.1%
9.1%
9.5%
6.9%
5.1%
4.0%
4%
2%
7.1%
3.1%
0.1%
0%
90%
70%
50%
30%
P roba bility of Ac hie ving S ta te d Re turn or G re a te r
10%
RED CAPITAL GROUP
614-857-1416
Andrew T. Warnock, Director
atwarnock@redcapitalgroup.com
800-857-1586
Austin, Texas
Multifamily Housing Update 1Q13 July 2013
Payroll Job Summary
Total Payrolls
838.7m
Annual Change
30 6m(3.8%)
2013 Forecast
32.3m
2014 Forecast
35.8m
2015 Forecast
38.0m
2016 Forecast
35.4m
Unemployment
5.4% (May)
Metro job growth forged ahead rapidly in 1Q13 as
establishments hired at a 30,600-job, 3.8% rate,
on par with the prior quarter’s 31,200-job, 3.9%
pace. Strength was evident across the board as
every super-sector added jobs over the year with
the exception of financial services. The skilled
services continued to provide market leadership:
business, health care and education services
added workers at an 11,100-job, 5.1% annual
rate, equaling the prior period pace. Leisure services also exhibited notable momentum, especially among entertainment and recreation concerns
Tenants absorbed an average of 913 units per
quarter during 2011 and 2012 and maintained
this rapid pace in 1Q13, net leasing 897 units,
according to Reis. Accounting for deliveries of 498
new units, occupancy increased 20 basis points
sequentially and 50 bps year-over-year to 96.0%.
Axiometrics surveys indicate that occupancy at
stabilized larger properties averaged 94.8%, up
40 bps y-o-y but down 40 bps sequentially.
RED 50 Rank
96.0%
26Th
Annual Chg. (Reis)
+0.5%
RCR YE13 Forecast
94.4%
RCR YE14 Forecast
94.3%
RCR YE15 Forecast
95.0%
RCR YE16 Forecast
94.9%
Mean Rent (Reis)
$869
Annual Change
3.8%
RED 50 Rank
13Th
RCR YE13 Forecast
3.2%
RCR YE14 Forecast
3.3%
RCR YE15 Forecast
4.5%
RCR YE16 Forecast
3.7%
$5mm+ Sales
Approx. Proceeds
Median Cap Rate (FNM)
Avg. Price/Unit
20
$452mm
7.2%
$82,565
8.3%
RED 46 ETR Rank
24Th
Risk-adjusted Index
2.62
RED RAI Rank
38st
New space absorption trends were constructive.
which added 2,700 workers year-on-year, demonstrating Austin’s robust tourism sector.
The second quarter got off to a good start. Seasonally-adjusted figures show a 6,900-job advance in April and May, and nominal comparisons
continued to exhibit near-4% annual growth.
The RCR econometric payroll model paints a
bright picture of the future. Following ten consecutive quarters of 3% y-o-y growth or faster the equation forecasts more of the same as annual gains
range from 32,000 jobs (2013) to 38,000 (2018).
Axiometrics data reveal that three properties delivered in 1H12 were 95% to 98% occupied in 1Q13,
representing absorption rates between 22 and 32
units per month. Likewise for the student segment
wherein an 86-unit West Campus property that
debuted in the fall semester was full in March.
The Reis pipeline and RCR supply model suggest
that a few bumps lie ahead. Heavy supply will cut
occupancy about 180 bps by YE14; but receding
supply will facilitate a rebound to 95% by 2H15.
Reis rent trends stayed on a steady moderate
course, rising $6 (0.7%) sequentially following $7
increases in each of the preceding two quarters.
As a result, the year-on-year comparison declined
for the second consecutive quarter from 4.5% in
3Q12 and 4.0% in 4Q12 to 3.8%. Axiometrics surveys indicate that same store rents at stabilized
larger properties increased $17.43 (1.8%) sequentially to $995.61, equating to y-o-y growth of
4.2%. This series also exhibited a slowing tendency as the 1Q13 datum was the smallest y-o-y ad-
vance recorded since the second quarter 2010.
Campus-centric areas posted the strongest rent
growth. North Travis, San Marcos and Near South
and Near North Central submarkets each notched
1% or greater sequential quarter increases.
The RCR rent model forecasts further slowing
through 1Q14, largely due to supply pressures,
followed by another burst of rapid rent growth in
2015 as occupancy recovers. Rents are projected
to rise at a 5-year compound growth rate of 3.8%.
Sales velocity was seasonally slower during the
winter quarter as 20 properties of 80 units or
more exchanged hands for total proceeds of approximately $450 million. This compares to 37
trades valued at about $925mm during 4Q12.
Transactions for which pricing data were available
were valued at $82,565 per unit. By way of comparison, the same datum for 4Q12 was $95,588.
Assets traded during 1Q13 consisted primarily of
class-B suburban garden projects in second tier
submarkets. Applicable cap rates were mostly in
the 6% to 7% range. The principal exception was
a 2012-vintage “A-” Far Northwest property still in
lease-up. We estimate a 5.5% pro forma yield.
After evaluating 2013 trade activity we elected to
raise the generic cap rate assumption 50 basis
points to 5.5%. Based on this level and our model
derived occupancy and rent forecasts we estimate
that an Austin investor would expect to achieve an
8.3% 5-year unlevered return, moderately above
the 8.1% R46 mean; but payroll volatility hinders
the risk-adjusted index, which ranks R46 38th.
Metro Occupancy Rate Trends
Metro Occupancy Rate
97%
RED 46 AVERAGE
AUSTIN
96%
95%
94%
93%
92%
91%
90%
89%
1Q 10
1Q 11
1Q 12
1Q 13
1Q 14
1Q 15
1Q 16
1Q 17
8%
7%
11%
V ACA NCY R A TE
OCCU PI ED STOCK GR OWTH
I NV ENTOR Y GR OWTH
6%
5%
10%
9%
8%
4%
7%
3%
6%
2%
5%
1%
4%
0%
3%
1Q 10
1Q 11
1Q 12
1Q 13
1Q 14
1Q 15
1Q 16
Vac anc y Rat e
Year-on-year Growth Rate Rate
Metro Occupied Stock and Inventory Growth Trends
1Q 17
Metro Cap Rate Trends
8.0%
Average Cap Rate
A U STI N
WEST SO CENTRAL
7.0%
6.0%
5.0%
6. 7%
6. 5%
5. 7%
6. 3%
6. 4%
6. 4%
7. 1%
8. 0%
6. 9%
7. 2%
7. 4%
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
4.0%
McNeil Ranch (Far Northwest)
Trails at Buda Ranch (Hays Co.)
Promesa Apts. (Northwest Travis Co.)
Palms at Walnut Creek (Far No. Central)
Canyon Oaks Apts. (Southeast)
Property Class/
Type (Constr.)
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated
Cap Rate
A-/GLR (1998)
B+/GLR (2008)
A-/GLR (2012)
B-/GLR (1999)
C/GLR (1973)
22-Jan-2013
29-Mar-2013
31-Mar-2013
22-Apr-2013
10-Jun-2013
$21.0
$23.0
$41.0
$20.5
$14.3
$109,375
$87,121
$141,869
$72,183
$25,491
6.4%
6.9%
4.5%/5.5% p.f.
6.6%
8.0%
RED CAPITAL Research | July 2013
MARKET OVERVIEW 1Q13 | AUSTIN TEXAS
YoY Rent Trend
Metro Effective Rent Trends
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
1Q 07
RED 46 AVERAGE
1Q 08
1Q 09
1Q 10
1Q 11
1Q 12
AUSTIN (REIS/RCR)
1Q 13
1Q 14
AUSTIN (AXIOM)
1Q 15
1Q 16
1Q 17
Y-o-Y % Change
Metro Home Price Trends
Source: FHFA Home Price Index
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
U. S. A .
2007
2008
2009
AUSTIN
2010
2011
2012
Metro Payroll Employment Trends
Source: BLS , Institute for Economic Competitiveness & RCR
5%
Y-o-Y % Change
4%
3%
3. 8%
3. 6%
2%
1%
0%
-1%
U.S.A.
-2%
AUSTIN
-3%
2010
2011
2012
2013f
2014f
2015f
2016f
RED CAPITAL Research | July 2013
SUBMARKET TRENDS
Effective Rent
Submarket
Central
Physical Vacancy
1Q12
1Q13
Change
1Q12
1Q13
Change
$1,078
$1,107
2.7%
4.3%
3.6%
-70 bps
East
$684
$700
2.3%
7.4%
5.2%
-220 bps
Far North Central
$601
$617
2.8%
5.8%
6.0%
20 bps
Far Northwest
$917
$942
2.8%
3.8%
3.8%
Unchd
Far South
$910
$963
5.8%
3.1%
3.1%
Unchd
$768
$797
3.7%
3.6%
2.6%
-100 bps
Near North Central
$742
$771
3.9%
3.7%
3.2%
-50 bps
Near Northwest
Near South Central
$830
$959
$849
$1,007
2.4%
5.0%
4.5%
3.3%
2.9%
6.9%
-160 bps
360 bps
North Travis
$785
$816
4.0%
4.3%
4.2%
-10 bps
$1,047
$1,105
5.6%
4.1%
2.4%
-170 bps
$833
$852
2.3%
5.1%
3.8%
-130 bps
$785
$810
3.2%
5.5%
4.3%
-120 bps
Southeast
$741
$779
5.1%
6.1%
5.1%
-100 bps
$837
$869
3.8%
4.5%
4.0%
-50 bps
Metro
Total Return
12%
AU S (R AI =2. 62)
R ED 46 A V G. (R A I =4. 29)
10%
9.6%
8.0%
8%
6%
Total Return Distributions
Source: RED CAPITAL Research
6.4%
3.8%
11.8%
10.6%
9.0%
7.8%
6.6%
4.6%
4%
2%
0%
90%
70%
50%
30%
P roba bility of Ac hie ving S ta te d Re turn or G re a te r
10%
RED CAPITAL GROUP
614-857-1416
Kenneth H. Bowen, President, Red Mortgage Capital, LLC
khbowen@redcapitalgroup.com
800-837-5100
Austin, Texas
Multifamily Housing Update 4Q11 February 2012
Payroll Job Summary
Total Payrolls:
785.9m
Annual Change:
+13.0m
2012 Forecast
+14.2m
2013 Forecast
+10.9m
2014 Forecast
+20.3m
2015 Forecast
+29.3m
Conditions in the Austin economy continued to
improve last year. December proved to be the
best month as the pace of year-over-year payroll
job formation accelerated to 16,100 (2.1%). As a
result, the metro unemployment rate fell to 6.3%,
the lowest level observed since April of 2009.
Faster job growth was largely attributable to hiring
among retail and leisure service firms. Combined,
the sectors added 7,200 jobs year-over-year in the
fourth quarter, up from a monthly average of
5,100-jobs in the first nine months of 2011.
Vacancy Rate Summary
4Q11 Absorption and Vacancy Rate Trends
Vacancy Rate (Reis)
4.9%
RED 50 Rank
30th
Annual Chg (Reis)
-2.1%
RCR YE12 Forecast
4.9%
RCR YE13 Forecast
6.1%
RCR YE14 Forecast
6.5%
A lack of development allowed property managers
to fill existing units last year. Positive net absorption totaled 3,671 units during 2011, outpacing
the 19-year low 256 units completed in the metro
area. As a result, the metro vacancy rate fell from
7.0% in 4Q10 to 4.9% in 4Q11. Not only was the
fourth quarter vacancy rate the lowest observed
since 1Q01 but the vacancy rate never came within 150 basis points of 4.9% over the nine year
span from stretching from 2002 to 2010.
The largest publicly-traded REITs reported similar
4Q11 Rent Trends
Mean Rent (Reis)
$830
RED 50 Rank
5th
Annual Change
3.6%
RCR 2012 Forecast
4.9%
RCR 2013 Forecast
4.1%
RCR 2014 Forecast
3.6%
Property managers capitalized on surging tenant
demand by raising rents at a faster pace. In fact,
the average effective rent rose 3.6% from $801 in
4Q10 to $830 in 4Q11, the 5th fastest increase
recorded among the RED 50 (behind only DC, Fort
Lauderdale, San Francisco and San Jose). Similarly, Austin portions of publicly-traded REIT portfolios
generated 2.5% sequential and 8.9% year-overyear rent gains. The figures compare favorably to
the 0.9% and 5.4% growth rates observed in the
geographically diverse REIT portfolios.
$5mm+ Sales
13
Approx. Proceeds
$335mm
Median Cap Rate
6.1%
Avg. Price/Unit
$92,545
According to Loopnet.com, investors purchased
13 multifamily properties priced at or above $5
million in the fourth quarter. A mid-rise student
housing property located in the Central submarket
fetched the highest price. The 2008-vintage asset
was acquired by a student-housing real estate
trust. The buyer paid $86.2 million, equating to
$234,877 per unit or $84,016 per bed. Reis estimate a 4.6% cap rate.
Expected Total Return 7.4%
RED 45 Rank
10th
RCR calculate a 7.4% un-levered five-year holding
Economy.com believe that metro job growth will
accelerate slightly this year before taking off in the
next two years. Indeed, the source projects gains
of 17,900, 28,020 and 41,710 jobs in 2012,
2013 and 2014, respectively.
The RCR payroll model produces less optimistic
results, partially due to our expectation of subdued national economic growth over the next two
years. Specifically, we expect employers to add a
total of 45,400 jobs over the three-year period.
experience. As of 4Q11, the 8,009-unit REIT inventory was 96.0% occupied, down only 10 bps
from the seasonally stronger third quarter.
The RCR forecast models project that vacancy will
remain stable this year but begin to rise as supply
mounts. Specifically, we forecast vacancy rates of
6.1% and 6.5% in 2013 and 2014, respectively.
The Reis forecast follows a similar, albeit less
conservative trend, projecting a vacancy rate of
5.5% by December 2014.
Recent rent improvement favored Class B/C rentals. Sequential and annual asking rent growth
averaged 1.5% and 3.3% among Class B/C properties. By comparison, Class-A asking rent rose
1.0% sequentially and 3.0 year-over-year to
$1,054.
Reis expect effective rent growth to peak at 6.1%
this year, before slowing to 5.1% in 2013. RCR
are somewhat less optimistic, projecting gains of
4.9% and 4.1% in 2012 and 2013, respectively.
period total return for generic metro assets, assuming a 5.0% going-in yield. The expected return
ranks 10th highest in the RED 45.
But metro investment is not without risk. Austin
ranks 39th in our risk-adjusted index due to high
historic NOI growth trend volatility. Looking ahead,
supply is the lynchpin. According to February Reis
construction data, there were 77 apartment projects containing more than 27,000 units in various
stages of the development pipeline.
Apartment Vacancy Trends
Source: Reis, Inc., RCR Metro Forecasts
12%
Metro Vacancy Rate
11%
10%
AUSTIN
U.S.A.
9%
8%
7%
6%
5%
4%
4.9%
3%
1Q 05
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q12
1Q13
1Q14
Multifamily Cap Rates
Sources: Fannie Mae, RCR
9%
Average Cap Rate
8%
7.6%
7.1%
7%
6%
7. 2%
6.5%
6.2%
5.7%
6.3%
5.6%
5. 5%
5.2%
5%
4%
Oklahoma
Arkansas
Texas
Louisiana
Austin, TX
Payroll Employment Growth
Source: BLS Data & RCG Research Forecast
Annual Chg (000)
40
30
14.2 10.9
20
10
0
-10
-20
00
01
02
03
04
05
06
07
08
09
10
11
12f
13f
Siena Ridge (Southeast)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated
Cap Rae
B/C
December 2012
$12.1
$54,260
6.8%
Jefferson 26 (Central)
Student
December 2012
$86.2
$234,877
4.6%
Villages at Turtle Rock
A
October 2012
$37.0
$103,933
5.6%
Apartment Effective Rent Trends
Source: Reis, Inc., RCR Metro Forecasts
YoY Rent Trend
8%
6%
AUSTIN
4%
U.S.A.
3.6%
2%
0%
-2%
-4%
1Q 05
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q12
1Q13
1Q14
Metro Median Single-Family Home Prices
Source: FHFA Home Price Index
Y-o-Y % Change
15%
10%
5%
0%
USA
-5%
MSA
-10%
2005
2006
2007
2008
2009
2010
2011
Year-over-year Payroll Growth Rate
Source: BLS, RCG Research Forecasts
8%
6%
Rate
4%
2%
0%
-2%
-4%
AUSTIN
USA
-6%
05
06
07
08
09
10
11
12f
13f
gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations
or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot
be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under
no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any
particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel,
accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market
conditions and other factors.
SUBMARKET TRENDS
Submarket
Effective Rent
Physical Vacancy
4Q10
4Q11
Change
4Q10
4Q11
Central
East
Far North Central
Far Northwest
Far South
Near North Central
Near Northwest
$1,049
$674
$575
$867
$868
$723
$710
$775
$1,071
$681
$597
$908
$903
$762
$741
$814
2.1%
1.1%
3.7%
4.8%
4.1%
5.5%
4.5%
5.1%
7.5%
9.9%
8.5%
6.2%
5.3%
6.1%
6.3%
7.1%
5.1%
7.5%
6.2%
4.3%
3.3%
4.0%
4.0%
5.0%
-240 bps
-240 bps
-230 bps
-190 bps
-200 bps
-210 bps
-230 bps
-210 bps
Near South Central
North Travis
Ranch Rd 620N / FM 2222
$946
$743
$1,044
$792
$744
$959
$775
$1,051
$835
$770
1.4%
4.3%
0.7%
5.4%
3.5%
5.1%
6.3%
5.4%
8.4%
4.6%
3.7%
4.6%
4.0%
5.5%
5.2%
-140 bps
-170 bps
-140 bps
-290 bps
60 bps
$706
$730
3.5%
9.8%
6.6%
-320 bps
$801
$830
3.6%
7.0%
4.9%
-210 bps
Southeast
Metro
RED CAPITAL GROUP
Daniel J. Hogan
614-857-1416
Kenneth H. Bowen
President, Red Mortgage Capital, LLC
khbowen@redcapitalgroup.com
800-837-5100
Change
RED CAPITAL GROUP®
Market Overview
Austin,Texas
Multifamily Housing Update
March 2011
EXECUTIVE SUMMARY
T
he Austin economy emerged
from the Great Recession during the second half of 2010,
posting solid job creation rates and
firmer residential real estate markets;
but the boom that typically follows a
sharp decline failed to materialize.
After posting a robust 17,200-job,
year-on-year 2.3% advance during
3Q10 the rate of job creation unexpectedly slowed to a 16,000-job, 2.0%
4Q pace, and a 6-month low 15,200job y-o-y advance in December.
The slowing trend in payroll job
growth was repeated in the seasonally-adjusted data. This series counted
a 16,300-job net gain during the first
half of 2010, but a 1,200-job loss in
2H10, including a 1,200-job monthto-month setback in December.
The slowdown was primarily attributable to stagnating job creation in the
leisure and hospitality services sector.
After recording strong, tourism inspired gains in the spring, headcounts
declined in both the accommodations
and food and drink service subsectors after mid-year, causing yearon-year comparisons to fall from a
13,200-job y-o-y add in 3Q to a 9,300
advance in 4Q. State government payroll cuts also were a factor, as fiscal
austerity gave rise to a net decline of
-600 workers relative to 4Q09.
Austin’s high tech sector made a positive contribution to metro payroll
growth and promises to play a larger
roll in 2011. Durable goods headcounts rose at a 600-job annual pace
in 4Q, up from a 200-job loss in the
prior quarter, in part due to hiring by
semiconductor fabricators; while the
tech components of the business service sector expanded, hinting that the
small business sector is poised to
make a larger contribution to Austin
headcount expansion.
A survey of small business sentiment
suggests that optimism is growing
SNAP SHOT
among Austin employers, but that
doubts among them regarding the
strength of the recovery linger. Our
econometric payroll model tends to
validate their concern, forecasting
moderately faster job growth rates in
2011 (2.7%) and 2012 (3.1%), falling
short of the 4% to 5% gains that characterized the post-2001 recovery.
Apartment demand increased, however, as tenants absorbed 2,904 units
in 4Q, according to Reis, up from
2,709 units in 3Q and nearly double
the 1,553-unit 11-year 4Q mean.
Against 4Q10 gross supply of 1,181
units average metro occupancy increased 110 basis points sequentially
to 93.0%, among the highest metrics
reported in any quarter since 2001.
Eleven of 14 metro submarkets
notched 100 bps sequential occupancy
gains or stronger, and only North
Travis Co. suffered a decline. Near
North Central posted the largest advance (560 bps), followed by San
Marcos (420 bps); Far South (210
bps) and Cedar Park (210 bps).
Rent growth was moderate as leasing
agents emphasized occupancy growth
over price maximization. Average
asking rents increased $4 (0.45%) to
$885 quarter-to-quarter and concession levels drifted lower, allowing
effective rents to rise $5 (0.62%).
Four pricey suburban submarkets
recorded sequential rent decreases,
including RR 620 and Round Rock,
while infill Near North Central posted
a 4.2% sequential surge.
Sales of Austin assets soared in the
second half, rising from 9 trades for
proceeds of $132mm in 1H10 to 17
closings valued at $350mm in 2H
(RCA). Cap rates declined accordingly, descending over the year about
100 bps to the 6% area for standard
institutional quality assets. Trophy
pricing remained inscrutable as little
trade data were publicly available.
Vacancy
(7.0% - 4Q10)
Effective
Rents
Y-o-y
Projected
change
2011
3.1%
0.1%
2.6%
3.7%
($801 - 4Q10)
Cap Rate
(6.0% - 4Q10)
1.3%
Employment
(775.2m - 4Q10)
16.0m
20.7m
KEY POINTS
 Apartment
demand continued to build as
tenants absorbed 2,904 units in 4Q, up from
2,709 units during the prior quarter.
 Occupancy
increased 110 basis points
sequentially, 260 bps June-to-December and
310 bps year-over-year to 93.0%. On these
bases, Austin ranked 3rd, 1st, 2nd and 34th,
respectively, among the RED 50.
 Average asking and
effective rent increased
$4 (0.5%) and $5 (0.6%) sequentially, to
$885 and $801. Rent momentum was strong
in infill submarkets but relatively weak in
some higher-rent suburban areas, including
Round Rock and Cedar Park.
 Single-family
home sales declined 5% in
2010, according to the Board of Realtors, but
were stronger in January, rising 14% yearon-year. The average price gained 6% to
$190,000, but marketing times remained
extended, averaging 93 days.
 The pace of economic recovery slowed
late
in the year. Austin establishments hired
employees at a 16,000-job year-on-year pace
in 4Q, down from a 17,200-job rate in 3Q.
RCR expect Austin employers to create a net
of about 20,700 jobs in 2011.
Austin - Round Rock - San Marcos, TX MSA - Q4 2010
VACANCY TRENDS
12%
110 basis points higher sequentially and 310 bps year-on-year to
93.0%, despite delivery of 1,181 new units. The one-quarter advance
was the second largest comparable gain recorded among the RED 50.
10%
 Six submarkets registered year-on-year occupancy growth of 400 bps
or more. The largest gains were recorded near UT / Downtown and the
Dell campus. Central and Near North Central occupancy increased by
470 and 860 bps, respectively, while the Round Rock submarket posted
a 710 bps advance to 91.6%. Highest occupancy was observed south
of the Capital in San Marcos (95.4%) and Far South (94.7%).
Metro Vacancy Rate
 Tenants absorbed a net of 2,904 units during 4Q, pushing occupancy
Source: Reis, Inc.
10.1%
8%
7.0%
6%
6.6%
4%
AUSTIN
U.S.A.
2%
 Reis expect occupancy gains to moderate beginning in 2011, slowing
0%
to 10 bps this year and 20 bps in 2012.
4Q 04 4Q 05 4Q 06 4Q 07 4Q 08 4Q 09 4Q 10
RANK: 34th out of 50
RENT TRENDS
Metro Rent Trends
Source: Reis, Inc.
 Regardless
 Five
publicly-traded REIT operate 6,508 Austin MSA units. Unit
weighted average rent increased $9.47 (1.2%) quarter-to-quarter,
reversing a $5.75, -0.7%, drop recorded from December to September.
 Infill submarkets posted strong 4Q10 effective rent increases.
Central
Austin properties recorded a 1.0% sequential gain to $1,049, while
Near North Central chalked down a $19 (4.2%) advance to $710.
8%
6%
YoY Rent Trend
of the fact that Austin properties net leased more units
during 2011 (7,721) than in any previous year in the 1990 to 2010 Reis
data series, leasing agents were cautious regarding pricing strategy.
Asking and effective rents increased $14 and $20, respectively, over
the year, representing 1.6% and 2.6% gains, ranking RED 50 16th.
4%
2%
0%
-2%
4Q 04 4Q 05 4Q 06 4Q 07 4Q 08 4Q 09 4Q 10
Metro Multifamily Cap Rate Trend
PROPERTY MARKET & CAP RATE TRENDS
Source: Reis, Inc.
 Real Capital Analytics report that 25 Greater Austin garden apartment
fund acquired a 300-unit luxury San Marcos property in the fall, one of
the few trophies to trade recently. Pricing data weren’t available.
 RCR estimate a 6.0% market clearing cap rate for average Austin institutional
quality properties. Employing this assumption and Reis rent and occupancy
forecasts, we estimate that an investor will expect to yield a 9.9% un-levered
five-year total return, 90 bps above the R50 mean and 15th highest among the
group. The risk-adjusted return estimate ranks only 47th highest in the group,
however, attributable to high historical NOI volatility in this market.
8.5%
8.0%
7.5%
Cap Rate
 A joint venture between a local investment company and a Wall Street
1.6%
Asking
Effective
-4%
Reis project 3.9% compound annual rent growth between year end 2010 and 2015,
faster than the 3.7% average forecast for the nation’s top 80 markets.
complexes exchanged hands during 2010 for total proceeds of
$455mm. Prices ranged from the equivalent of $19,000 to $106,500
per unit, with mean of $54,209. Cap rates ranged from 6% to 9%,
according to this source, and averaged 7.6%.
2.6%
7.0%
6.5%
6.0%
5.5%
5.0%
2Q
4Q
2Q
4Q
2Q
4Q
08
08
09
09
10
10
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
Shady Oaks (Far South)
C+
07-Dec-2010
$18.75
$78,782
4.0%
Montecito Apts (Far South)
B-
22-Nov-2010
$11.25
$41,978
7.5%
The Forest (Far South)
Sanctuary Lofts (San Marcos)
BA-
26-Nov-2010
25-Sep-2010
$7.96
$21.40
$43,261
$106,468
7.5%
6.0%
RED CAPITAL Research
Austin - Round Rock - San Marcos, TX MSA - Q4 2010
DEMOGRAPHICS & HOUSING MARKET
Metro Median Single Family Home Prices
Source: National Association of Realtors
 The
Census Bureau report that Travis and Williamson County
populations were 1,024,266 and 422,679 at April 1, 2010. The data
compare to July 1, 2009 estimates of 1,026,158 and 410,686. The 2010
Census data are collectively 10,101 persons lower than 2009 estimates.
$230
AUST
Prices (000)
$220
US
$210
 The
median price of an Austin MSA home sold during 4Q10 was
$190,300, according to the N.A.R., representing a 4.1% increase from
the $182,800 4Q09 price metric.
$200
$190
$180
 The Austin Board of Realtors revealed that 975 metro homes sold in
$170
January, up 14% from 2010. The average price of a single-family
home was $190,000, up 6% from last year. Homes sold spent an
average of 93 days on the market, 11% longer than in January 2010.
$160
07 08 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Y
Y
09 09 09 09 10 10 10 10
Non-Seasonally Adjusted
 The Austin recovery continued at a measured pace in quarter four.
50
40
Annual Chg (000)
Only 1.49% of households
received a notice of default or foreclosure last year, only the 113th highest rate
recorded among the 206 largest U.S. metros.
EMPLOYMENT TRENDS
24.6
30
20.7
20
10
Total payrolls increased at a 16,000-job, 2.1% speed, down from 3Q’s
17,200-job, 2.3% advance. Total payroll jobs in December were up
15,200 jobs from the year-earlier period, the smallest year-on-year
gain recorded since June.
 The 4Q10 slowdown was largely attributable to moderating growth in
0
the leisure and hospitality sector. Year-on-year expansion in the sector decelerated from a cycle peak of 9,100 jobs in 3Q10 to only 6,800
in 4Q. Total sector payrolls reached a record high of 93,400 in September before declining to 90,700 jobs in December.
-10
-20
-30
00 01 02 03 04 05 06 07 08 09 10 11f 12f
 The critical business services sector made slow but steady progress.
Sector employment increased by 2,600 jobs year-on-year in 4Q10, up
from 2,500 in the prior quarter. Notably, gains in the professional and
technical services accelerated and employment service headcounts
returned to the black for the first quarter since 1Q08. Both trends
bode well for the high tech sector in 2011.
Source: BLS
8%
 The unemployment rate was 6.8% in December, down 20 bps y-o-y.
6%
Seasonally-Adjusted
4%
Rate
 Incidence of foreclosure in Austin remained low.
 After posting a robust 16,300-job gain in 1H10, job creation stalled
2%
over the summer and fall. Austin payrolls declined 2,700 jobs in
3Q10 and recovered only 1,500 jobs in 4Q.
0%
 Payrolls fell 1,200 jobs between November and December.
-2%
AUSTIN
USA
-4%
-6%
Forecast
03 04 05 06 07 08 09 10 11f 12f
 Our
econometric model forecasts accelerating growth throughout
2011, followed by a period of stable job creation in the 3% per annum
range. By the numbers, the model projects a 20,700-job add in 2011,
followed by 24,600-job and 24,900-job gains in 2012 and 2013.
RED Estimated Generic Unlevered Asset Total Return Probabilities
A US T ( R A I = 1. 7 7 )
20%
10%
10.4%
2.1%
S . A . ( R A I = 5 . 54 )
12.3%
6.7%
9.7%
13.6%
12.5%
14.9%
16.2%
16.6%
0%
90%
70%
50%
30%
10%
P ro ba bilit y o f A c hie v ing St a t e d R e t urn o r G re a t e r
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
Central
East
Far North Central
4Q09
4Q10
Change
4Q09
4Q10
Change
$1,024
$652
$1,049
$674
2.4%
3.3%
12.2%
12.4%
7.5%
9.9%
-470 bps
-250 bps
$565
$575
1.8%
10.8%
8.5%
-230 bps
Far Northwest
$846
$867
2.4%
6.1%
6.2%
10 bps
Far South
$851
$868
2.0%
9.6%
5.3%
-430 bps
$701
$723
3.1%
10.7%
6.1%
-460 bps
Near North Central
$720
$710
-1.5%
14.9%
6.3%
-860 bps
Near Northwest
$771
$775
0.5%
9.2%
7.1%
-210 bps
Near South Central
$913
$946
3.6%
8.5%
5.1%
-340 bps
North Travis
Ranch Road 620N / FM2222
$722
$743
2.9%
8.3%
6.3%
-200 bps
$1,028
$1,044
1.6%
10.9%
5.4%
-550 bps
$777
$792
1.9%
15.5%
8.4%
-710 bps
$717
$744
3.8%
8.1%
4.6%
-350 bps
Southeast
$683
$706
3.3%
9.7%
9.8%
10 bps
Metro
$781
$801
2.6%
10.1%
7.0%
-310 bps
SUPPLY TRENDS
Completions and Absorption
Source: Reis, Inc
 Reis
identify only four major apartment developments
incorporating 898 total units currently under construction. Two
are located in Hays County beyond the boundaries of the Reis
coverage area. A third is in the Hays County submarket.
12,000
 The
Units
 Thirty projects were in the planning stage in late February.
Daniel J. Hogan
614-857-1416
William T. Hinga
Business Development
wthinga@redcapitalgroup.com
614-857-1499
6,000
4,000
2,000
The
deals encompass a total of 8,340 units. Only one is assigned a
projected completion date, however; a 298-unit REITsponsored affair located on South Lamar Boulevard in the Near
South Central submarket (slated for September 2012).
Lady Bird Lake was added to the Reis inventory in August.
The property was reportedly 69% occupied in December at
rents averaging $2,808.
Absorption
8,000
Reis pipeline report indicates that four projects were
delivered during the fourth quarter, one each in Far South (148
units); North Travis (256 units); Round Rock (402 units); and
Southeast (375 units) submarkets.
 An 8-story, 294-unit mid-rise located between Downtown and
Completions
10,000
0
04
05
06 07
08
09 10 11f 12f
 A
294-unit garden project in Far South Austin near Barton
Creek was 50% occupied at rents averaging $1,029. The
property was delivered in 1Q10.
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
www.redcapitalgroup.com
800.837.5100
©2010 RED CAPITAL GROUP
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to
buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented
in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon
this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are
subject to change without notice due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Austin,Texas
December 2010
EXECUTIVE SUMMARY
E
conomic conditions in the
Austin-Round Rock MSA
improved this year. After
cutting –17,600 (-2.3%) jobs in 2009,
employers added jobs at a 7,300
(1.0%) year-over-year pace from
January to October. The advance was
partially due to hiring among business
service, leisure service and government payrolls. Combined, the sectors
added jobs at a 16,800-job monthly yo-y average in 3Q10, up from an
8,300-job gain in 1H10.
Data from the BLS’s household survey also demonstrate stronger job
growth this year. Total employment
advanced 25,957 (3.1%) y-o-y in
3Q10, the strongest gain since 2Q07
(+3.3%). As a result, the metro unemployment declined from 7.2% in
September 2009 to 6.8% in the same
month this year.
By contrast, seasonally-adjusted payroll data show that employment trends
deteriorated in the third quarter. Indeed, payroll headcounts advanced
5,400 in 1Q10 and 10,900 in 2Q10
before declining –2,700 from July to
September. Additionally, the Manpower Employment Outlook Survey
shows that the share of companies
that plan to trim staffs rose from only
6% in September to 13% in December. On the other hand, the percent of
firms that expect to add workers remained unchanged at 15%.
RED CAPITAL Research (RCR)
expect Austin employers to add
10,800 (1.4%) jobs in 2010, one of
five markets in the RED 50 to generate a gain this year. Moreover, our
econometric model predicts that job
growth will accelerate to 20,200
(2.6%) per year in 2011 and 2012.
Economy.com are more optimistic,
projecting gains of 19,610 jobs in
2011 and 31,040 jobs in 2012.
Home price trends rose over the past
SNAP SHOT
year. The National Association of
Realtors report that the median singlefamily MSA home price advanced
8.4% y-o-y from $189,100 in 3Q09 to
$205,000 in 3Q10. Likewise, the
Real Estate Center at Texas A&M
University calculate an 8.8% home
price increase in the twelve-month
period ended in October.
Apartment demand surged during the
third quarter, producing a 140 basis
point improvement in occupancy from
90.4% in 2Q10 to 91.8% in 3Q10.
Positive net absorption totaled 2,459
units from July to September, outpacing the 2,108 units absorbed in the
first six months of the year. Managers of Class-A properties net leased
3,354 units year-to-date, while tenants
occupied 1,213 Class B/C units during the period0. Class-A and Class
B/C occupancy improved 270 bps and
100 bps, respectively, year-to-date to
91.9% and 91.6%.
Rent trends also improved over the
past year. The average effective rent
increased 0.9% sequentially and 2.7%
y-o-y to $796 in 3Q10. The latter
represented the strongest over-theyear gain since 4Q08 (+3.9%). According to asking rent data, annual
rent growth among Class-A properties
(1.7%) outpaced the advance recorded
among lower tier assets (1.1%) in the
third quarter.
Real Capital Analytics identify 19
investor-grade transactions in the first
ten months of 2010, totaling $366
million in sales volume. The source
also reports a $64,410 average price
per unit and a 7.6% mean cap rate.
RCR calculate over-the-year NOI
growth of 10.9% in 3Q10, the fastest
increase among the RED 50. Furthermore, Reis forecasts support a 9.8%
expected return assuming a 6.0% going-in yield, ranking third highest
among the peer group.
Y-o-y
change
Vacancy
(8.2% - 3Q10)
Effective
Rents
($796 - 3Q10)
Cap Rate
(5.6% - 3Q10)
270bps
2.7%
Projected
2010
20bps
2.8%
240bps
Employment
(767.7m - 3Q10)
17.2m
10.8m
KEY POINTS
 Slower
supply growth and faster absorption
gave rise to strong occupancy improvement
during the third quarter; the metro occupancy
rate surged 140 basis points sequentially to
91.8% in 3Q10. Developers completed only
294 units and property managers net leased
2,459 units from July to September. By
comparison, demand (2,108 units) only
modestly outpaced supply (1,387) in 1H10.
 Year-over-year
rent trends improved in the
third quarter as the pace of asking rent
growth accelerated to 1.6% and effective
rent growth accelerated to 2.7%. Property
managers trimmed concessions from 10.5%
of asking rent in 3Q09 to 9.6% in 3Q10.
 According
to the National Association of
Realtors, the median price of a single-family
MSA home increased 8.4% year-over-year
from $189,100 in 3Q09 to $205,000 in
3Q10. But the Real Estate Center at Texas
A&M University notes that sales plunged
from July to September following the
expiration of the homebuyer tax credit.
 Real
Capital Analytics report that 19
properties traded in the first ten months of
2010, totaling $366 million in sales
proceeds.
Austin-Round Rock-San Marcos, Texas MSA - Q3 2010
VACANCY TRENDS
 The
 Class-A
vacancy fell 160 basis points quarter-over-quarter to 8.1%,
comparing favorably to the 110 basis point improvement observed
among Class B/C properties.
 ALN Apartment Data suggest that same-store occupancy advanced 310
basis points to 93.7% in the twelve-month period ended in November.
Source: Reis, Inc.
14%
Metro Vacancy Rate
metro vacancy rate plunged 140 basis points sequentially from
9.6% in 2Q10 to 8.2% in 3Q10. Positive net absorption totaled 2,459
units during the third quarter, outpacing supply of 294 units.
 Reis expect a modest increase (+20 bps to 8.4%) in vacancy during
10.9%
12%
8.2%
10%
8%
6%
4%
Austin
U.S.A.
2%
0%
4Q10. But the service believes that vacancy will improve to 7.5% in
2011 and 7.1% in 2012.
3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q
00 01 02 03 04 05 06 07 08 09 10
th
RANK: 36 out of 50
RENT TRENDS
Metro Rent Trends
Source: Reis, Inc.
 The average effective rent increased 0.9% from $789 in 2Q10 to $796
 Same-store figures from ALN Apartment Data show that effective rent
declined –0.4% year-over-year to $826 in November.
 Effective
rent in the Near North Central submarket declined –3.4%
year-over-year in 3Q10.
YoY Rent Trend
in 3Q10. As a result, the pace of year-over-year effective rent growth
accelerated from 1.7% to 2.7%. Falling concessions were partially
responsible. The size of the average concession package fell from
10.5% of asking rent in 3Q09 to 9.6% in 3Q10.
15%
Asking
Effective
10%
2.7%
5%
1.6%
0%
-5%
-10%
 Reis anticipate strong rent growth in Austin.
Specifically, the source
predicts that annual effective rent growth will accelerate to 3.2% in
2011, and 4.3% by 2014.
3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q
00 01 02 03 04 05 06 07 08 09 10
RANK: 7th out of 50
Source: Reis, Inc.
 Real
9%
Capital Analytics identify 19 transactions involving properties
priced at or above $5 million in the first ten months of 2010. Sales
volume totaled $366 million and the average price per unit was
$64,410.
twelve-month period ended in September, down –25% from the same
period last year. The source attributes the price decline to slower sales
velocity among top-tier assets.
Cap Rate
 Marcus & Millichap calculate a median price per unit of $42,600 in the
8%
 RCR calculate that a 6.0% generic metro asset cap rate gives rise to a
strong 9.8% expected rate of total return. Although the expected return
ranks 3rd highest among the RED 50, elevated levels of historic NOI
growth volatility produce the fifth lowest measure of risk-adjusted
return in the group.
7%
6%
5%
4%
3%
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
08
08
09
09
09
09
10
10
10
Property Name
Property Class
Date of
Transaction
Total Price
(in millions)
Price per
unit/bed
Estimated Cap
Rate
5.6%
Sanctuary Lofts (Student Housing)
A
July 2010
$21.4
$106,468/$43,943
The Zone San Marcos (Student Housing)
A
September 2010
$27.0
$104,651/$38,793
6.5%
Royal Canyon
B
September 2010
$8.8
$56,090
6.5%
Melograno at Teravista
A
October 2010
N/A
N/A
N/A
Austin-Round Rock-San Marcos, Texas MSA - Q3 2010
$240
MSA
Prices (000)
$220
 The
population of the Austin-Round Rock MSA increased 3.1% in
2009, moderately slower than the 3.7% advance recorded in the
previous year.
US
 According to the National Association of Realtors, the median price of
$200
a single-family MSA home increased 8.4% year-over-year from
$189,100 in 3Q09 to $205,000 in 3Q10. Likewise, the median home
price recorded by the Real Estate Center at Texas A&M University
advanced 8.8% to $195,000 in the twelve-month period ended in
October.
$180
$160
$140
$120
 Austin posted a –0.5% year-over-year decline in the FHFA home price
$100
07
08
09
Y
Y
Y
index in 3Q10, ranking 115th among the 299 markets tracked by the
source.
3Q 4Q 1Q 2Q 3Q
09
09
10
10
 RealtyTrac.com
10
report a 0.43% 3Q10 foreclosure rate, comparing
favorably to the 0.72% US average.
EMPLOYMENT TRENDS
Annual Chg (000)
50
 Metro headcounts advanced 17,200 (2.3%) year-over-year in 3Q10,
40
comparing favorably to the 6,200 (0.8%) job advance recorded in the
previous quarter. Moreover, employers added 18,200 (2.4%) jobs
during the twelve-month period ended in October.
30
20.2 20.2
20
10.8
 Hiring
among business service and leisure / hospitality firms was
partially responsible as the super-sectors added 2,500 jobs and 9,100
jobs year-over-year, respectively, in 3Q10.
10
0
-10
 Local
governments also created positions at a faster pace in 3Q10
(4,400 jobs) as compared to 2Q10 (1,300 jobs).
-20
-30
00 01 02 03 04 05 06 07 08 09 10f 11f 12f
Austin
 On
a seasonally-adjusted basis, metro headcounts advanced 17,100
during the first ten months of 2010, following a –19,400-job decrease
during the comparable period of 2009.
USA
6%
4%
Rate
25,957 (3.1%) year-over-year in 3Q10. As a result, the September
2010 unemployment rate (6.8%) was lower than the prior year comparison (7.2%).
Seasonally-Adjusted
Source: BLS
8%
 The BLS’s household survey reports that total employment increased
Forecast
2%
 RCR predict that job growth will accelerate from 10,800 (1.4%) net
0%
new jobs in 2010 to 20,200 (2.6%) new jobs in 2011. But our econometric model projects that Austin payroll growth will remain stable
(+20,200, 2.6%) in 2012.
-2%
-4%
 Economy.com are comparatively optimistic, forecasting consecutive
-6%
gains of 19,610 jobs in 2011 and 31,040 jobs in 2012.
99 00 01 02 03 04 05 06 07 08 09 10
RANK: 1st out of 50
20%
15%
Austin
10%
5%
4.5%
1.6%
Dallas
6.4%
7.0%
9.6%
12.5%
8.5%
10.0%
16.6%
12.2%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
Far South
Near South Central
Southeast
Central
East
Near North Central
Far North Central
North Travis
Near Northwest
Far Northwest
Hwy 183 / Cedar Park / Leander
Round Rock / Georgetown / Hutto
San Marcos / North Hays County
Ranch Rd 620 N / F M 2222
Metro
3Q09
3Q10
Change
3Q09
3Q10
$853
$933
$687
$1,001
$630
$707
$570
$717
$753
$834
$697
$777
$867
$939
$690
$1,041
$655
$683
$577
$744
$777
$861
$727
$794
1.6%
0.6%
0.5%
3.9%
3.9%
-3.4%
1.2%
3.7%
3.2%
3.2%
4.3%
2.1%
12.0%
8.8%
9.7%
11.1%
10.2%
15.6%
9.9%
9.4%
9.4%
6.3%
9.4%
19.1%
7.4%
6.5%
10.1%
8.7%
11.1%
11.9%
9.6%
5.8%
7.3%
7.1%
8.2%
9.8%
-460 bps
-230 bps
40 bps
-240 bps
90 bps
-370 bps
-30 bps
-360 bps
-210 bps
80 bps
-120 bps
-930 bps
$725
$739
1.9%
9.2%
8.8%
-40 bps
$1,010
$1,053
4.2%
17.8%
6.9%
-1,090 bps
$776
$796
2.7%
10.9%
8.2%
-270 bps
SUPPLY TRENDS
Source: Reis, Inc
 Developers
 Reis
expect three more apartment properties (925 units) to open in
December. Three other assets (518 units) were under construction and
scheduled to open in 2011 and 2012.
 The development pipeline remains stout, including 42 properties in the
planned / proposed phase. The assets contain 16,886 units, although
4,618 are located outside of the Reis coverage area.
William T. Hinga
614-857-1499
12,000
Completions
Absorption
10,000
8,000
Units
completed seven apartment properties in the first 11
months of 2010, totaling 1,937 units. The largest additions to
inventory were recorded in the Central (469 units) and Far Northwest
(438 units) submarkets. Additionally, supply totaled 288 units, 222
units, 256 units and 264 units, in the Far South, Hwy 183 / Cedar Park /
Leander, North Travis, and San Marcos / North Hays County
submarkets, respectively.
Daniel J. Hogan
614-857-1416
Change
6,000
4,000
2,000
0
02 03 04 05 06 07 08 09 10f 11f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or
sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED
CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED
cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and
exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice
due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Austin,Texas
August 2010
EXECUTIVE SUMMARY
A
fter missing an upgrade cycle or two during the recession, business customers
were anxious to replace aging PC’s in
the spring, boosting Round Rockbased Dell’s 2Q earning 16% and
returning the company to world #2
status in PC sales. Meanwhile, strong
global demand for home computers,
mobiles, PDA and tech capital goods,
pushed global semiconductor sales up
37% year-on-year and 47% year-todate, according to the Semiconductor
Industry Association, helping Austin
post some of the strongest payroll
growth in the country: 16,800 jobs
created January to July, expressed on
a seasonally-adjusted basis.
Year-on-year comparisons showed a
6,200-job advance in 2Q10, up from
1Q’s 5,000-job, -0.7% setback.
Gains were still stronger in July when
total payrolls revealed an 18,600-job,
2.5% y-o-y advance, the strongest
metric recorded in 26 months.
While high tech revenues may have
been the catalyst, electronics firms
weren’t the principal source of new
jobs. Rather, the hospitality and state
government sectors made the largest
contributions, accounting for 8,100
jobs y-o-y in 2Q and 13,300 over the
12-month period ended in July. The
data suggest that expansion at U.T.
and strong leisure travel activity were
responsible for the robust conditions.
The strength of Austin’s economy
won praise from a host of media
sources recently, earning kudos from
Kiplinger’s, Forbes and CNN since
June. RED Research’s econometric
model was no exception, forecasting
that capital area firms will add an
average of 9,000 jobs in 2010, surging
to 17,700 and 28,000 in 2011 and
2012, respectively. Next year’s 2.4%
growth rate would be the third fastest
pace posted among the RED 50, following only Dallas and Nashville.
SNAP SHOT
Austin’s economic strength and Gen
Y-friendly lifestyle make it a magnet
for ambitious Twenty-something job
seekers. Second quarter apartment
demand was exceptionally strong as a
result, producing meaningful occupancy gains. Tenants net leased 1,255
units in 2Q, according to Reis, the
strongest spring quarter results in four
years. With supply reduced to a fouryear quarterly low 552 units, occupancy increased 50 basis points sequentially and 90 bps year-over-year
to 90.4%. Submarkets with high tech
and Gen Y tenant bases posted the
strongest sequential gains, led by
Central, Round Rock and Cedar Park,
where occupancy increased 210, 170
and 120 bps, respectively.
2Q rent trends were mixed, rising
sharply in some areas and falling in
others. Overall, average asking rents
were unchanged quarter-to-quarter
while concessions levels declined
about 2%, producing a $2 (0.3%) effective rent advance. Rents in the
Northwest suburbs (RR620N and
Cedar Park) posted healthy 170 bps or
greater increases, while infill areas
recorded moderate rent declines, including the Central and Near North
submarkets, where effective rents
declined 40 and 230 bps, respectively.
The performance outlook generated
by Reis forecast models continued to
improve. The service now expects
occupancy to rise to 90.7% by YE10,
up from forecasts of 90.1% made in
February and May. With regard to
effective rents, the latest Reis projection foresees a 1.8% advance in 2010,
up from 1.2% and –0.4% published in
the previous two quarterly cycles.
RCR’s estimate of unlevered returns
follows accordingly. In the latest iteration, annual total returns from generic Austin assets are expected to
average 9.0%, ranking fourth highest
among the RED 50 markets.
Vacancy
(9.6% - 2Q10)
Effective
Rents
($789 - 2Q10)
Cap Rate
(6.0% - 2Q10)
Y-o-y
change
Projected
YE 2010
90 bps
20 bps
1.7%
1.8%
1.0%
Neutral
6.2m
9.0m
Employment
(768.6m - 2Q10)
KEY POINTS
•
Austin displayed impressive job and
demographic growth in the first half,
generating some of the strongest apartment
demand in the country. Reis report that
tenants absorbed 1,255 units during 2Q10,
giving rise to a 50 basis point increase in
average market occupancy to 90.4%.
•
Rent trends were mixed as apartment owners
emphasized occupancy growth over revenue
enhancement. The average metro face rent
was unchanged sequentially, although a
small decrease in lease concessions allowed
effective rents to rise $2 (0.3%) to $789.
•
Hiring by accommodations and food service
establishments, university labs and faculties
and professional service firms paced a job
surge in the early summer.
Payrolls
increased by a monthly average of 6,200 jobs
in 2Q and 18,600 jobs year-on-year in July.
•
Transaction activity accelerated, rising from
four transaction valued at $60mm in 1H09 to
nine transactions valued at $132mm during
the first half 2010 (Real Capital Analytics).
•
A recent construction SoCo mid-rise sold for
$27mm in April, priced to a 6% estimated
cap rate, setting a market value standard.
Austin - Round Rock - San Marcos, TX MSA Q2 2010
2Q10 VACANCY TRENDS
•
•
Brisk demand chipped away at the metro average vacancy rate for the
third consecutive quarter. Tenants absorbed 1,255 units against supply
totaling 552, increasing metro occupancy by 50 basis points to 90.4%.
Demand in the Far South submarket, largely running from Manchaca
to the Colorado River, and Round Rock submarket was exceptional,
approaching 1,700 units between them. Respective submarket
occupancy rates increased 40 bps and 170 bps sequentially.
Owners of infill units near Downtown and the U.T. campus must have
been pleased by tenant demand. Central submarket occupancy
increased 210 bps sequentially after net absorption of about 300 units.
Source: Reis, Inc.
13%
12%
Metro Vacancy Rate
•
AUSTIN
U.S.A.
11%
9%
8%
7%
7.8%
6%
5%
Reis expect occupancy to rise 20 bps by YE10 and ultimately to 92.7% by YE14.
Six public REITs with 7,360 Austin units posted a 20bps sequential gain in 2Q10.
4%
2Q 04 2Q 05 2Q 06 2Q 07 2Q 08 2Q 09 2Q 10
2Q10 RENT TRENDS
•
•
•
Metro Rent Trends
Following 1Q10’s impressive 0.8% effective rent surge, average gains
in the second quarter were modest. Reis found that average face rents
were steady March to June, while concession levels receded by $2. As
a result, average effective rents increased 0.3% sequentially to $789.
M/PF Research report that effective rents declined -0.5% during the
second quarter, despite estimated net absorption of 3,800 units. The
firm typically is a reliable source of Texas market data.
O’Connor & Assoc. report that average Austin rent per unit was $818
in June, a 0.3% increase from $815.50 in March.
Source: Reis, Inc.
8%
6%
YoY Rent Trend
•
4%
0%
Reis forecast a $6, 0.7% average effective rent increase for Austin in
2H10, accelerating to $18 (2.3%) in 2011, and $23 (2.8%) in 2012.
•
0.6%
ASKING
EFFECTIVE
-4%
2Q 04 2Q 05 2Q 06 2Q 07 2Q 08 2Q 09 2Q 10
Source: Reis, Inc.
Investors stepped up acquisition efforts in the Capital City, acquiring
nine properties in the first half 2010 for a total of $132 million, up
from four transactions valued at $60mm in the same period of 2009.
The marquis transaction was the acquisition of a 2008-construction
mid-rise property in South River City. A nationally-branded
management company paid an estimated $27mm for the property or
approximately $160,000 per unit. RCR estimate that the price equates
to a 6.0% yield.
Using a 6.0% generic cap rate assumption, RCR derive a 9.0%
expected five-year, unlevered total rate of return for Austin property
investments. Only San Antonio, Charlotte and Fort Lauderdale produce
higher measures of expected return. Austin is a volatile market,
however, trimming the risk-adjusted index to a 46th-ranked 1.46.
Cap Rate
•
1.7%
2%
-2%
RANK: 5th out of 50
•
9.6%
10%
8.5%
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
2Q
4Q
2Q
4Q
2Q
4Q
2Q
07
07
08
08
09
09
10
Property Name
Malibu Apartments (Far North)
SoCo Midrise
(Far South)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
C
A
Jun-2010
Apr-2010
$21.0 (est)
$27.0
$44,118
$159,763
4.5%
6.0%
Austin - Round Rock - San Marcos, Texas MSA - Q2 2010
Source: N.A.R.
Median PX (000)
$250
AUSTIN
US
•
$200
$150
•
$100
$50
•
$0
'06 '07 '08 1Q 2Q 3Q 4Q 1Q 2Q
09 09 09 09 10 10
•
Annual Chg (000)
40
28.0
17.7
9.0
10
•
0
-10
•
-20
-17.6
-30
99 00 01 02 03 04 05 06 07 08 09 10f 11f12f
•
Source: BLS, Woodley Park Research, RCR
Metro payroll trends improved considerably in the spring. Year-overyear comparisons for the April—June period showed a 6,200-job,
0.8% increase, up from 1Q10’s 5,000-job, -0.7% decline. Growth in
2Q compared favorably to the nation’s –0.5% annual rate of job loss.
Faster hiring among wholesale and retail trade shops, growth in the
tech-related business services and hospitality industries and firmer
conditions in the goods producing sectors propelled the advance.
Lodging, food service and professional service firms and the state
government accelerated hiring in July. The foregoing brought new
employees on at a 12,700-job annual rate, boosting total payrolls
18,600 jobs above the comparable total in July 2009.
The Austin workforce expanded by nearly 20,000 (2.2%) individuals
in the 12 months ended in June. Consequently, the unemployment rate
held steady at a near record 7.4% despite robust job creation.
Seasonally-Adjusted
•
8%
6%
4%
Rate
Home sales tumbled in July, falling 25% year-over-year, according to
the Austin Board of Realtors, largely due to expiry of the federal
buyers credit. The median priced home traded for $222,000, up 15%
y-o-y, and the average market time shortened by two days to 73.
50
20
According to HousingTracker.net, the median listing price of Austin
homes during August was $230,000, representing an -8.0% decline
from August 2009, and a –1.9% decrease from July 2010.
EMPLOYMENT TRENDS
30
Austin home prices have been remarkably stable over the past five
years, in stark contrast to the roller coaster ride experienced in many
market areas during the period. According to the N.A.R., the median
price of an Austin MSA home sold in 2Q10 was $196,200 (+1.3% y-oy). The metro median prices observed in the second quarters of 2007,
2008 and 2009 were $186,600, $194,200 and $194,000, respectively.
Establishment payrolls increased in eight of ten months from October
2009 to July 2010, rising 19,300 jobs in the process. Of this amount,
10,900 jobs were created during the second quarter, up from 5,400 in
1Q10. The rate of progress slowed to only 500 jobs in July, however.
•
2%
Temporary hiring for the 2010 Census had a minor bearing on 2Q10
payroll expansion, accounting for roughly 500 jobs.
Forecast
0%
AUST ACTUAL
AUST FORECAST
USA ACTUAL
USA FORECAST
-2%
-4%
-6%
•
03 04 05 06 07 08 09 10 11f 12f
20%
15%
10%
5%
Austin job trends appear to be on the cusp of a major positive move.
The RCR payroll model projects that year-on-year payroll expansion
will accelerate to a 15,800-job rate in 3Q10, rising gradually to a
21,000-job pace by 4Q11. The trend is expected to produce a 9,000job average monthly advance this year, followed by 17,700-job and
28,000-job adds in 2011 and 2012, respectively.
RED Estimated Generic Unlevered Asset Total Return Probabilities 15.8%
AUST (RAI=1.46)
2.6%
0.4%
RAL-DUR (RAI=2.10)
8.7%
5.4%
5.3%
11.7%
9.0%
7.2%
11.5%
0%
90%
70%
50%
P ro ba bilit y o f A c hie v ing S t a t e d R e t urn o r G re a t e r
30%
10%
SUBMARKET TRENDS
Submarket
Central Austin
East Austin
Far North Central
Far Northwest
Far South
Near North Central
Near Northwest
Near South Central
North Travis
Southeast Austin
Metro
Effective Rent
Physical Vacancy
2Q09
2Q10
Change
2Q09
2Q10
$987
$615
$567
$855
$838
$722
$666
$758
$946
$725
$1,027
$780
$718
$1,043
$649
$568
$851
$862
$722
$689
$765
$920
$727
$1,040
$796
$727
5.7%
5.5%
0.2%
-0.5%
2.9%
0.0%
3.4%
0.9%
-2.7%
0.3%
1.2%
2.0%
1.3%
12.0%
8.6%
8.4%
6.2%
11.7%
10.8%
6.6%
7.6%
10.4%
11.6%
13.6%
17.5%
8.3%
9.4%
12.7%
11.9%
7.4%
8.8%
10.0%
14.4%
8.5%
7.2%
7.0%
9.0%
11.9%
10.6%
-260 bps
410 bps
350 bps
120 bps
-290 bps
-80 bps
780 bps
90 bps
-320 bps
-460 bps
-460 bps
-560 bps
230 bps
$684
$776
$696
$789
1.7%
1.7%
9.4%
10.5%
11.1%
9.6%
170 bps
-90 bps
SUPPLY TRENDS
•
•
•
Source: Reis, Inc
After welcoming the largest crop of new apartment units in the 21year Reis data series (10,337) in 2009 (quite an achievement for
this active market), Austin supply level eased in 1H10 and are
poised to decline sharply over the next several years.
12,000
Reis identify six large apartment projects presently under
construction. Four are expected to receive final CoO during 2010,
adding 1,181 units to the market inventory. The other two are
projected to reach completion by 1Q12, contributing 518 units to
stock. A total of 32 projects encompassing 8,183 units are in the
planning phase, according to Reis. O’Connor & Assoc. counted
2,820 units underway and 2,342 units in the planning stage in June.
Daniel J. Hogan
614-857-1416
William T. Hinga
614-857-1499
Absorption
8,000
Developers completed five projects encompassing 1,387 units
during the first half 2010, down from 6,071 units in 1H09, and
4,266 units in 2H09. Reis expect 1,475 units to be delivered in the
second half (including a 294-unit mid-rise near Lady Bird Lake
completed in August) and 1,622 units (an 18-year low) in 2011.
The trailing 12-month trend of building permits in structures with 5
or more units peaked in April at 7,802. The trend plummeted
thereafter, falling to a series-low 735 units during the year ended in
June. From January to July 2010, only 386 units were permitted.
Completions
10,000
Units
•
Change
6,000
4,000
2,000
0
02 03 04 05 06 07 08 09 10f 11f
•
•
A 174-unit Allandale mid-rise entered lease-up in late
2009 and was completed in April. Asking rents ranged
from $930 to $2,015 in August. The property was 80%
occupied in June at rents averaging $1,497 (Reis).
A 288-unit garden project in Kyle (Hays County) began
leasing units in January and received a final Certificate of
Occupancy in April. The project was 38% occupied in
June at rents averaging $831.
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
RED CAPITAL GROUP®
Market Overview
Austin,Texas
June 2010
EXECUTIVE SUMMARY
A
fragile recovery took shape
in the spring, characterized
by firmer tech manufacturing output and employment; higher
consumer spending; and more upbeat
tourism activity. Gains were realized
in fits and starts, however, and weren’t galvanized to the degree necessary
to end all doubt that escape velocity
was achieved and a return to last
year’s lassitude out of the question.
Surging semiconductor demand paced
the factory sector. Global chip sales
increased 54% year-to-date in April
and are projected by analysts to rise
20% for the year. Payroll employment
in the sector continued to decrease,
but the rate of attrition was slower
and the outlook brighter. Indeed,
Samsung committed to a $3.6b expansion of its #2 Austin chip fabrication
plant, raising the prospect of 500 new
hires coming on board by next year.
Sales tax collections surged in April,
rising at a 12.2% y-o-y rate compared
to depressed 2009 results, largely due
to stronger retail sales and restaurant
receipts. But gains were considerably
smaller in May, following a pattern
observed elsewhere in Texas, reflecting weaker oil and gas revenues and
soft factory and construction output.
On the tourism front, airport enplanements rose 3.3% y-o-y in April and
5.5% over the first four months of
2010, aided by an 11% attendance
increase at South by Southwest. Rising visitor volume helped boost hotel
bookings after 2009’s dismal 6-year
low, as occupancy rates spiked 7.9%
y-o-y in 1Q, according to PKF.
As a result, the rate of 1Q total payroll decline slowed to 5,000 (-0.7%)
jobs from 4Q09’s 21,900-job, -2.8%
pace. Conditions continued to improve in April, when annual comparisons rose above parity for the first
time since December 2008 with a
year-on-year advance of 800 jobs.
SNAP SHOT
Seasonally-adjusted data also took on
a brighter hue. Sequential monthly
gains were posted in 5 months between October and April, netting a
9,900-job advance, the best seven
month stretch recorded in two years.
RED Research payroll models suggest that job creation is likely to accelerate steadily through 2012. The
model generates an 8,000-job forecast
for 2010, followed by 21,800- and
32,100-job gains in 2011and 2012.
First quarter apartment demand
slowed markedly from 4Q’s 2,867unit net absorption surge, but owners
still easily exceeded the 290-unit 10year 1Q average by net leasing 853
units. But supply challenges persisted
as developers added another 835 units
to the metro inventory, holding average occupancy constant at 89.9%.
Owners effected some of the largest
rent increases in the country, however, building on 4Q’s useful $6
(0.8%) sequential quarter hike. Real
rents increased another $6 in 1Q10,
reaching $787, thereby eclipsing the
previous record ($786) set in 3Q08.
Rents were 1.0% higher y-o-y, ranking third among the RED 50 markets.
While supply pressure is expected to
persist, Reis have an optimistic outlook for occupancy. The service forecasts metro vacancy to drop 20 bps by
YE10, and 250 bps by 2014, far
stronger than the mean 140 bps decline projected for the RED 50. Rent
growth, on the other hand, is forecast
to average a less impressive 2.5%
annually from 2011 to 2014 (slower
than the 2.6% R50 mean) after rising
1.2% in 2010 (RED50 4th fastest).
Institutional quality assets trade at
about 6.5% yields, producing expected total returns of 8.9%, RED 50
#2 ranked. High volatility trims the
risk-adjusted index to 1.40, however,
ranking a lowly 45th among the group.
Vacancy
(10.1% - 1Q10)
Effective Rents
($787 - 1Q10)
Cap Rate
(7.0% - 1Q10)
Employment
(755.6.m - 1Q10)
Y-o-y
change
Projected
YE 2010
50 bps
Unchd
1.0%
1.2%
Unchd
5m
8m
KEY POINTS
•
The Austin economic recovery gained
strength in the spring, led by tech manufacturing, tourism and trade. Metro establishments
trimmed payrolls at a 5,000-job year-overyear rate in 1Q10, but annual losses turned to
gains (800 jobs) in April.
•
RED Research models forecast that Austin
will add 8,000 payroll jobs in 2010, setting
the stage for 3% to 4% gains in 2011-2012.
•
Brisk apartment demand continued over the
winter after a blow-out fall quarter: tenants
net leased 853 units in the seasonally-weak
first quarter. Supply counter-balanced the
progress though, holding sequential average
metro occupancy steady at 89.9% (Reis).
•
Owners pushed effective rent to a new record
high. The average effective rent increased $6
(0.8%) quarter-to-quarter to $787, eclipsing
by $1 the previous metro record set in 3Q08.
•
Reis expect occupancy to rally 20 bps by
year-end and 250 bps by 2014, but foresee not
better than national average rent growth.
•
Investors actively pursued distressed assets
and repositioning plays. Pro forma yields
were mostly in the mid-6% to 7% range.
VACANCY TRENDS
•
•
Following 4Q09’s powerful 80 basis point occupancy rate increase,
Austin apartment owners continued to experience robust demand over
the winter. Reis reports that 853 units were absorbed, well above the
290-unit average of the previous first quarter periods.
Supply of 835 units nearly balanced demand, holding occupancy
steady quarter-to-quarter at 89.9%, but leaving average occupancy 50
bps below the year-before level. By contrast, MPF Research estimate
March occupancy at 90.2%, up 100 bps from March 2009.
Reis expect occupancy to blossom beginning in 2011. The service
forecasts a moderate 20 bps gain by YE10, but rapid improvement
thereafter, sending average occupancy to the 93.4% level by 2014.
Source: Reis, Inc.
14%
Metro Vacancy Rate
•
12%
10.1%
10%
8%
6%
8.0%
4%
AUSTIN
U.S.A.
2%
0%
Occupancy improved 190 bps quarter-to-quarter, 140 bps y-o-y in Round Rock.
1Q 04 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10
RENT TRENDS
•
•
First quarter sequential quarter rent trends were among the strongest in
the country (ranked #2 in the RED 50) . Reis report that owners hiked
face rents an average of $4 (0.5%) to $875, establishing a new metro
data series high. Concession levels retreated as well, sending effective
rents $6 (0.8%) higher to $787, also setting a metro data series record.
Rents in the Central submarket, popular with young professionals and
students, were exceptionally strong. Rent levels rose $24 (2.4%)
sequentially and $64 (6.6%) year-over-year. New luxury supply was a
factor in the gains (stock increased 12%), but demand was brisk for the
high cost units, holding submarket average occupancy near 88.5%.
Source: Reis, Inc.
8%
6%
YoY Rent Trend
•
Metro Rent Trends
4%
0%
-2%
MPR Research report that their surveys found that Austin effective rents
declined -4.8% y-o-y in 1Q10, an improvement over 3Q09’s near -7% drop.
•
ASKING RENT
EFFECTIVE RENT
-6%
1Q 04 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10
Investors zeroed in on rehab and repositioning plays, acquiring 11 late1960s to mid-1980s vintage projects from January to early-June. Most
were distressed to one degree or another. Initial yields were difficult to
estimate accordingly, but the backs of our envelopes suggest that
buyers can drive 7.0% to 8.5% yields at current rents just by raising
economic occupancy back to the 80% level.
An individual investor acquired a distressed, recent-construction loft
project in Round Rock at a price estimated at slightly less than
$100,000 per unit. At current rents and 85% economic occupancy,
RCR estimate that the property will generate about a 6.5% yield.
Reis expect Austin occupancy to increase 250 bps by 2014. The service’s
pessimistic view of rent growth over the period notwithstanding, an investor
buying a generic asset at our assumed 6.5% purchase cap rate would earn
expected total returns of 8.9%, second highest among the RED 50 markets.
Source: Reis, Inc.
8.5%
8.0%
7.5%
Cap Rate
•
0.3%
-4%
RANK: 3rd out of 50
•
1.0%
2%
7.0%
6.5%
6.0%
5.5%
5.0%
1Q
3Q
1Q
3Q
1Q
3Q
1Q
07
07
08
08
09
09
10
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
Arbor Pointe (Southeast)
Shady Oaks (Far South)
B
B- (distressed)
01-Jun-2010
04-Feb-2010
In contract
$8.1 (approx)
N/A
$35,000 (approx)
7.0%
5.0% / 8.5% pf
La Frontera (Round Rock)
A (distressed)
05-May-2010
$33.3 (approx)
$95,000 (approx)
1.5% / 6.5% pf
Source: FHFA HPI
•
15%
Y-o-Y Change
10%
5%
-2.0%
•
-6.8%
•
0%
-5%
AUSTIN
-10%
USA
3Q 05 2Q 06 1Q 07 4Q 07 3Q 08 2Q 09 1Q 10
•
Annual Chg (000)
40
32.1
30
21.8
8.0
•
0
-10
-20
-17.6
-30
99 00 01 02 03 04 05 06 07 08 09 10f11f12f
•
Source: BLS, Woodley Park Research, RCR
Austin payrolls declined at a 5,000-job, -0.7% pace in the first quarter, a substantial forward step after the prior quarter’s 21,900-job, 2.8% setback. Improvement was observed across virtually all industry sectors. The largest gains were posted by the manufacturing and
business and hospitality services sectors. The foregoing registered
aggregate y-o-y losses of -12,000 jobs in 4Q09, but only -1,400 in 1Q.
Austin posted a year-on-year increase in April (800 jobs), the first
positive metric recorded since December 2008. The gain was largely
attributable to surging hospitality sector employment. Tourism was
up sharply, as typified by record attendance at South by Southwest in
March, boosting accommodations headcounts and contributing to
faster hiring among restaurants and night spots.
The unemployment rate in April was 7.0%, down 60 bps from the
January peak, but up 80 bps y-o-y. Improvement since January was
attributable to rising total employment. The BLS reported that the
number of employed residents increased by 15,859 January-to-April
(24,169 year-on-year), while the labor force gained 11,781 persons.
8%
Seasonally-Adjusted
6%
•
4%
Rate
Austin population increased by 50,975 persons in 2009, a 3.1%
advance. The figure was down from 2008’s 59,975 (3.7%) increase and
was the smallest one-year add registered since 2005.
50
10
Anecdotal evidence suggests that the Austin condo market is heating
up after a deep slump in 2008 and 2009. Reports indicate that year-todate sales were about 33% higher than 2009 overall and 50% higher in
the critical Downtown core. Renters with stable employment situations
seem to be jumping into the fray before prices begin to rise again.
EMPLOYMENT TRENDS
20
Available price data suggest that Austin home values were relatively
stable in the first quarter. The N.A.R. report a median sales price of
$182,500 for 1Q10, within $300 of both the comparable prior quarter
and year earlier levels. Similarly, the Federal Housing Finance Austin
all transaction index declined –2.0% y-o-y and -0.9% sequentially.
2%
0%
-2%
Forecast
A USTIN A CTUA L
A USTIN FORECA ST
USA A CTUA L
USA FORECA ST
-4%
-6%
•
03 04 05 06 07 08 09 10 11f 12f
AUST (RAI=1.40)
SEA (RAI=1.70)
15%
10%
0%
Austin is exiting the Great Recession earlier and with greater force
than the nation and its principal “smart” city rivals, like Seattle, Denver and Raleigh. RED Research forecast a net gain of 8,000 jobs in
2010, followed by creation of 21,800 jobs in 2011 and 31,100 jobs in
2012. Economy.com are slightly more optimistic than this.
20%
5%
Expressed on a seasonally-adjusted basis, Austin establishment created 8,900 jobs from October 2009 through April 2010. The pace of
growth was strongest in January when Austin employers brought on a
net of 4,900 workers. Hiring was steady in March and April, when
net payroll increases totaling 800 and 1,000 jobs were recorded.
5.4%
1.2%
0.1%
90%
8.7%
4.2%
70%
11.9%
6.1%
50%
8.0%
30%
16.0%
10.5%
10%
SUBMARKET TRENDS
Submarket
Effective Rent
1Q09
1Q10
Physical Vacancy
Change
1Q09
1Q10
Change
Far South
$848
$861
1.5%
11.8%
9.2%
-260 bps
Near South Central
$943
$910
-3.5%
10.6%
8.0%
-260 bps
Southeast
$682
$682
0.0%
8.1%
10.2%
210 bps
Central
East
Near North Central
Far North Central
North Travis County
Near Northwest
Far Northwest
$983
$618
$670
$574
$730
$768
$850
$735
$1,048
$662
$705
$565
$714
$767
$854
$710
6.6%
7.2%
5.2%
-1.5%
-2.2%
-0.2%
0.5%
-3.5%
11.3%
7.6%
4.7%
7.7%
11.3%
7.1%
6.6%
9.2%
11.5%
11.9%
14.8%
11.4%
8.0%
8.3%
8.4%
11.2%
20 bps
430 bps
1010 bps
370 bps
-330 bps
120 bps
180 bps
200 bps
$783
$788
0.6%
15.0%
13.6%
-140 bps
$714
$723
1.3%
4.1%
7.4%
330 bps
$1,017
$1,017
0.0%
12.1%
10.2%
-190 bps
$779
$787
1.0%
9.6%
10.1%
50 bps
Metro
SUPPLY TRENDS
•
•
•
Four projects encompassing a total of 1,123 units were added to the
metro inventory during the first four months of 2010. Each lies in a
unique submarket; distributed as follows: Far South (268 units);
Central (175); Far Northwest (438) and Cedar Park (222).
Source: Reis, Inc
Completions
12,000
Absorption
10,000
8,000
The Far South project is a 3-story garden complex with upscale
community amenities and kitchen designs. Rents range from $774
to $1,275 or roughly $1.00 per square foot of interior space.
Units
•
6,000
4,000
2,000
The Central submarket property is located in Bohemian Brentwood.
This stylish four-story mid-rise with center courtyard design rents
for $973 to $2,025 or $1.60 to $1.70 per sf2 of living space.
Six projects encompassing 1,798 units were under construction in
June. Each is expected to be complete by year-end. Again, the
Downtown core and close-in suburban locations will receive the
lion’s share. Two (609 units) are located in the Central submarket,
and a third (375 units) lies on the west bank of Lake Austin on the
immediate outskirts of the urban core. The balance fall in San
Marcos (148 units), North Hays Co. (264) and Round Rock (402).
Daniel J. Hogan
614-857-1416
William T. Hinga
614-857-1499
0
02
•
•
03
04
05
06
07
08
09
10f
11f
A 36-story, 259-unit high rise located near Town Lake’s
Shoal Beach was 70% occupied in March after leasing for
about nine months. Rents averaged $3,282.
A 187-unit, 31-story tower near Walter Beach was about
95% occupied in March at rents averaging $3,213. The
project began leasing in late-2008.
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
RED CAPITAL GROUP®
Market Overview
Austin,Texas
March 2010
EXECUTIVE SUMMARY
I
n March, Portfolio Magazine
recognized Austin as the best
place in America for young people to become established, citing its
record of strong employment growth
and high concentration of young
adults with college degrees. Ironically, the announcement coincided
with the opening of Austin’s South by
Southwest independent music festival,
the venue in which Austin most
clearly demonstrates the cultural
qualities that make it so popular with
the young, hip and high tech set.
While young adults are the multifamily housing industry’s bread and butter, their mere presence in the metro
area isn’t sufficient to propel them to
establish new households. They need
jobs too, and these are lately a rare
commodity even in Austin. According to recently released “rebenchmarked” payroll data, Austin
establishments trimmed a net of
17,600 (-2.3%) positions last year,
representing a -15,400-job downward
revision from the original CES data
and Austin’s largest one-year job decline since metro data were first reported in 1970. Recent prints were
worse, as year-on-year payroll comparisons deteriorated in the second
half of 2009, falling at a 23,700-job, 3.1% annual pace in 3Q09, and a
21,900-job, -2.8% rate in 4Q09.
Layoffs in 4Q were most severe in the
goods producing industries, as construction, manufacturing and wholesale trade concerns reduced headcounts at a 17,000-job, -12.0% aggregate rate. But jobs cuts also were recorded in consumer-oriented and
skilled service industries, especially
retail trade (3,400 jobs); information
services (1,400 jobs) and financial
and business services (8,100 jobs).
Only the health care and hospitality
sectors exhibited much forward momentum, posting 2,400- and 2,200-job
advances y-o-y, respectively.
SNAP SHOT
RED Research still expect the Austin
job market to rebound this year, but
the timing and strength of the recovery will be later and less robust than
we previously projected. Austin isn’t
likely to post y-o-y payroll growth
before the bluebonnets bloom and job
gains for the year will number only
about 8,800 (1.2%). Gains will accelerate in 2011 to about 19,000 (2.5%).
Job losses notwithstanding, apartment
owners encountered robust demand in
4Q as tenants net leased a total of
2,975 units, according to Reis, representing the largest one quarter harvest
in nine years. Although supply was
hefty as well — developers put the
finishing touches on 1,902 units —
occupancy climbed 80 basis points
quarter-to-quarter to 89.9%, easily the
best performance recorded among the
RED 50. Tenants absorbed more than
500 units in three submarkets, including Far South, Central and Round
Rock. Households also expressed
strong demand for units in the Northwest suburbs, leasing 482 units in the
RR 620N submarket and 146 units in
Cedar Park, reducing average vacancy
360 and 690 bps, respectively.
Rent trends were constructive, buttressed by vigorous demand and the
addition of new luxury properties to
inventory. Average face rents increased $4 (0.5%) from September to
December to $870, and concessions
receded $2, producing a $6 (0.8%)
advance in effective rents to $781.
Only one market among the RED 50
(District of Columbia) chalked down
faster growth. Of 10 submarkets that
did not add new supply, five reported
sequential effective rent decreases.
On the other hand, Northwest Austin
neighborhoods were conspicuous
gainers, especially the RR 620N, Near
Northwest and Far Northwest submarkets, which advanced 1.8%, 2.4% and
1.4%, respectively. Central submarket
surged 2.4% to a $1,024 average.
Y-o-Y
change
Vacancy
Projected
2010
(10.1% - 4Q09)
2.4%
0.2%
Effective
Rents
0.3%
0.4%
($783 - 4Q09)
Cap Rate
(7.3% - 4Q09)
Employment
(759.2m - 4Q09)
1.5%
21.9m
8.8m
KEY POINTS
•
The Austin apartment market delivered the
best 4th quarter performance among the
RED 50 markets, posting an 80 basis point
sequential occupancy rate gain and an 0.8%
advance in average effective rents.
•
Reis aren’t convinced that the rally is
sustainable. The service expects occupancy
to rise just 20 bps in 2010, while rents
reverse course, falling by a projected -0.4%.
•
Revised 2009 payroll data from the BLS
suggest that the Austin economy was weaker
than previously understood. Rather than a
initally disclosed 2,200-job setback for 2009,
Austin actually lost 17,600 jobs last year, the
biggest one-year loss on record.
•
RCR adjusted its projection of 2010 and
2011 job creation accordingly. The group’s
econometric payroll model now produces a
forecast of 8,800 new payroll jobs in 2010,
down from 14,800 previously. By contrast,
the 2011 forecast is a bit stronger, rising
from the initial 18,000 jobs to 19,000 now.
•
After a sluggish 4Q09, trade in Austin
properties gained steam in early 2010.
Investors closed on 5 properties and were
under contract for 3 more by February 10.
Austin - Round Rock - San Marcos, TX MSA - 4Q09
VACANCY TRENDS
•
•
•
Reis report that Austin households absorbed a nine-year high 2,945
units in 4Q09, and a 12-year high 5,420 units in calendar 2009.
Supply levels were copious, however, limiting occupancy gains.
Developers delivered 1,902 units in 4Q and a record 10,101 units
during calendar 2009. As a result, occupancy increased 80 basis points
sequentially in 4Q (to 89.9%) but was 240 bps lower on the year.
M/PF Research also report year-end occupancy averaging 89.9%.
Source: Reis, Inc.
16%
Metro Vacancy Rate
•
14%
10.1%
12%
10%
7.7%
8%
6%
4%
Developers delivered 756 units to the Central submarket in 4Q.
Tenants absorbed a net of 546, but occupancy slipped 1.1% to 87.8%
nevertheless.
AUSTIN
AUS CLASS-A 10.8%
AUS CLASS-BC 9.8%
2%
0%
4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q
COMMENT: Supply is projected to decline to 2,501 units in 2010, but Reis
expect occupancy to increase only 20 bps due to a parallel decrease in demand.
99 00 01 02 03 04 05 06 07 08 09
RENT TRENDS
•
•
The combination of vigorous retail apartment demand and delivery of
nearly 2,000 units of mostly luxury supply caused face and effective
rents to increase in 4Q09, according to Reis. Average face rents
advanced $4 (0.5%) to $870, while effective rents surged $6 (0.8%) to
an average of $781. For the year, effective rents fell $2 or –0.3%.
M/PF and REIT data tell a somewhat different story. According to the
former source, effective rents dropped -1.3% in 4Q and -5.5% for the
calendar year. Five public trusts with a total of 6,071 Austin units
recorded –1.7% and –6.0% unit-weighted average sequential and
calendar year decreases, respectively.
Reis expect rents to fall in 2010. The service forecasts $1 (-0.1%) and
$3 (-0.4%) declines in face and effective rents, respectively, next year.
YoY Rent Trend
•
Metro Rent Trends
Source: Reis, Inc.
ASKING
EFFECTIVE
CL-A ASK
CLC-BC ASK
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
0.0%
-0.3%
4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q
RANK: 6th out of 50
99 00 01 02 03 04 05 06 07 08 09
•
•
•
Source: Reis, Inc.
Sales velocity was slow in 2009. Real Capital Analytics report that
only 11 properties valued at $264mm exchanged hands last year, down
from 45 properties valued at $1.1bn in 2008. Sales of four properties
were closed in 4Q for total value of $84.5mm, down $35mm from 3Q.
Trade accelerated in early 2010. RCA identified five closed properties
and three under contract by mid-February. The former category was
highlighted by a 75% occupied, 234-unit, class-B property located in
the Far South submarket. Price information was not made available.
Investors continued to bid aggressively for class-A projects, but cap
rates for class-B&C assets increased to the 8% to 9% range.
Employing a 7.2% generic cap rate assumption for Austin assets, RCR estimate
expected 5-year holding period total returns of 7.9%, 6th highest among the RED 50.
Conversely, high volatility produces a below average risk-adjusted return metric.
Austin’s risk-adjusted index is 1.18, well below the RED 50 mean of 2.29.
8.5%
8.0%
Cap Rate
•
7.5%
7.0%
6.5%
6.0%
5.5%
1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q
06
06
07
07
08
08
09
09
Property Name
Legacy @ Western Oaks (Far So)
Longhorn Station (Southeast)
Falls on Bull Creek (Near NW)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
C
B
30-Dec-2009
08-Nov-2009
14-Jan-2010
$46.5
$4.5 (Reis)
$17.5 (allocated)
$97,077
$15,000
$51,005
5.5%
9.0%
9.0%
Austin - Round Rock - San Marcos, TX MSA - 4Q 2009
$240
AUSTIN
•
US
Prices (000)
$220
$200
$180
•
$160
$140
•
$120
$100
2006 2007 2008 1Q
2Q
3Q
4Q
09
09
09
09
•
•
Annual Chg (000)
40
30
19
0
•
-10
-17.6
-30
99 00 01 02 03 04 05 06 07 08 09 10f 11f
AUSTIN
USA
8%
6%
•
•
Source: BLS
Foreclosure activity was sharply higher last year (up 39.5%), but remained below the
national average, ranking 112th highest among the nation’s top 203 metro areas.
Year-over-year payroll losses subsided moderately from 3Q09’s rapid
23,700-job, -3.1% pace, falling to 21,900 jobs or –2.8%.
High rates of employment losses in construction, manufacturing and
wholesale trade were largely responsible. Headcounts fell at a combined 17,000-job, -12.0% rate in the period, accounting for about 65%
of the metro’s total job losses in the period.
Trends in the critical business service sector deteriorated in 4Q.
Losses accelerated from 3Q’s 6,100-job, -5.5% annual pace to a
6,600-job, -5.9% rate.
Preliminary January data suggest that a recovery may arrive soon.
Total payrolls were down only 10,000 jobs from January 2009, the
smallest over-the-year loss posted in 12 months and less than one-half
the number of job cuts recorded in the 12 months ended in December.
The Austin unemployment rate in December held steady month-tomonth at 6.9%, well below the 9.7% national average.
Seasonally-Adjusted
•
4%
Rate
•
8.8
-20
Downtown condo sales continued at a slow but steady pace. A total of
112 MLS listed condos traded last year, down from 130 in 2008. The
average price was $329,000, down -4.9% from $346,000 in 2008.
50
10
The Federal Housing Finance Agency report that Austin homes
declined -1.7% in value from 4Q08 to 4Q09, comparing unfavorably to
the 4.1% advance recorded in the one-year prior period.
EMPLOYMENT TRENDS
20
Austin home prices were steady in the fourth quarter. According to the
NAR, the median price of an Austin home was $184,000, -0.4% from
the comparable period of 2008. Median home price metrics vacillated
within an unusually tight range from 2007 to the present, trading
between $183,000 and $194,000 during the period.
2%
•
0%
-2%
Seasonally-adjusted figures also pointed to improvement in the Austin
labor market. According to these data, Austin establishments added a
total of 2,300 jobs in 4Q, after trimming -6,200 in 3Q09.
January figures also were constructive. The BLS report that Austin
seasonally-adjusted payrolls increased 4,500 jobs during the month!
Forecast
-4%
-6%
99 00 01 02 03 04 05 06 07 08 09 10
20%
15%
10%
5%
0%
-5%
•
RCR models suggest that Austin year-over-year comparisons should
exceed parity sometime in early spring, setting the stage for an 8,800job add during calendar 2010. Gains should accelerate steadily
through YE2011, producing a 19,000-job advance next year.
AUS (RAI=1.18)
1.2%
SEA (RAI=1.69)
4.1%
4.2%
7.7%
10.9%
6.2%
8.1%
15.4%
10.8%
-1.4%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Submarket
Effective Rent
Physical Vacancy
4Q08
4Q09
Change
4Q08
4Q09
Far South
Near South Central
Southeast
Central
East
Near North Central
Far North Central
North Travis
Near Northwest
Far Northwest
$862
$934
$696
$988
$622
$673
$587
$740
$788
$859
$728
$772
$851
$913
$683
$1,024
$652
$720
$565
$722
$771
$846
$701
$777
-1.3%
-2.2%
-1.9%
3.6%
4.8%
7.0%
-3.7%
-2.4%
-2.2%
-1.5%
-3.7%
0.6%
7.8%
8.2%
7.4%
10.8%
6.2%
4.4%
7.2%
9.1%
6.8%
6.2%
7.7%
7.9%
9.6%
8.5%
9.7%
12.2%
12.4%
14.9%
10.8%
8.3%
9.2%
6.1%
10.7%
15.5%
180 bps
30 bps
230 bps
140 bps
620 bps
1050 bps
360 bps
-80 bps
240 bps
-10 bps
300 bps
760 bps
$720
$717
-0.4%
3.8%
8.1%
430 bps
$983
$1,028
4.6%
10.2%
10.9%
70 bps
$783
$781
-0.3%
7.7%
10.1%
240 bps
Metro
SUPPLY TRENDS
•
•
Source: Reis, Inc
Reis report that seven projects encompassing 1,998 units
received final CoO in 4Q09. Three consisting of 756 units are
located in the Central Austin submarket. The other projects are
scattered in the East, Northwest and Round Rock / Georgetown
areas.
12,000
Daniel J. Hogan
614-857-1416
William T. Hinga
614-857-1499
Absorption
8,000
Three apartment developments were added to the metro
inventory during the first two months of 2010. These included a
175-unit project in Central submarket; a 438-unit community in
Northwest Austin and a 222-unit affair in Cedar Park.
Nine projects consisting of 2,272 units were under construction
in March. Each is projected to be complete sometime in 2010.
The northwest quadrant will be spared further supply pressures,
but Central submarket will gain two more projects, in this case
consisting of 294– and 315-units, respectively. The south end of
the metro will bear the brunt of the remainder, as two are
targeted at the Far South submarket (436 units), and the
Southeast and San Marcos submarkets will add one property
each. In addition, Round Rock will add another 402 units in a
garden property scheduled for December delivery.
Completions
10,000
Units
•
Change
6,000
4,000
2,000
0
02 03 04 05 06 07 08 09 10f 11f
•
•
A 31-story luxury high-rise on Rainey Street was 93% occupied
at rents averaging $2,965 after leasing for about fifteen months.
A 36-story tower on Colorado delivered in late summer leased
about 35% of its units by December at $1,356 average rents.
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
RED CAPITAL GROUP®
Market Overview
Austin,Texas
December 2009
EXECUTIVE SUMMARY
A
downturn in semiconductor
and other computer-related
production was partially
responsible for the -5,300 (-0.7%) job
year-over-year payroll job decline in
3Q09. On an annual basis, computer
and other electronic equipment manufacturers cut -4,100 jobs in 3Q09,
with the semiconductor production
industry accounting for about onehalf. Slower electronic production
resulted in staff reductions among
wholesalers. In particular, professional and commercial equipment
wholesale trade firms eliminated
-4,300 jobs y-o-y in 3Q09.
Reduced housing construction and
dwindling retail sales were also to
blame for falling headcounts. Construction establishments posted
monthly average y-o-y losses of
-3,300 jobs in the first ten months of
2009. By comparison, store payrolls
were essentially unchanged in 1H09
but a net of -700 jobs were eliminated
y-o-y in 3Q09.
The downturn is likely to end swiftly.
Seasonally-adjusted payroll data from
the Federal Reserve Bank of Dallas
shows that Austin employers trimmed
-9,600 jobs in 1Q09 and -7,300 jobs
in 2Q09, but added 1,600 workers to
staffs in the third quarter. Responses
to the September Manpower Employment Outlook Survey suggest that
firms will continue to add workers,
albeit at a slow pace in the fourth
quarter as more companies planned to
add workers (10% of respondents)
than reduce staffs (8%).
The RED CAPITAL Research
(RCR) econometric model predicts
that y-o-y job trends will turn positive
in 2H10. With regard to annual figures, the model produces point estimates of 3,200 (0.4%) new jobs in
2010 and 12,700 (1.7%) jobs in 2011.
Relatively stable economic conditions
supported better-than-average home
SNAP SHOT
price trends in Austin. Data from the
National Association of Realtors reveal that the median price of a singlefamily MSA home declined only
-0.9% y-o-y from $190,800 in 3Q08
to $189,100 in 3Q09. By contrast, the
US median price dropped -11.2%
during the period.
The resilient economy also supported
steady apartment demand; net absorption was positive in each of the first
three quarters of the year. But occupancy declined, owing to robust supply. Developers completed 7,125 in
the first nine months of 2009, forcing
the metro occupancy rate down from
92.3% in December to 89.4% in September. On a sequential quarter basis,
occupancy fell only 30 bps as demand
(1,084 units) nearly kept pace with
supply (1,744 units).
Real Capital Analytics report that
eight investor-grade properties traded
in the first ten months of 2009. The
source estimates $197 million in sales
volume and an average price per unit
of $63,487. Based on a 7.0% goingin yield, RCR calculate a 6.2% expected rate of total return, better than
the 5.4% RED 50 average. But high
historic NOI growth volatility produces a less favorable risk-adjusted
return profile.
Projected
2009
350bps
30bps
1.3%
1.9%
Vacancy
(10.6% - 3Q09)
Effective
Rents
($776 - 3Q09)
Cap Rate
(8.0% - 3Q09)
110bps
Employment
(770.8m - 3Q09)
5.3m
3.2m
KEY POINTS
•
The metro vacancy rate rose 30 basis points
sequentially and 350 basis points year-overyear to 10.6% in 3Q09. Supply was largely
to blame. Developers completed 8,528 units
in the twelve-month period ended in
September, outpacing positive net absorption
of 2,336 units. On the other hand, O’Connor
& Associates report that occupancy surged
120 basis points from 88.9% in June to
90.1% in September as managers net leased
3,887 units during the three-month period.
•
Average effective rent was unchanged
sequentially in 3Q09 at $776 but down
-1.3% year-over-year, owing to increased
concessions.
The size of the average
concession package rose from 9.4% of
asking rent in 3Q08 to 10.5% in 3Q09.
•
The National Association of Realtors
calculate that the median price of a singlefamily home fell -0.9% year-over-year to
$189,100.
•
Real Capital Analytics identify eight
transactions totaling $197 million in the first
ten months of 2009. Marcus & Millichap
note that the median price per unit fell -22%
year-over-year to $60,600.
Although demand was stable, property managers reduced rents to compete with the deluge of supply. At
$776, the metro average effective rent
was -1.3% below the figure from the
comparable period of 2008. Moreover, ALN Apartment Data estimate
that same-store effective rent fell
-2.1% y-o-y to $803.
The apartment inventory in the Round
Rock / Georgetown submarket rose
22% as 2,024 units were completed in
the first three quarters of 2009. Consequently, the submarket occupancy
rate plunged from 92.1% in 4Q08 to
82.5% in 3Q09.
Y-o-y
change
Austin - Round Rock, Texas MSA - 3Q 2009
VACANCY TRENDS
•
•
Apartment demand (1,084 units) rebounded in the third quarter but was
unable to keep pace with supply (1,744 units). As a result, the metro
vacancy rate rose 30 basis points from 10.3% in 2Q09 to 10.6% in
3Q09. On an annual basis, vacancy surged 350 basis points as
developers completed 8,528 units and managers net leased 2,336 units
in the twelve-month period ended in September.
Data from other sources largely support the Reis figures. According to
ALN Apartment Data, the metro occupancy rate fell 90 basis points
year-over-year to 89.2% in September. O’Connor & Associates report
that the occupancy rate was 90.1% in September, down about 300 basis
points from the same month last year.
Source: Reis, Inc.
14%
Metro Vacancy Rate
•
12%
10.6%
10%
7.1%
8%
6%
4%
Austin
U.S.A.
2%
0%
3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q
Reis predict that vacancy will rise 30 basis points by year-end.
00
01 02
RENT TRENDS
•
•
Effective rent was unchanged sequentially in 3Q09, putting an end to
three consecutive quarters of decline. On the other hand, annual
effective rent trends deteriorated from a modest 0.8% second quarter
gain to a -1.3% drop. Increased concessions were to blame. The size
of the average concession package rose from 9.4% of asking rent in
3Q08 to 10.5% in 3Q09.
07 08
09
ALN Apartment Data note that on a same-store basis effective rent fell
-2.1% year-over-year to $803 in 3Q09. Conversely, O’Connor &
Associates estimate that the average rent rose $3 (0.4%) year-over-year
to $824 in September.
Asking
Effective
10%
-0.1%
5%
0%
-1.3%
-5%
-10%
Reis expect effective rent to fall $7 by year-end and another $3 in
2010.
3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q
00
At an assumed 7.0% going-in yield, RCR calculate a 6.2% expected
rate of total return, ranking 13th highest among the RED 50. But
relatively high levels of NOI growth volatility produces the 46th
highest measure of risk-adjusted return.
02
03
04 05
06
07
08
09
Source: Reis, Inc.
Real Capital Analytics report that eight properties priced at or above $5
million traded in the first ten months of 2009. Sales volume totaled
$197 million and the average price per unit was $63,487.
9%
8%
Cap Rate
Marcus & Millichap calculate a median price per unit of $60,600 in the
twelve-month period ended in September and a $45,800 median price
in the past six months. Likewise, the trailing 12-month average cap
rate was about 7.5%, lower than the reported 8.0% average cap rate for
properties under-contract.
01
•
06
Source: Reis, Inc.
RANK: 21 out of 50
•
05
15%
st
•
04
Metro Rent Trends
YoY Rent Trend
•
03
7%
6%
5%
4%
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
07
07
08 08
08
08 09
09
09
Property Name
The Cunningham
Woodland Heights
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
BC
October 2009
August 2009
$18.0
$11.8
$64,286
$40,972
7.5%
7.0%
$240
Prices (000)
$220
MSA
•
US
•
$200
$180
$160
$140
$120
$100
05
06
07
Y
Y
Y
•
3Q 4Q 1Q 2Q 3Q
08
08
09
09
09
Annual Chg (000)
Relatively stable economic and home price trends contributed to a low
foreclosure rate in Austin. RealtyTrac.com estimate that the 0.41%
rate ranked 112th highest out of 203 metro markets.
•
40
30
20
12.7
•
3.2
0
-3.2
-10
According to the National Association of Realtors, the median price of
a single-family MSA home declined slightly from $190,900 in 3Q08 to
$189,100 in 3Q09. By comparison, the US median price fell -11.2%
year-over-year to $177,900. Home sales velocity slowed -11.6% as the
Real Estate Center at Texas A&M University count 17,628 closed sales
in the first ten months of 2009. The source also noted that the median
price of homes and condos fell -4.6% year-over-year to $179,800 in
October.
EMPLOYMENT TRENDS
10
The metro homeownership rate decreased from 67.5% in 3Q08 to
65.8% in 3Q09. The latter ranked 45th highest among the 75 metro
markets tracked by the Census Bureau.
•
-20
99 00 01 02 03 04 05 06 07 08 09f 10f 11f
The Austin economy continued to outperform the balance of the RED
50 in the third quarter as metro establishments cut only -5,300
(-0.7%) positions from payrolls year-over-year.
Most of the job loss was attributable to construction and manufacturing firms. The sectors lost a combined -10,000 jobs year-over-year in
3Q09, following a -9,600-job annual decline in the previous quarter.
Semiconductor and other electronic product manufacturers cut -2,000
jobs in the twelve-month period ended in October.
On the other hand, employers in the finance, business and health service segments continued to expand at a healthy rate. The sectors
added a combined 4,500 jobs year-over-year in 3Q09.
Seasonally-Adjusted
•
Source: BLS
8%
Austin
6%
USA
Rate
4%
The Federal Reserve Bank of Dallas publishes seasonally-adjusted job
data. According to the Fed’s payroll series, metro employers added
1,600 jobs from July to September, following three consecutive quarters of job loss. Conversely, the source estimates that the metro unemployment rate rose from a seasonally-adjusted 6.6% in June to
7.2% in September.
Forecast
2%
•
0%
-2%
-4%
•
-6%
99 00 01 02 03 04 05 06 07 08 09
Austin is poised for a quick recovery. Our econometric model predicts that following this year’s estimated loss of -3,200 jobs (-0.4%),
employers will add 3,200 (0.4%) workers in 2010 and another 12,700
(1.7%) jobs in 2011.
Economy.com are more optimistic forecasting gains of 14,380 jobs in
2010 and 26,340 jobs in 2011.
RANK: 1st out of 50
15%
10%
Austin
5%
-0.3%
0%
-5%
Houston
2.9%
2.6%
6.0%
8.7%
4.4%
6.2%
8.7%
-1.7%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Submarket
Far South
Near South Central
Southeast
Central
East
Near North Central
Far North Central
North Travis
Near Northwest
Far Northwest
San Marcos
Ranch Road 620 N / FM 2222
Metro
Effective Rent
Physical Vacancy
3Q08
3Q09
Change
3Q08
3Q09
$863
$937
$686
$994
$628
$668
$585
$744
$792
$846
$743
$791
$720
$1,018
$786
$853
$933
$687
$1,001
$630
$707
$570
$717
$753
$834
$697
$777
$725
$1,010
$776
-1.2%
-0.4%
0.1%
0.7%
0.3%
5.8%
-2.6%
-3.6%
-4.9%
-1.4%
-6.2%
-1.8%
0.7%
-0.8%
-1.3%
7.1%
7.9%
7.1%
10.8%
4.9%
4.6%
6.6%
7.4%
5.7%
6.0%
8.3%
6.9%
4.4%
9.2%
7.1%
12.0%
8.8%
9.6%
11.1%
10.2%
14.4%
9.9%
9.4%
9.3%
6.3%
9.4%
17.5%
6.5%
17.8%
10.6%
•
Source: Reis, Inc
Development continued to ramp-up this year. As of November,
developers completed 8,859 apartment units this year, up from the
4,836-unit tally from all of 2008. Additionally, one project containing
420 units is scheduled to open in December, bringing the 2009 total to
9,279 units. Supply in only one submarket exceeded 2,000 units yearto-date as the seven projects were added to the Round Rock /
Georgetown inventory containing 2,373 units.
Supply will moderate next year. Eleven apartment projects totaling
2,867 units were under construction in November (excluding the
project scheduled to open in December).
O’Connor & Associates identified 5,749 apartment units (including
market-rate and affordable units) under construction in October and
another 5,615 units in the planning stage.
Daniel J. Hogan
614-857-1416
William T. Hinga
614-857-1499
10,000
Completions
Absorption
8,000
Units
•
490 bps
90 bps
250 bps
30 bps
530 bps
980 bps
330 bps
200 bps
360 bps
30 bps
110 bps
1,060 bps
210 bps
860 bps
350 bps
SUPPLY TRENDS
•
Change
6,000
4,000
2,000
0
02
03
04 05
06
07 08 09f 10f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
RED CAPITAL GROUP®
Market Overview
Austin,Texas
September 2009
EXECUTIVE SUMMARY
S
emi-conductor and component sales plunged during the
recession, with negative consequences for the Austin economy.
But evidence emerged in mid-summer
that chip and PC demand were gaining strength, a necessary condition for
economic recovery and a return of
robust employment growth.
Specifically, the Semiconductor Industry Association reported that chip
sales increased sequentially in July
for the fifth consecutive month, falling only -17% below the comparable
period in 2008, a considerable improvement from the -25% decline
recorded during the first six months of
the year. Likewise, executives at
limping Round Rock-based manufacturer/retailer Dell Inc. told investors
that signs of stabilizing PC demand
were becoming increasingly apparent.
This is certainly welcome news for
the Capital City. Metro year-overyear payroll metrics slipped into the
red in 2Q09 for the first time since
2003 as a net of 2,000 (-0.3%) positions were lost, down from a 2,000job advance in the prior three-month
period and five-digit gains posted as
recently as 4Q08. Cuts were concentrated in the high tech sector, highlighted by a 3,700-job trim in the
electronics manufacturing industry,
and smaller losses posted in the information and business service sectors.
July payroll aggregates were encouraging, as June’s dismaying six-year
worst 6,400 (-0.8%) y-o-y job cut
gave way to July’s 1,400-job, -0.2%
loss comparison. The month-to-month
gains largely were attributable to improved trends in tech-related business
service segments and faster hiring in
the hospitality and finance sectors.
RED CAPITAL Research’s econometric payroll model isn’t convinced
that the metro economy lies on the
cusp of recovery. The model antici-
SNAP SHOT
pates y-o-y job losses persisting
through 1Q10, producing a 2,300-job
loss for FY09, followed by a 3,500job advance in 2010; accelerating to a
14,000-job gain in 2011.
Second quarter apartment demand
was constructive as tenants leased a
net of 729 units, representing the 13th
consecutive quarter of positive absorption. But tenant demand was no
match for supply: developers completed seven projects from April to
June incorporating about 2,000 units.
According to Reis, average occupancy fell 60 basis points sequentially
and 300 bps y-o-y to 89.9%, the lowest level printed in nearly five years.
Reis expect occupancy to decline another 50 bps by year-end 2009 before
recovering moderately next year.
Suburban submarkets had the worst of
it, especially Round Rock, where
completion of 970 units during 2Q09
pressed average occupancy down 470
bps to 83.5%. Far Northwest (-370
bps) and Ranch Road 620 (-340 bps)
reported occupancy losses of similar
magnitude, the former distinguished
by the fact that supply contributed
nothing at all to the setback.
Increased competition from projects
in lease-up exerted downward pressure on rents. Average asking rent fell
$2 (-0.2%) to $870 in 2Q, while concession costs sliced another $1 from
effective rents, trimming the metro
average $3 (–0.4%) to $776. Yearover-year effective rent trends remained in the black, rising $6 (0.8%)
from 2Q08 levels, but the outlook is
guarded. According to Reis’s midyear forecast, rents will fall another
$16 by year-end, generating a –3.1%
net decline for the full year.
Sales slowed accordingly. Only four
Austin assets traded in 1H09 for
$60mm, down from $435mm in the
comparable period of 2008. Cap rates
averaged 7.0%, according to RCA.
Y-o-y
change
Projected
YE09
300 bps
50 bps
Vacancy
(10.1% - 2Q09)
Effective
Rents
0.8%
3.1%
($776 - 2Q09)
Cap Rate
(7.0% - 2Q09)
Employment
(777.3m - 2Q09)
20 bps
2.0m
2.3m
KEY POINTS
•
Austin establishments eliminated 2,000 (0.3%) payroll jobs over the 12-months ended
in June, the first year-over-year cut recorded
since 2003. Weakness in the high tech
sector was largely responsible.
•
Attrition peaked at a 6,400-job, -0.8% rate in
June before easing to –1,400 positions in
July. Unemployment continued to rise,
however, hitting a series-high 7.3% in July.
•
RCR expect Austin to lose a net of 2,300
jobs in 2009. Positive year-on-year payroll
comparisons should re-emerge by 2Q10.
•
Heavy supply forced metro occupancy down
50 bps from March to 89.9%, lowest level
recorded since 2004. Reis expect occupancy
to decline another 50 bps by year-end 2009.
•
Asking and effective rent also fell
sequentially in 2Q09. The former declined
$2 (-0.3%) and the latter $3 (-0.4%). Reis
expect a large $16 (-2.1%) decline by YE09.
•
Employing a 7.0% generic cap rate, RCR
estimate expected 5-year, unlevered total
returns for Austin assets of 4.2%, moderately
lower than the 4.6% R50 average. Riskadjusted returns are below par as well.
Austin-Round Rock, Texas MSA - 2Q 2009
VACANCY TRENDS
•
•
Supply pressure pushed average Austin occupancy lower in 2Q.
Tenants absorbed a net of 729 units in the period but developers stayed
two steps ahead, delivering seven projects incorporating 2,080 units.
Average occupancy fell 50 basis points sequentially and 300 bps yearover-year to 89.9%, the lowest metric registered since 4Q04.
The Round Rock submarket inventory grew 970 units in 2Q. Owners
managed to net lease about 450 units, but average occupancy
plummeted -470 bps from March to 83.5%, lowest in the metro area.
Source: Reis, Inc.
14%
Metro Vacancy Rate
•
10.1%
12%
10%
7.1%
8%
6%
4%
AUSTIN
U.S.A.
2%
Reis expect average Austin area vacancy to rise another 50 bps by year
end to 10.6%. In their view, this metric will represent the cyclical
trough, with improvements likely in each of the next four years,
returning metro occupancy to the 91.2% level in 2013.
0%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
00 01 01 02 03 04 04 05 06 07 07 08 09
RENT TRENDS
•
•
Metro Rent Trends
The introduction of new competition forced metro face rents lower and
concession costs higher in 2Q. The average asking rent fell $2 (-0.3%)
sequentially to $870. The value of the typical lease discount rose $1
per month, producing a $3 (-0.4%) decline in sequential effective rents
to an average of $776. Effective rents remained $6 (0.8%) above the
year-earlier level, the 4th strongest gain recorded among the RED 50.
O’Connor & Associates report that metro face rents fell about 0.1%
year-over-year in June to an average of $821. This source also found
that rents averaged $0.98/sf at mid-year, down -$0.01 from June 2008.
Nine of Austin’s 14 Reis-defined submarkets notched sequential
effective rent declines in 2Q09. The principal exceptions were close-in
suburban areas lying immediately south (Southeast, Near South
Central) and west (Ranch Road 620) of the city center.
Source: Reis, Inc.
15%
ASKING
10%
YoY Rent Trend
•
EFFECTIVE
0%
0.8%
-5%
-10%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
th
00 01 01 02 03 04 04 05 06 07 07 08 09
RANK: 4 out of 50
•
•
Investment activity waned in the first half of 2009 as the near-term
prospects for property NOI growth dimmed. During the first half of
2008, Real Capital Analytics identified 18 transactions valued at $5
million or more of $435mm total proceeds. Only four trades of
$60.4mm aggregate proceeds were consummated in 1H09.
Property sale price details for 2009 Austin trade were largely
unavailable, rendering cap rate estimation difficult. Reis and Real
Capital Analytics report indicative cap rates of about7.0%.
Using a 7% cap rate assumption and Reis forecasts for prospective rent
and occupancy trends, RCR estimate expected metro total returns of
4.2% and risk-adjusted index of 0.71. These data compare to RED 50
averages of 4.7% and 1.73. Investors are advised to seek situations
priced at above average yields or with clear repositioning potential.
Source: Reis, Inc.
7.5%
7.0%
Cap Rate
•
2.0%
5%
6.5%
6.0%
5.5%
5.0%
4Q
2Q
4Q
2Q
4Q
2Q
06
07
07
08
08
09
Property Name
Hills at Arboretum (Far No West)
Woodland Heights (Far No Cent)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
C
02-Jul-2009
25-Aug-2009
NA
NA
NA
NA
NA
NA
$240
AUSTIN
$220
•
US
Prices (000)
$200
$180
$160
$140
•
$120
$100
$80
05
06
07
Y
Y
Y
•
1Q 2Q 3Q 4Q 1Q 2Q
08
08
08
08
09
09
•
Annual Chg (000)
30
20
•
14.1
3.5
0
-2.4
•
-20
00 01 02 03 04 05 06 07 08 09f 10f 11f
•
AUSTIN
USA
6%
Rate
4%
Forecast: July results notwithstanding, the RED CAPITAL Research
econometric payroll model doesn’t anticipate a fast recovery in the Austin labor market. The model forecasts continued negative y-o-y payroll
comparisons through 1Q10, producing a –2,400-job loss for the full year
2009. The model projects a net 3,500–job advance in 2010, followed by
a return of robust growth in 2011, when the metro will add 14,000 jobs.
-4%
-6%
99 00 01 02 03 04 05 06 07 08 09
Goods producing industries remained weak, as manufacturing and
wholesale trade comparisons were softer in July than June. Rather,
faster hiring in the financial and hospitality services sectors was the
principal catalyst helped by more constructive trends among temporary employment and contract labor agencies.
10%
-5%
After registering a six-year low 6,400-job loss, –0.8% year-over-year
comparison in June, conditions improved in July. Aggregate payrolls
were only 1,400 (-0.2%) jobs below the applicable 2008 comparison.
-4.2%
0%
0%
Trends in the tourism and hospitality sector were demonstrably
stronger in Austin than in many cities in America. The number of
residents employed in the accommodations and food services industries increased by 2,100 year-over-year in 2Q, up from 2,000 worker
in the second period. Moreover, the size of retail trade employment
was stable, boosted by continued support from visitors.
•
-2%
5%
Weakness in the core high tech sector was partially responsible.
Headcounts in the electronic equipment manufacturing sub-sector
declined at a 3,700-job, -12.4% rate in the quarter, down from a loss
of 2,500 jobs in 1Q09. By the same token, employment at professional, technical and scientific service companies increased at a slow
0.5% annual rate, down from a comparably robust 3.3% in 1Q09.
-0.2%
2%
15%
Austin year-over-year payroll comparisons slipped below parity for
the first time since 4Q03 as 2,000 (-0.3%) fewer workers were employed by establishments in 2Q09 than 2Q08.
Twelve Months ended July 2009
Source: BLS
8%
Foreclosure activity increased 19% in 2Q09, ensnaring 0.58% of metro
households, ranking 125th highest among the top 202 U.S. metros, as
reported by RealtyTrac.com
Second Quarter 2009
40
-10
The Federal Housing Finance Board report that Austin home values
increased 0.09% during the 12 months ended in June, ranking 69th in
the agency’s 296-metor area index. Seasonally adjusted prices fell –
0.92% in 2Q09, however, the second successive sequential decline.
EMPLOYMENT TRENDS
10
The median price of an Austin MSA home purchased in the second
quarter was $194,000, virtually unchanged from the $194,200 metric
recorded in the year-earlier period. The metro performance compared
favorably to the –15.6% U.S. and –10.3% South Region median price
declines recorded in the same period. Austin value trends also
compared well to in-state peers. Only Houston among the Texas
metros reported stronger price appreciation during the period.
-0.1%
0.9%
2.3%
4.0%
4.7%
AUSTIN (RAI=0.71)
-4.1%
90%
70%
6.9%
7.0%
10.9%
10.1%
DENV (RAI=1.11)
50%
30%
10%
SUBMARKET TRENDS
Submarket
Far South
Near South Central
Southeast
Central Austin
East Austin
Near North Central
Far North Central
North Travis County
Near Northwest
Far Northwest
San Marcos
Metro
Effective Rent
Physical Vacancy
2Q08
2Q09
Change
2Q08
2Q09
Change
$839
$923
$675
$911
$621
$673
$574
$737
$807
$852
$736
$773
$716
$994
$836
$950
$687
$982
$613
$664
$567
$722
$760
$853
$719
$779
$717
$1,027
-0.4%
2.9%
1.7%
7.9%
-1.4%
-1.4%
-1.3%
-2.1%
-5.8%
0.0%
-2.2%
0.8%
0.1%
3.3%
5.8%
7.9%
5.4%
7.0%
6.2%
5.1%
7.8%
7.6%
6.4%
6.1%
10.2%
8.5%
5.4%
10.6%
11.7%
10.4%
8.3%
12.0%
8.6%
5.8%
8.4%
11.6%
7.5%
6.2%
9.7%
16.5%
5.6%
13.4%
590 bps
250 bps
290 bps
500 bps
240 bps
70 bps
60 bps
400 bps
110 bps
10 bps
-50 bps
800 bps
20 bps
280 bsp
$770
$776
0.8%
7.1%
10.1%
300 bps
SUPPLY TRENDS
•
•
•
•
•
The 2009-vintage of new apartment projects promises to the largest
crop ever harvested in this fast-growing market. Reis expect a total of
9,473 units to be added to the metro inventory this year, topping the
existing 8,443-unit record high set in 2001.
Source: Reis, Inc
Completions
Three projects were awarded final C.O.’s and therefore added to the
Reis inventory in July and August encompassing a total of 682 units.
Twelve major projects are currently under construction with
completion dates scheduled during calendar 2009. These properties
contain a total of 3,620 units.
Supply promises to subside in 2010, falling to about 2,230 units,
according to Reis. The service identifies six projects of 1,141 units
under construction with 2010 scheduled completion dates. Three
others with 829 units are underway with unspecified finish dates.
Seven new properties debuted in the Central submarket in 2008.
Lease-up performance was mixed as June occupancy rates ranged from
59% to 98%. Mean and median vacancy rates were 15.4% and 19.2%,
respectively, while rents averaged $1,959.
The Far South submarket added 2,910 units since January 2008. In
June, average vacancy of recent construction properties was 16.1%. A
195-unit project delivered in January absorbed about 5 units/month.
Daniel J. Hogan
614-857-1416
William T. Hinga
614-857-1499
Absorption
10,000
9,000
8,000
Units
•
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
02
•
03
04 05
06
07 08 09f 10f
O’Connor & Associates report that 7,087 units were
under construction and 6,335 units were in the planning
state in July. O’Connor reported metro average
occupancy at 88.86%.
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
©2008 RED CAPITAL GROUP (11/08)
CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the
report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should
any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is
solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Austin,Texas
June 2009
EXECUTIVE SUMMARY
A
ustin is the last holdout defying the otherwise inexorable force of the Great Recession. The Texas capital maintained
positive payroll job growth expressed
on a year-over-year basis through
1Q09, adding 2,000 jobs, making it
the only RED 50 market to stay in the
black through March. The metro continued to post positive annual comparisons in April (900/0.1%) and May
(4,200/0.5%), exhibiting admirable
resilience in the latest datum, boosted
by stronger hiring in financial services (1,700) and government (7,600).
Austin did not emerge unscathed
though. Domestic and export markets
for high tech equipment have evaporated, forcing local manufacturers to
reduce production and furlough workers. Total factory headcounts fell at a
-9.9% pace in May, fueled by an
11.9% drop in semiconductor and
electronic component subsector payrolls. Likewise, demand for tech service diminished, giving rise to telecom headcount cuts (-5.1%) and
weaker hiring by professional and
technical service shops, where growth
declined to the slowest pace in 5 years
in April (0.7%) and May (0.9%).
RED CAPITAL Research’s econometric payroll model predicts greater
slack developing in the Capital economy. The model anticipates pending
2H09 weakness to pull full-year 2009
average payroll levels down by 5,800
(-0.8%) jobs. But that forecast is
based on payroll data through March.
In light of the rebound of y-o-y trends
in the May data, it seems likely that
job losses will be smaller than forecast. For 2010, the model predicts a
smaller loss of -900 jobs.
Apartment demand remained robust
in 1Q09 as tenants absorbed a total of
709 units, up from 538 in the yearearlier period. Supply of 3,535 units
was too much to overcome, however,
SNAP SHOT
and average market vacancy surged
170 basis points quarter-to-quarter to
9.2%. Apartment inventories in suburban tech-employment sub-markets
recorded the largest inventory increases, notably Far South (1,384
units / 6.0%) and Round Rock (882
units / 9.8%), causing submarket occupancy to fall 400 and 490 bps, respectively, to 88.2% and 90.0%.
By contrast, tenant demand for Central Austin units was exceptional.
Renters leased about 265 units of the
337 (3.4% stock growth) delivered in
1Q09, limiting the decrease in average occupancy to 40 bps. Demand
wasn’t as strong in North Travis,
however, as supply of 614 units (3.8%
stock growth) raised vacancy 210 bps
sequentially to 11.2%.
Supply pressures and the soft economy exerted downward pressure on
rents. While average face rent advanced $2 (0.2%) to $872, competition from new properties forced average concessions $7 higher to $93 per
month, producing a net $5 (-0.6%)
decrease of average effective rent to
$779. Supply-laden submarkets recorded the weakest trends, with Central Austin, Far South and North
Travis submarkets posting 0.5%,
1.4% and 1.5% cuts, respectively.
Reis expect supply conditions to place
further pressure on fundamentals. The
service projects delivery of 5,620
units from April to December but sees
fewer than half leased by year end.
As a result, occupancy and effective
rent are tipped to drop 160 basis
points to 89.2% and $20 (-2.6%) to
$759 by December.
The property market was as arid as
the Hill Country in July due to investor caution and tight credit market
conditions: only three trades were
recorded in 1H09. Details are scarce.
Based on scant evidence, institutional
cap rates range from 6.5% - 7.5%.
Y-o-y
change
Projected
YE09
130 bps
160 bps
2.1%
3.2%
50 bps
25 bps
2.0m
5.8m
Vacancy
(9.2% - 1Q09)
Effective
Rents
($779 - 1Q09)
Cap Rate
(7.0% - 1Q09)
Employment
(771.9m - 1Q09)
KEY POINTS
•
Texas exceptionalism was on display in
1Q09 as the Austin metro area emerged as
the sole RED 50 market to post a positive
year-over-year payroll growth metric. The
Capital economy added 2,000 (0.3%) jobs.
•
The latest RCR payroll model output
forecasts a –5,800-job net loss for 2009. But
stronger than expected statistics in April and
May suggest that actual results will be better.
•
Apartment demand strengthened as tenants
absorbed a net of 709 units in 1Q, up from
383 and 580 in the prior quarter and year
earlier period, respectively. But supply
pressures were enormous and occupancy
tumbled 170 basis points quarter-to-quarter
anyway, falling to 90.8%.
•
The competition among properties in leaseup sent concession levels skyrocketing to a
record high $93 (10.7% of face rent). Thus,
effective rent fell $5 (-0.6%) sequentially,
even as face rents increased $2 to $872.
•
2009 trade in Austin assets was thin, making
a determination of indicative cap rates
difficult. Levels for class A assets appear to
gravitate to the 6.5% level, with class B
properties trading at 7.0% to 8.0%.
VACANCY TRENDS
•
•
•
Austin owners face a supply onslaught in 2009. Developers brought
3,353 units to market in 1Q09; and this was just the tip of the iceberg.
Reis report that another 5,620 more units will be completed by year
end. Many of these projects already are partially complete and in lease
up. Downward occupancy and effective rent pressure will intensify.
The metro vacancy rate increased 230 basis points during the 12
months ended in March. Only Jacksonville, Nashville and San Antonio
posted larger increases during the same period.
Source: Reis, Inc.
14%
Metro Vacancy Rate
•
12%
10%
6.9%
8%
6%
4%
AUSTIN
U.S.A.
2%
Reis expect vacancy to reach 10.8% by year end, representing the 7th
highest forecast rate among the RED 50. Currently, Austin ranks 9th.
0%
1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
Demand for Central Austin units remains encouragingly robust.
00 00 01 02 03 03 04 05 06 06 07 08 09
th
RANK: 9 out of 50
RENT TRENDS
•
•
Metro Rent Trends
Source: Reis, Inc.
On average, owners sweetened lease concession offers to attract and
retain tenants in the competitive, over-supplied market environment.
Reis found that the value of the typical 1Q09 discount exceeded one
month free rent in every submarket except Central and San Marcos.
Average effective fell $5 (-0.6%) sequentially to $771. Nonetheless,
Austin rents were up 2.1% year-over-year, representing the 4th fastest
growth recorded in the RED 50. Marcus & Millichap report year-overyear class-A and class-B asking rents up 2.9% and 1.9%, respectively.
Reis expect the downward trend in rents to grind on through year-end
or longer. The service forecasts a $759 average effective rent level for
year end, down –2.6% from March, -3.2% for the full year. Marcus &
Millichap are more pessimistic, retailing a –3.9% rate of decline for the
full year 2009.
15%
ASKING
EFFECTIVE
10%
YoY Rent Trend
•
3.3%
5%
0%
2.1%
-5%
-10%
1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
00 00 01 02 03 03 04 05 06 06 07 08 09
RANK: 4th out of 50
•
•
Following 2008’s feverish property market, when 45 major apartment
properties exchanged hands, trade waned dramatically year-to-date.
Only three properties exchanged hands during the first 24 weeks of
2009, and only one acquisition was consequential: a $20.4 million
purchase of a class-B property in the Far South submarket. The 1986vintage asset was valued at $56,044 per unit to yield an estimated 7%.
A 1960’s-vintage Central Austin garden project popular with UT
students was acquired in June by an out-of-state investor. As Texas is
a non-disclosure state, pricing data for this trade were unavailable.
Approximately eight institutional quality properties were listed for sale
in late June. The properties were offered at stated cap rates ranging
from 6.3% to 8.0%. Class-A, institutional quality assets may trade in
the 6.5% to 7.0% range currently. Class-B assets yield 7.0% to 8.0%.
Source: Reis, Inc.
7.5%
7.0%
Cap Rate
•
9.2%
6.5%
6.0%
5.5%
5.0%
4.5%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
07 07 07 07 08 08 08 08 09
Duval Villa (Central / Hyde Pk)
Summer Grove (Hwy 183 Cedar)
Tanglewood Forest (Far South)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
B
B
B
02-Jun-2009
20-Mar-2009
09-Feb-2009
NA
NA
$20.4
NA
NA
$56,044
NA
NA
7.0%
$240
AUSTIN
Prices (000)
$220
•
US
$200
•
$180
$160
$140
$120
•
$100
06
07
Y
Y
4Q 1Q 2Q 3Q 4Q 1Q
07
08
08
08
08
09
Home prices decreased -3.4% from April 2008 to April 2009, but sales
velocity accelerated, reducing the supply of homes available for sale
by 9%. The unsold inventory would require a 4.4 month marketing
period to clear at the pace of sales observed in April.
Past 12 Months
•
40
Annual Chg (000)
Home prices were nearly stable in 1Q09. The median price of a home
sold during the period was $182,300, down -1.2% from 2008. Prices
were the highest in Texas and price performance was stronger than
either Houston or Dallas where median prices fell –6.7% and –4.7%,
respectively.
EMPLOYMENT TRENDS
30
20
•
10
0
-0.9
-5.8
-10
Demographic growth slowed moderately in 2008, falling from a 4.5%
rate in 2006 and 2007 to a 3.9% pace. The metro area added 58,349
residents. Williamson County recorded the fastest population
expansion, adding 22,172 persons, representing a 6.0% advance.
-20
99 00 01 02 03 04 05 06 07 08 09f 10f
•
Following three weak months of data when year-over-year gains averaged 1,300 jobs Austin payroll trends gained momentum in May,
rising 4,200 (0.5% ) jobs. Stronger hiring in retail trade, finance and
government fueled the rebound.
At the same time, layoffs in the critical high tech manufacturing sectors intensified. Headcounts at computer and electronic equipment
manufacturing concerns fell at a 3,600-job pace in May, down from a
2,500-job average in 1Q09. Attrition in the semiconductor sector
increased by 50%, rising from an 800-job, -4.9% rate in 1Q09 to a
1,200-job, -7.1% pace in May.
The unemployment rate continued to crest in the spring. After hitting
a cyclical peak of 6.4% in January the rate dropped to 5.8% in April.
First Quarter 2009
•
Source: BLS
AUSTIN
USA
8%
6%
•
Rate
4%
2%
•
0%
-2%
-4%
Metro payroll inched ahead at a 2,000-job, 0.3% rate in 1Q09. Less
than robust, perhaps, but Austin was the only metro area among the
RED 50 markets to post a gain in the period.
Strong hiring trends were recorded in the business, health care, education and other services sectors and by government agencies. In all,
the foregoing four super-sectors expanded at a 11,000-job pace.
In a Manpower Survey taken in March, 17% of Austin area respondents reported that they planned to hire by the end of the second quarter. Only 10% planned to cut staff, suggesting moderate job growth.
Forecast
-6%
99 00 01 02 03 04 05 06 07 08 09
•
•
15%
10%
5%
0%
-5%
-10%
PNC economist Stuart Hoffman expects U.S. GDP to fall -2.9% in
2009 before mounting a tepid 1.9% rebound in 2010.
RCR forecast that Austin payrolls will decline by 5,800 jobs in 2009
and 900 in 2010. Strong May job data suggest a better outcome.
-0.3%
0.3%
2.3%
AUSTIN
-4.6%
90%
70%
3.4%
4.0%
6.4%
5.7%
10.3%
7.9%
DALLAS
50%
30%
10%
SUBMARKET TRENDS
Submarket
Far South
Near South Central
Southeast
Central
East
Near North Central
Far North Central
North Travis
Near Northwest
Far Northwest
Effective Rent
Physical Vacancy
1Q08
1Q09
Change
1Q08
1Q09
Change
$829
$885
$676
$878
$623
$668
$572
$732
$798
$861
$727
$770
$850
$943
$683
$987
$619
$671
$574
$730
$765
$851
$737
$780
2.5%
6.6%
1.1%
12.4%
-0.6%
0.5%
0.4%
-0.3%
-4.2%
-1.2%
1.3%
1.3%
5.2%
6.3%
5.5%
6.0%
6.5%
5.7%
8.4%
8.3%
5.9%
6.2%
8.9%
9.0%
11.8%
10.1%
8.1%
11.1%
6.9%
4.6%
7.7%
11.2%
7.1%
6.4%
9.2%
11.8%
660 bps
380 bps
260 bps
510 bps
40 bps
-110 bps
-70 bps
290 bps
120 bps
20 bps
30 bps
280 bps
San Marcos
$722
$716
-0.8%
5.2%
4.1%
-110 bps
$981
$1,017
3.7%
8.2%
10.0%
180 bps
$763
$779
2.1%
6.9%
9.2%
230 bps
Metro
SUPPLY TRENDS
•
•
•
•
Austin often grapples with excess apartment supply. But the current
situation is imbalanced even by its own standard. The metro area
received 7,151 units during the 12 months ended March 31, 2009, nearly
half of which were completed in the first quarter 2009. Another 1,861
units were delivered between April 1 and June 15. Matters will
deteriorate later in the year: 5,683 units were under construction in June.
Source: Reis, Inc
Supply is likely to exceed 10,000 units in 2009, the highest total ever
observed here. The previous record was 8,447 units set in 2001. That
event was instrumental to a 850 bps (3.2% to 11.7%) increase in Austin’s
vacancy rate spanning a 12 month period from 1Q01 in 1Q02.
The Central and Far South submarkets are the sites of the most intense
development activtiy. Presently, 1,759 units are underway in Central and
1,184 units have broken ground in Far South. The Round Rock and
Cedar Park inventories also are poised for considerable expansion.
The tidal wave of Central submarket properties completed in 2008 appear
to be leasing up well. The nine properties in this class (which encompass
1,395 units) were 83% occupied in March at asking rents averaging
$2,100. Indeed, five of the properties already had achieved stabilized
(90%+) occupancy at the end of the first quarter.
A 187-unit, 31-story high-rise received final C.O. in January. The
property was 18% occupied in March. Occupied unit rents averaged less
than $1,500, lower than the developer’s target rate of about $1,800.
Daniel J. Hogan
614-857-1416
William T. Hinga
614-857-1499
10,000
Completions
9,000
Absorption
8,000
7,000
6,000
Units
•
5,000
4,000
3,000
2,000
1,000
0
02
03
04 05
06
07 08 09f 10f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations
to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or
accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or
conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party
sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or
strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation.
Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Austin,Texas
April 2009
EXECUTIVE SUMMARY
T
he pace of Austin job growth
moderated to a degree in
4Q08. Metro establishments
added 18,000 (2.4%) positions to payrolls in 3Q08 but only 12,700 (1.7%)
y-o-y in 4Q08. Despite the modest
slowdown, the pace of Austin job
growth was the highest among the
RED 50.
Unfortunately, metro establishments
were unable to sustain strong growth
in the first quarter of 2009. On a y-oy basis, employment growth slowed
from 9,900 (1.3%) in December to
3,300 (0.4%) in March, and an average of 2,300 (0.3%) in 1Q09. The
slowdown was partially attributable to
increased attrition among manufacturing, wholesale trade and employment
service firms as the sectors lost a
combined -7,400 jobs y-o-y in 1Q09.
Reduced hiring by state and local
government agencies was also to
blame.
RED CAPITAL Research (RCR)
forecast a modest decline in employment this year and a slight rebound in
2010. Our econometric model generates point estimates of -1,300 (-0.2%)
jobs lost in 2009 and a 6,000 (-0.8%)
job gain next year. By comparison,
Economy.com project an 8,200
(1.1%) job gain this year and a 24,550
(3.1%) increase in 2010.
Job growth helped fueled home price
appreciation in the fourth quarter.
According to the OFHEO home price
index, Austin home prices increased
4.4% y-o-y in 4Q08. By contrast the
NAR show the median price of a single-family MSA home falling -0.1%
over-the-year to $184,800, and the US
median home price slipping -12.4% to
$180,100.
Weak demand and increased supply
in 4Q08 gave rise to a 40 basis point
decrease in the metro occupancy rate,
from 92.9% in 3Q08 to 92.5%. On an
annual basis, occupancy fell 80 basis
SNAP SHOT
points as developers completed 4,542
units and tenants signed a net of 2,834
leases.
Reis expect occupancy to decline
sharply this year as development accelerates. A construction report dated
March 23rd reveals that supply will
surge to 10,630 units this year. The
Round Rock (2,373 units), Far South
(2,045 units) and Central (1,778 units)
submarkets are expected bear the
largest supply burdens.
Owners increased concessions and
pursued less aggressive asking rent
growth in response to weaker tenant
demand. The average asking rent
increased at a robust 1.8% quarterover-quarter pace in 3Q08 but only
0.2% sequentially in 4Q08. In addition, rising concession levels -- from
9.4% of asking rent in 3Q08 to 10.0%
in 4Q08 -- resulted in a -0.4% sequential decrease in effective rent.
Y-o-y
change
Projected
2009
(7.5% - 4Q08)
80bps
280bps
Effective
Rents
3.8%
4.3%
Vacancy
($783 - 4Q08)
Cap Rate
(5.8% - 4Q08)
140bps
unch
Employment
(784.1k - 4Q08)
12.7k
1.3k
KEY POINTS
•
Reis expect volatility to work against
rent growth this year. The service
forecasts a -4.1% decrease in the average effective rent, the sharpest decline since 3Q03. Reis forecast negative rent trends to persist in 2010
when effective rent falls -0.7% to
$744.
The metro vacancy rate increased 40 basis
points sequentially and 80 basis points yearover-year to 7.5% in 4Q08. Supply was
partially to blame. Developers completed
1,183 units in 4Q08 and 4,542 units in
calendar 2008.
Preliminary data suggest
that vacancy spiked to 9.2% in 1Q09.
•
Real Capital Analytics identified
$1.074 billion in property sales last
year, a -21% decrease from 2007.
The source reports an average cap rate
of 6.9% and an average price per unit
of $95,615.
Reis expect supply to peak this year. The
service identified 13 properties totaling
3,535 apartment units that were completed
through March 23rd. In addition, 25 projects
containing 7,095 units were under
construction and scheduled to open this year.
•
Asking and effective rent trends were
relatively weak in 4Q08. The average
effective rent fell -0.4% sequentially to $783.
On an annual basis, effective rent growth
decelerated to 3.8%. Likewise, asking rent
rose at a 0.2% sequential pace, down from
the 1.8% advance recorded in the previous
period.
•
Weaker economic conditions and increased
supply will apply downward pressure to NOI
growth this year. Reis forecast a -4.1%
decrease in effective rent and a 280 basis
point increase in vacancy in 2009.
RCR calculate a 5.2% generic fiveyear holding period expected rate of
total return for Austin, far below the
6.6% RED 50 average. Current pricing (we assume a 7.0% generic cap
rate) and fundamental forecasts do not
support an active buying program.
Investors comfortable with a longer
holding period may find attractively
priced assets as sellers adjust price
expectations.
VACANCY TRENDS
•
Active development was partially responsible for rising vacancy in
4Q08. Completions totaled 1,183 units during the quarter, exceeding
net absorption of 572 units. As a result, the metro vacancy rate
increased 40 basis points from 7.1% in 3Q08 to 7.5% in 4Q08.
Vacancy increased 80 basis points from the 4Q07 cyclical low of 6.7%
due to supply. Developers completed 4,542 units, representing a 3.2%
increase in the rental stock. Tenant demand was comparatively weak
as 2,834 leases were netted in calendar 2008, down from the 4,773-unit
tally in the previous year.
Source: Reis, Inc.
14%
Metro Vacancy Rate
•
12%
10%
8%
6.7%
6%
4%
Austin
U.S.A.
2%
Reis project supply to surge this year. The service forecasts the
delivery of 10,630 units, a figure that will exceed the 2001 high of
8,447 units.
0%
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
RANK: 33rd out of 50
COMMENT: Reis preliminarily report that vacancy rose 170 bps in 1Q09.
99 00 01 02 02 03 04 05 05 06 07 08 08
RENT TRENDS
•
•
•
Metro Rent Trends
Source: Reis, Inc.
In response to weaker tenant demand, owners increased the size of the
average concession package from 9.4% of asking rent in 3Q08 to
10.0% in 4Q08. Consequently, effective rent declined -0.4% to $783.
Asking rent continued to rise, albeit at a slower pace. Following the
1.8% sequential advance in 3Q08, the rate of asking rent growth
slowed to 0.2% in 4Q08.
Significant development of high-end rental product contributed to a
15.1% increase in asking rent in the Central submarket. Concessions
edged higher, from 0.6 months to 0.7 months free-rent on a twelvemonth lease.
Reis expect effective rental rates to fall through 2010. The service
forecasts a -4.1% decrease this year, followed by a -0.7% drop in 2010.
15%
Asking
Effective
10%
YoY Rent Trend
•
7.5%
4.2%
5%
3.8%
0%
-5%
-10%
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
99 00 01 02 02 03 04 05 05 06 07 08 08
th
RANK: 4 out of 50
COMMENT: Reis report asking rents increased 0.2% in 1Q09.
•
•
Strong economic conditions provided some stability for property trade
velocity. According to Real Capital Analytics, investors purchased
$1.074 billion of Austin apartment assets in 2008, down only -21%
from the previous year. By comparison, Southwest Region sales
volume fell -55%.
RCA calculate a $95,615 average price per unit, up 16% from the
previous year. The average cap rate increased 90 basis points to 6.9%.
Based on an assumed 7.0% going-in yield, RCR estimate a 5.2%
expected rate of total return, far below the 6.6% RED 50 average.
Owing to above average historic NOI growth volatility, the metro
ranks 47th with regard to risk-adjusted return.
7.0%
Cap Rate
•
Source: Reis, Inc.
7.5%
6.5%
6.0%
5.5%
5.0%
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
06 07 07 07 07 08 08 08 08
Property Name
Mission at Tanglewood
Presidio
Gables Great Hills
Windsor at Spyglass
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
B
A
A
B
February 2009
November 2008
November 2008
October 2008
$20.4
$18.8
$23.0
$30.0
$112,088
$75,000
$83,333
$100,671
4.0%
5.8%
5.4%
5.6%
$240
MSA
Prices (000)
$220
•
US
•
$200
$180
$160
$140
•
$120
$100
05
06
07
Y
Y
Y
4Q 1Q 2Q 3Q 4Q
07
08
08
08
First Quarter 2009
•
Annual Chg (000)
40
30
20
6
10
•
0
-1.3
Metro employment growth slowed to a crawl in January and February. The pace of year-over-year growth decelerated from a monthly
average of 19,900 (2.6%) in 2008 to 3,200 (0.4%) in January and 300
(0.0%) in February. Growth rebounded in March to 3,300 (0.4%)
jobs.
Slower job growth contributed to a rise in the metro unemployment
rate, from 3.8% in February 2008 to 6.3% in the same month of 2009.
Fourth Quarter 2008
•
-20
99 00 01 02 03 04 05 06 07 08 09f 10f
•
Source: BLS
8%
Austin
USA
•
4%
Rate
According to the Real Estate Center at Texas A&M University, the
median home price increased 4.2% year-over-year to $187,900 in
February. Likewise, Austin registered a 4.4% annual increase in the
OFHEO home price index, ranking 6th highest among the 292 markets
tracked by the source.
EMPLOYMENT TRENDS
6%
The National Association of Realtors report a median single-family
home price of $184,800 in 4Q08, down only -0.1% year-over-year. By
contrast, the source calculates a -10.5% year-over-year decrease in the
median condo price from $173,200 in 4Q07 to $155,00 in 4Q08.
08
-10
The pace of population growth decelerated from 4.3% in 2007 to 3.8%
in 2008. Net domestic migration slowed from 40,534 residents to
35,041.
2%
Austin payroll growth decelerated in 4Q08. Metro employers added
12,700 (1.7%) workers to payrolls year-over-year, the fastest increase
in the RED 50. Still, the fourth quarter metric was below the 18,000
(2.4%) increase observed in 3Q08.
Private fourth quarter job growth was largely fueled by business and
health service firms. Combined, the sectors created 6,700 new positions year-over-year. Public sector headcounts also advanced at a
healthy pace as state and local government agencies hired 6,700
workers year-over-year in 4Q08.
The slowdown was partially attributable to increased attrition among
construction firms (-3,600 jobs) and reduced hiring by retail establishments (600 jobs).
Forecast
0%
•
-2%
-4%
RCR estimate a -1,300 (-0.2%) job decline in 2009. We expect the
local economy to rebound next year as 6,000 (0.8%) jobs are created
in 2010.
99 00 01 02 03 04 05 06 07 08 09
RANK: 1st out of 50
15%
10%
Austin
3.4%
5%
Houston
6.1%
2.0%
5.0%
7.9%
7.8%
9.6%
12.0%
0%
-5%
-2.6%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Submarket
Far South
Near South Central
Southeast
Central
East
Near North Central
Far North Central
North Travis
Near Northwest
Far Northwest
Physical Vacancy
4Q07
4Q08
Change
4Q07
4Q08
$824
$868
$662
$868
$603
$648
$578
$722
$790
$841
$721
$749
$862
$931
$698
$991
$619
$676
$587
$741
$787
$861
$727
$770
4.6%
7.3%
5.5%
14.1%
2.7%
4.4%
1.6%
2.6%
-0.5%
2.4%
0.9%
2.8%
5.3%
7.0%
6.0%
6.3%
7.0%
5.7%
9.0%
6.8%
6.5%
5.9%
7.7%
7.5%
7.8%
7.6%
7.4%
10.7%
5.5%
4.4%
7.2%
9.1%
6.8%
6.1%
7.7%
6.9%
250 bps
60 bps
140 bps
440 bps
-150 bps
-130 bps
-180 bps
230 bps
30 bps
20 bps
unchg
-60 bps
San Marcos
$699
$722
3.4%
5.5%
3.8%
-170 bps
Ranch Rd 620 North / FM2222
$988
$981
-0.7%
8.8%
8.4%
-40 bps
Metro
$754
$783
3.8%
6.7%
7.5%
80 bps
SUPPLY TRENDS
•
•
Source: Reis, Inc
Developers completed 1,183 units in 4Q08. All of the units are located
in the North Travis and Far South submarket. Development activity
surged in the first three months of 2009 as 3,535 units were completed
through March 23rd.
Another 7,095 apartment units were under construction and slated for
completion this year. Reis expect the largest additions to inventory to
occur in the Round Rock (2,373 units), Far South (2,045 units) and
Central (1,778 units) submarkets.
As of March, 2,539 condo units were under construction and another
3,468 condo units were in the planned or proposed phase.
COMMENT: Reis expect apartment supply to soar from 4,542 units last year to
9,688 units in 2009. The tally will exceed the delivery total from 2007 and 2008
combined (8,853 units).
Daniel J. Hogan
614-857-1416
William T. Hinga
614-857-1499
12,000
10,000
Completions
8,000
Units
•
Change
Absorption
6,000
4,000
2,000
0
02
03
04 05
06
07 08 09f 10f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
800.837.5100
CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the
report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should
any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is
solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Austin,Texas
December 2008
EXECUTIVE SUMMARY
I
t may be true that the notion that the
high technology industry is impervious to the business cycle is relegated to history’s dust bin but reports of
sales declines, profit drops and plunging
stock prices from computer firms remain a bit disquieting. Reading the Austin business press is, therefore, an anxiety filled experience these days.
On one hand, large chip fabricators like
AMD and Cirrus Logic (among the largest metro employers) expect sharply
lower near-term earnings due to weak
demand from East Asian manufacturers
and distributers. On the other hand, the
prospects for small tech players look
considerably grimmer as venture capital
funding — the lifeblood of early-stage
companies — evaporates, plummeting
65% in 3Q08. With the IPO market frozen shut young firms are finding it
nearly impossible to obtain the necessary capital and credit to operate.
Notwithstanding the foregoing storm
clouds, metro employment trends haven’t deteriorated much to date. Austin
payrolls increased at a 16,800-job, 2.2%
year-over-year rate in 3Q08, a modest
improvement from 2Q’s 16,500-job add.
The construction, retail, finance, tourism
and government sectors continued to
hire at brisk clips, expanding at a combined 15,300-job y-o-y rate, while the
health care and transportation industries
held their own, adding 2,100 jobs.
By contrast, a degree of softening was
evident in the technology and skilled
service sectors. Headcounts at electronics manufacturers fell at a 1,700-job, 5.6% pace, while attrition of 1,200 (5.2%) jobs was registered by tech equipment wholesalers. Professional and
technical service firms were affected as
well, trimming growth from 2Q’s 3,800job rate to 2,200 (3.8%) jobs.
The RED Research econometric payroll model forecasts slower growth over
the next five quarters. RCR expect hiring to slip to a 9,400-job pace in 4Q08,
SNAP SHOT
followed by a steady decline over the
first three quarters of 2009. For
FY2009, the model projects net creation
of 2,000 (0.3%) jobs, representing the
smallest vintage posted since 2003.
Owners enjoyed robust apartment demand in 3Q08, net leasing an estimated
1,272 units. This represents a significant
rebound from 2Q’s disappointing 426unit harvest, but heavy supply of 1,372
units blocked any occupancy rate progress: metro occupancy was unchanged
at 93.0% sequentially and year-overyear. Ten of 14 submarkets registered
sequential occupancy gains, however,
including six of 100 basis points or
more. Declines were largely confined to
the Central submarket, where delivery
of more than 600 units gave rise to a
380 bps average vacancy rate increase.
Rent momentum was exceptionally
strong, propelling metro asking rents
$15 (1.8%) higher to $867. Concession
levels were unchanged, allowing effective rents to rise $15 (1.9%) to $785, the
fastest rate recorded among the RED
50. Rents rose 5.7% year-over-year, led
by supply-influenced advances of more
than 10% in the Central (16.5%) and
Near South Central (12.4%) submarkets.
Reis expect fundamental performance to
succumb to additional supply pressures
in 4Q08 and 2009. The service forecasts delivery of 2,049 units in 4Q and
6,712 units next year, contributing to a
180bps occupancy rate reversal by
YE09 and sub-2.5% 2009 rent growth.
Investor interest in Austin assets is
among the strongest in the country.
According to Real Capital Analytics,
total sales increased 15% through September compared to a decline of -57%
in the rest of the Southwest Region.
Sales were boosted by the August acquisition of a $270mm, 9-property pool at
an average cap rate in the low-6% area.
Expected total returns continue to rank
in the R50 top 5: accumulate at 6%+.
Y-o-y
change
Projected
YE2008
Unchd
ps
90 bps
5.7%
4.5%
Vacancy
(7.0% - 3Q08)
Effective
Rents
($785 - 3Q08)
Cap Rate
(6.9% - 3Q08)
Unchd
Employment
(775.5m - 3Q08)
16.8m
16.7m
KEY POINTS
•
The Austin economy remained among the
Nation’s strongest in 3Q08. Metro
establishments expanded at a 16,800-job,
2.2% rate, third fastest among the RED 50.
•
In spite of a supply surge, metro occupancy
remained at an average of 93.0% as owners
net leased a total of 1,272 units.
•
Effective rents increased $15 (1.9%) to $785,
the fastest sequential rent hike recorded
among the RED 50 markets. Metro rents are
poised to eclipse the $787 series record high
rent level established in the 2Q01.
•
The largest apartment sale in Austin history
was consummated in August. Northland
Investment purchased nine properties owned
by Equity Residential for $270 million.
•
Employing a 4.9% cap rate for institutional
quality properties, RCR estimate generic
Austin 5-year unlevered total returns of
7.0%, equal second among the RED 50.
•
Although risk-adjusted returns are below
average, RCR find Austin economic and
market fundamentals compelling. We reaffirm our “Accumulate” rating for quality
assets at cap rates above 6%.
Austin-Round Rock, TX MSA - 3Q 2008
VACANCY TRENDS
•
•
Reis data indicate that the Austin apartment market has, so far, kept
pace with a deluge of 2008 supply. The service reports that third
quarter occupancy held steady at 93.0%, as owners nearly matched
1,372 units of supply with 1,272 net tenant move-ins.
Alternative data sources arrived at different conclusions. One national
service reported that occupancy declined 140 basis points from March
to September to 90.5%. ALN Systems posted a 90.3% metric for
September, down 370 bps from 2007 and 70 bps from August 2008.
Source: Reis, Inc.
14%
12%
Metro Vacancy Rate
•
9.5%
10%
7.0%7.0%
8%
6%
AUSTIN Reis
AUSTIN Other
U.S.A.
4%
2%
Reis report robust apartment demand in suburban submarkets with tech
exposure: Cedar Park, Round Rock, San Marcos and FM2222
recorded sequential quarter occupancy gains of 100 bps or more.
0%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q
00 01 01 02 03 04 04 05 06 07 07 08
RENT TRENDS
•
•
Metro Rent Trends
Reis recorded strong rent trends through September, elevating Austin
near the top of the RED 50 rankings. Reis posted $15 3Q asking and
effective rent hikes to $867 and $785, respectively, representing 1.8%
and 1.9% sequential gains. The latter ranked #1 among the R50.
Over-the-year, effective rents ballooned $44 (5.7%), third highest
percentage gain in the group after Seattle and San Francisco.
Alternative sources observed the development of a downward shift of
rent trends in 3Q08. One source reported a 1.0% year-over-year asking
rent advance, down from 2.9% and 5.1% in the prior two quarters.
ALN Systems estimated average asking rent at $854 month, reflecting
a year-over-year increase of 3.7%.
YoY Rent Trend
•
Source: Reis, Inc.
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
Effective rents stand $2 below the Reis series historic high of $787.
The prior record was established in the second quarter 2001.
Asking Reis
Effective Reis
Asking Alternative
5.5%
1. 0 %
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q
00 01 01 02 03 04 04 05 06 07 07 08
RANK: 3rd out of 50
•
•
Real Capital Analytics aver that Austin January through September
property sales were 15% greater than last year’s $787 million. By
contrast, trade in the balance of the Southwest region declined -57%.
RCA found that cap rates applicable to 2008 trades were higher as
well, however, rising from 2007’s 6.0% average to 7.1%.
Austin sales figures were boosted by a nine property portfolio sale
valued at $270 million. Northland Investment acquired 2,925 units
from Equity Residential in August, equating to a $90,452 price per
unit. RCR reverse engineer a portfolio cap rate in the low-6% range
for the EQR / Northland transaction.
RCR expect bot Austin economic and market fundamentals to outperform the
Source: Reis, Inc.
7.5%
7.0%
6.5%
Cap Rate
•
5.7%
6.0%
5.5%
5.0%
4.5%
4.0%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
nation; therefore, we assign an “accumulate” rating. Risk-averse investors may
choose to play elsewhere, downside risks also are above average.
06 06 06 06 07 07 07 07 08 08 08
Property Name
(Submarket)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
Riverstone Ranch (Far South)
Spyglass (Near South Central)
Madison @ Stone Crk (Cedar Pk)
Gables Great Hills (Far Northwst)
A
A
A
A
Jul-2008
Oct-2008
Aug-2008
Oct-2008
$40.5
$26.5
$30.4e
$23.0
$90,452
$88,926
$77,958e
$83,333
6.9%
6.5%
6.2%e
5.9%
$240
AUSTIN
•
US
Prices (000)
$220
•
$200
$180
$160
•
$140
$120
$100
05
Y
06 1Q 2Q 3Q 4Q 1Q 2Q
Y
07 07
07
07 08
•
08
Home sales velocity was steady during the summer and fall, pushing
unsold for-sale inventory down about 15% between August and
November, according to data published by HousingTracker.com.
The Office of Federal Housing Enterprise Oversight reports that the
average value of homes sold or refinanced using conventional
financing in 3Q08 rose 5.62% year-over-year, ranking #1 among the
292 metro areas covered by the agency. Prices advanced 1.69% in
3Q08, 7th strongest sequential quarter gain in the country.
Travis County real median household income increased 1.37% in 2007
to $52,937. Real MHI remained -9.04% below the 1999 series record.
EMPLOYMENT TRENDS
Third Quarter 2008
40
Annual Chg (000)
Austin home price trends were firm in the fall. The median price of a
home rose 1.4% year-over-year to $190,900, according to the National
Association of Realtors. The comparable U.S metric fell -9.0%.
•
30
•
17
20
10
•
2
0
-10
-20
99 00 01 02 03 04 05 06 07 08f 09f
•
Aggregate metro payrolls averaged 775,500 jobs in 3Q08, unchanged
from the prior quarter.
On a year-over-year basis, metro payrolls were up by 16,800 jobs, a
2.2% advance, a 300-job improvement over the prior quarter.
Business service employment was considerably weaker in the third
quarter, gaining 1,600 (1.5%) jobs expressed on a year-over-year
basis, down from 4,100 (3.7%) during 2Q08. Slower expansion by
professional and technical service companies was responsible for
roughly one-half of the decline.
Semi-conductor headcounts were up 200 (1.0%) y-o-y to a monthly
average 17,200. Sub-sector payrolls reached a six-year high total.
October 2008
•
Source: BLS
AUSTIN
USA
8%
•
6%
Rate
4%
Total payroll reached an all-time high 781,000 jobs in October. The
figure represented a 14,700-job, 1.9% pick-up from 2007.
The unemployment rate reached 4.8%, however, rising 10 bps from
the prior month and 130 bps from the year-earlier period. Unemployment was up from 3.3% in April.
Forecast
2%
•
0%
-2%
-4%
•
99 00 01 02 03 04 05 06 07 08
10%
8%
6%
4%
2%
0%
NCB chief economist Richard DeKaser revised his GDP forecast
down again on December 8. DeKaser now forecasts a –4.7% decline
in 4Q08, followed by a –2.6% annualized, seasonally adjusted plunge
in 1Q09. FY2009 GDP is forecast to fall by 1.0%.
RED CAPITAL Research expect slow but positive employment growth in
Austin. The group’s econometric model projects quarterly y-o-y gains of 9,400
jobs in 4Q08, falling gradually to a low of 200 jobs in 3Q09. Payroll gains
totaling 16,700 (2.0%) jobs are forecast for 2008; 2,000 (0.3%) for 2009.
9.2% Probabilities
RED Estimated Generic Unlevered Asset Total Return
8.3%
A UST IN ( R A I = 1. 40 )
SEA T T LE ( R A I = 2 . 15 )
2.6%
4.1%
6.8%
5.0%
6.6%
0.0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Submarket
Effective Rent
Physical Vacancy
3Q07
3Q08
Change
3Q07
3Q08
Far South
Near South Central
$801
$829
$860
$932
7.4%
12.4%
5.8%
6.5%
7.1%
7.9%
130 bps
140 bps
Southeast
$648
$684
5.6%
7.1%
6.5%
-60 bps
Central
$854
$995
16.5%
6.7%
10.8%
410 bps
East
$598
$630
5.5%
6.9%
4.9%
-200 bps
Near North Central
$620
$671
8.2%
4.7%
4.6%
-10 bps
Far North Central
$567
$587
3.5%
7.7%
6.6%
-110 bps
North Travis
$723
$744
2.8%
6.5%
7.4%
90 bps
Near Northwest
$809
$790
-2.3%
7.4%
5.7%
-170 bps
Far Northwest
$830
$844
1.6%
7.0%
6.0%
-100 bps
-110 bps
$702
$743
5.8%
9.4%
8.3%
$738
$794
7.6%
7.3%
6.9%
-40 bps
San Marcos
$684
$717
4.8%
6.0%
4.4%
-160 bps
$982
$1,019
3.8%
8.2%
9.2%
100 bps
$743
$785
5.7%
7.0%
7.0%
Unchd
Ranch Rd 620N / FM 2222
Metro
SUPPLY TRENDS
•
•
•
•
Source: Reis, Inc
Developers completed a total of 1,372 units in 3Q08, the second largest
one-quarter delivery registered since 2004.
8,000
Reis project delivery of 2,049 additional units by year-end 2008. The
4Q supply will be distributed evenly between the Central, North
Travis, RR620N / FM2222 and Far South submarkets.
Elevated supply levels will persist through 2009. Reis expect
completions to approach 7,000 units next year and represent the largest
vintage since 2001. Another service forecasts an 8,300-unit, 5.1%
addition to inventory next year, rivaling 2008’s 8,800-unit, 5.8% gain.
Completions
Absorption
7,000
6,000
5,000
Units
•
Change
4,000
3,000
2,000
Supply pressure will impeded further improvement in Austin
fundamentals. Occupancy is expected to drop 160 to 180 basis points
by YE2009, depending on the source.
1,000
0
A 231-unit Second Street District mid-rise delivered in 1Q08 was 85%
occupied in September at asking rents averaging nearly $2,500.
02
03
04
05
06
07
08f
09f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
614-857-1416
William T. Hinga
614-857-1499
800.837.5100
Columbus, OH_Boston, MA_Charlotte, NC_Chicago, IL
Denver, CO_Fredericksburg, TX_Irving, TX_Jupiter, FL_Linwood, NJ_Nashville, TN
Newport Beach,CA_Reston, VA_San Diego, CA_Syracuse, NY
Market Overview is a publication of RED CAPITAL GROUP. If you are interested in other metro areas we cover or would like to
read about the research methodology we apply in our reports, please visit us at www.redcapitalgroup.com/research.
RED CAPITAL GROUP®
Market Overview
Austin,Texas
September 2008
EXECUTIVE SUMMARY
S
trong payroll job and income
growth kept the Austin apartment market in good stead
last year, giving rise to some of the
best rent gains recorded among the
RED 50. Metro establishments hired
a net of 34,100 (4.1%) workers and
the household median income increased 7.3% to $56,746, substantially
better than the respective 1.1% and
1.3% gains achieved nationally.
But the Capital City isn’t immune to
the nation’s economic woes. Yearover-year payroll growth slowed to a
24,300-job, 3.2% pace in 1Q08, and
decelerated further to a 16,500 (2.1%)
job gain in 2Q08. Goods producing
industries were largely responsible.
Construction, manufacturing and
wholesale trade headcounts dropped
by 700 year-over-year in 2Q, down
from a net gain of 4,100 in 4Q07.
Weakness in the electronics manufacturing sector was a contributing factor,
reflecting slowing orders for consumer
electronics and the semiconductor
chips that drive them. Declining home
sales and construction also contributed
to the economic slowdown.
RED CAPITAL Research expect the
pace of payroll jobs creation to decelerate further in 2H08. The group’s
econometric payroll model yields a
forecast of 16,000 jobs in 2008, within
a 15,000- to 18,000-job confidence
interval. Payroll growth should stabilize by early 2009. Net gains should
range from 6,000 to 15,000 jobs, with
a forecast point estimate of 11,000.
Apartment absorption softened in the
spring, falling from 703 units in the
first quarter to 424 units in the second,
a sluggish result for the normally active spring leasing season. After accounting for new supply totaling 828
units, metro occupancy fell 20 basis
points sequentially to 93.0%, the lowest level in twelve months.
Robust tenant demand was observed
SNAP SHOT
in urban neighborhoods, demonstrating the rising popularity of downtown
living options. Tenants absorbed more
than 600 units in the Central, Near
North Central, Far North Central and
North Travis submarkets, sending vacancy rates down 60 to 70 bps in the
latter three (the Central vacancy rate
increased due to supply pressures).
By contrast, demand in suburban areas
was weaker, producing higher vacancy
rates, especially in submarkets west of
downtown like Cedar Park and Ranch
Road 620.
Rent growth decelerated accordingly.
Average effective rent advanced $7
(0.9%) to $770, the smallest hike in
eighteen months. Rents increased at a
brisk 5.2% year-over-year rate, ranking #12 among the RED 50; but this
figure was 90 bps slower than the #8ranked 1Q08 metric. Moreover, effective rent declined sequentially in four
submarkets, including the large Far
Northwest and Southeast Travis
County areas, perhaps presaging
broader weakness in 2HO8.
A deluge of supply is on tap for 2H08
that will exert further downward pressure on occupancy and rent trends.
Reis expect developers to deliver
4,511 units from July through December, more product than Austin has
borne in any 12-month period since
2002. Although Reis forecast the
strongest second half absorption registered in 7 years, occupancy is expected to fall 70 bps to 92.3% and
over-the-year rent growth to slow to
4.6% by year end. The outlook for
2009 is comparable: supply of 5,868
units will drop occupancy 90 bps to
91.4% and hold rent growth to 3.8%.
Supply issues notwithstanding, RCR
estimate generic Austin asset 5-year
total returns of a stout 8.7%, the second highest metric in the RED 50.
This leads us to affirm our Accumulate ranking at cap rates above 5.5%.
Y-o-y
change
Vacancy
(7.0% - 2Q08)
Effective
Rents
40 bps
5.2%
Projected
YE2008
70 bps
4.6%
($770 - 2Q08)
Cap Rate
(6.8% - 2Q08)
50 bps
Employment
(775.5m - 2Q08)
16.5m
16m
KEY POINTS
•
•
•
•
•
•
Job attrition in the electronics manufacturing
and construction industries constrained job
creation. Employers hired at a 16,500-job,
2.1% annual pace in 2Q08, down from a
24,300-job, 3.2% rate in the prior quarter.
RCR expect economic growth to moderate
in the second half before stabilizing in 2009.
Our econometric payroll model produces a
forecast of 16,000 new jobs in 2008, and
11,000 jobs in 2009.
Occupancy fell 20 basis points in the second
quarter to an average of 93.0%.
Sequential quarter rent growth slowed to
0.9%, following a 1.3% gain in 1Q08.
Supply pressures are beginning to build,
placing downward pressure on occupancy
levels and rent trends. Reis call for a 90 bps
decline in occupancy and slower rent growth
(3.8%) in 2009.
A combination of accessible cap rates and
optimistic long-term fundamental forecasts
produce an 8.7% expected total return from
generic Austin apartment investments, the
second highest among the RED 50, leading
RCR to affirm its “Accumulate” rating.
VACANCY TRENDS
•
•
Net absorption levels declined for the third consecutive quarter, falling
from 1,989, 818 and 703 units in 3Q07, 4Q07 and 1Q08, respectively,
to 424 units in the seasonally-strong 2Q08 spring leasing season.
The last year in which first quarter net absorption exceeded second
quarter absorption was 2001 As illustrated in the graph to the right, the
event preceded an 840 bps increase in the metro vacancy rate.
Demand for units in downtown and downtown collar neighborhoods
was healthy. Absorption in some suburban submarket, conversely, was
soft. Occupancy in the Ranch Road 620 and Cedar Park declined by
240 and 120 bps, respectively, due to supply and slow leasing trends.
Source: Reis, Inc.
14%
Metro Vacancy Rate
•
12%
10%
7.4%
8%
7.0%
6%
4%
AUSTIN
U.S.A.
2%
0%
th
RANK: 37 out of 50
COMMENT: Rising supply levels will continue to exert downward pressure
on average occupancy. Reis expect delivery of 10,000+ units from 7/08—12/09.
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
00 01 02 03 03 04 05 06 06 07 08
RENT TRENDS
•
•
•
Source: Reis, Inc.
Sequential rent growth slowed in 2Q after two consecutive quarters of
$10 (1.3%) effective rents gains. Metro rents advanced $7 (0.9%) in
the latest quarter, the smallest quarterly rise since 4Q06.
Owners implemented asking rent hikes averaging $8 (0.9%) to $852.
The monthly value of the standard rent concession package increased
$1 to $82 (9.6% of gross rent), 4th highest among the RED 50.
Delivery of new luxury apartment product inflated rent growth in some
submarkets above same store numbers. Near South Central, Central
and Ranch Road 620 appear to have benefited from this phenomenon.
By the same token, of eight submarkets that received no additions to
inventory four experienced negative sequential effective rent growth.
15%
Asking
Effective
10%
YoY Rent Trend
•
Metro Rent Trends
5.2%
5%
4.9%
0%
-5%
-10%
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
COMMENT: Supply will constrain rent growth through 2010.
00 01 02 03 03 04 05 06 06 07 08
•
•
From January through July, 21 Austin properties valued at $5mm or
more exchanged hands for $494mm, according to Real Capital
Analytics, a decline of about 33% from the same period in 2007..
The average price per unit increased, however, rising from $79,535 in
2007 to $99,982 in 2008, an increase of 25%.
Data from RCA suggest that average Austin cap rates increased
meaningfully year-over-year, from roughly 6.0% in 2007 to 7.1% in
1H08. An RCR analysis of recent trades belies the notion. Five
acquisitions of institutional quality assets completed in 2Q08 appear to
have been priced to initial yields of 5.1% or less. Four of the
transactions are featured below. The fifth, Mesa Verde, was transacted
at an approximate 4.8% going-in cap rate. Slower trade in 3Q08
suggests that bid / ask spreads grew wider during the summer.
Cap Rate
•
Source: Reis, Inc.
7.4%
7.2%
7.0%
6.8%
6.6%
6.4%
6.2%
6.0%
5.8%
5.6%
2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
06 06 06 07 07 07 07 08 08
Property Name
Arboleda (Cedar Park)
Villages of Bella Vista (Far So.)
Alexan Onion Creek (Southeast)
Palms at Walnut Crk (FrNoCnt)
Property Class
Date of
Total Price
Price per unit
Estimated Cap
A
A
A
A
Apr-2008
Apr-2008
May-2008
Jul-2008
$29.3
$48.0
$42.0
$19.0
$93,750
$119,403
$108,808
$67,747
4.5%
5.1%
4.3%
4.9%
AUSTIN
$240
•
US
Prices (000)
$220
$200
$180
•
•
$160
$140
$120
$100
•
04
05
Y
Y
06 1Q 2Q 3Q 4Q 1Q 2Q
Y
07
07
07 07
08
08
•
Annual Chg (000)
30
16
11
•
10
0
•
-10
-20
99 00 01 02 03 04 05 06 07 08f 09f
•
•
Source: BLS
AUSTIN
USA
6%
•
4%
Rate
The average price of homes sold in July was $253,100, an increase of
0.7% year-over-year.
The inventory of unsold homes increased 18% from July 2007 to July
2008. Consequently, unsold inventory increased from an amount equal
to 4.3 months of sales in July 2007 to 6.2 months of sales in 2008.
Second Quarter 2008
40
8%
January through July Austin metro home sales fell 19% from 2007.
EMPLOYMENT TRENDS
20
The Austin housing market remained among the most fundamentally
sound in the country. According to OFHEO, the value of the typical
metro home increased 0.52% quarter-to-quarter and 4.98% year-overyear in 2Q08. By comparison, the average US home declined by -1.4%
sequentially and -4.8% over-the-year. The 1-year price index was 8th
highest among the 295 US metro areas included in the rankings.
2%
Austin payrolls increased by 16,500 (2.1%) jobs year-over-year in the
second quarter, representing a marked slowdown from 1Q08’s
24,300-job, 3.2% advance.
Job attrition was most pronounced in the manufacturing sector. Factory headcounts fell by 2,500 (-4.4%) year-over-year, a deterioration
from 1Q08’s net loss of 700 jobs and -1.2% rate of decline.
Computer and electronic equipment manufacturers made the deepest
cuts. A net of 1,400 (-4.5%) positions were eliminated, calculated on
a year-over-year basis.
The semi-conductor industry was more stable by comparison. Fab
headcounts were up about 100 (0.2%) jobs year-over-year in the second quarter following a 300-job advance in 1Q08.
Business services establishments were responsible for the largest
number of new jobs. Sector headcounts grew at a 4,100-job, 3.7%
annual pace in the quarter, down from 6,200 jobs in 1Q08. Professional, scientific and technical service providers accounted for 3,800
jobs in the business services sector. By contrast, employment services made only a small 700-job contribution.
After falling to 3.3% in April, the unemployment rate spiked to 4.4%
in July. Total employment fell approximately 3,000 jobs while 7,000
people joined the workforce, producing the unemployment increase.
0%
Forecast
-2%
•
-4%
99 00
01 02
05 06 07
08
20%
14.5%
A UST IN ( R A I = 1. 74 )
15%
D EN VER ( R A I = 1. 46 )
10%
5%
03 04
RED CAPITAL Research expect payroll job growth to total 16,000
jobs in 2008. Payroll growth will stabilize by 1Q09, leading to a net
gain of 6,000 to 16,000 jobs next year with a most probable result of
11,000. The model appears to have a slight optimistic bias.
5.9%
1.8%
8.5%
3.4%
11.0%
5.6%
7.6%
10.4%
0.4%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
2Q07
2Q08
Change
2Q07
2Q08
Far South
Near South Central
Southeast
Central Austin
East Austin
Near North Central
Far North Central
North Travis County
Near Northwest
Far Northwest
$793
$814
$643
$850
$585
$613
$561
$721
$784
$819
$697
$730
$839
$923
$675
$911
$621
$673
$574
$737
$807
$852
$736
$773
5.8%
13.4%
5.0%
7.1%
6.2%
9.7%
2.4%
2.2%
2.9%
4.1%
5.6%
5.9%
6.6%
6.8%
8.1%
5.8%
5.3%
5.9%
8.5%
5.9%
7.4%
7.8%
9.5%
8.4%
5.8%
7.9%
5.4%
7.0%
6.2%
5.1%
7.8%
7.6%
6.4%
6.1%
10.2%
8.5%
-80 bps
110 bps
-270 bps
120 bps
90 bps
-80 bps
-70 bps
170 bps
-100 bps
-170 bps
70 bps
10 bps
San Marcos
$673
$716
6.4%
7.5%
5.4%
-210 bps
$947
$994
5.0%
9.8%
10.6%
80 bps
Metro
$732
$770
5.2%
7.4%
7.0%
-40 bps
SUPPLY TRENDS
•
•
•
Source: Reis, Inc
According to the latest Reis forecast, developers will complete 6,339
units in 2008, a 62 unit decrease from the service’s previous estimate.
Nevertheless, the 2008 vintage will represent the largest one-year
completion total to arrive in Austin since 2001 (8,447 units).
7,000
The 2001 supply tidal wave was complicit in raising the Austin metro
vacancy rate from 2.5% in 4Q00 to 11.7% in 1Q02, one of the most
dramatic turnabouts in the history of the modern US apartment market.
4,000
Completions
Absorption
6,000
5,000
Units
•
Change
3,000
2,000
The Central submarket added 553 units in 2Q08, causing average
occupancy to fall 100 bps. More units are scheduled for completion
this year; Reis expect developers to deliver another 1,350 by year end.
1,000
0
The Far South (1,088 units) and North Travis County (868 units) also
will feel supply pressure in the second half.
02
03
04
05
06
07
08f
09f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
614-857-1416
William T. Hinga
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Charlotte, NC_Chicago, IL
Fredericksburg, TX_Irving, TX_Jupiter, FL_Linwood, NJ_Nashville, TN
Newport Beach,CA_Reston, VA_San Diego, CA_Syracuse, NY_Voorhees, NJ
©2006 RED CAPITAL GROUP (8/9/06)
RED CAPITAL GROUP®
Market Overview
Austin,Texas
June 2008
EXECUTIVE SUMMARY
A
ustin economic trends were
the envy of the nation the
past three years. Metro payrolls increased 90,000 jobs during the
period, representing a 13.5% advance,
about three times faster than the U.S.
average. The unemployment rate fell
150 basis points to a seven-year low
3.6% in 2007, while real estate values
increased steadily but not so fast as to
significantly reduce affordability.
Although the metro economy continued to materially outperform the national average in early 2008, signs of
moderate stress began to emerge. The
annual rate of payroll job growth declined from 2007’s 34,100, 4.7% pace
to 24,300 (3.2%) in the first quarter
and 20,100 (2.7%) in April. The unemployment rate jumped 40 basis
points in May to 3.7%, the largest
year-over-year increase in more than
five years, while closed and pending
home sales dropped 20% and 55%,
respectively, from last year.
Hiring was slower in every industry
super-sector with the exception of personal services. The largest nominal
decreases were observed in the construction, manufacturing, retail trade
and business services industries, which
collectively expanded at a 8,500-job
pace in April, down from 11,500 in
1Q08 and 17,000 in 2007.
Weaker conditions in the computer and
semiconductor manufacturing industry
also were noteworthy. These high-tech
bellwethers added 1,800 employees in
2006 and 2007, averaging 6% annual
growth. But headcounts fell 400 jobs
y-o-y in April, reflecting softening
global demand for PC and handset
memory chips.
A tech slowdown will put meaningful
downward pressure on Austin economic growth trends. The RCR econometric payroll model produces forecasts of 19,000 (2.5%) and 14,000
(1.8%) jobs in 2008 and 2009, respec-
SNAP SHOT
tively. Applicable confidence intervals
are 17,000-to-21,000 (2008) and
9,000-to-18,000 (2009). This forecast
represents a moderate upward revision
from the levels published in April.
Y-o-y
change
Vacancy
(6.8% - 1Q08)
Apartment absorption was constructive
during the seasonally slow first quarter.
Owners net leased 703 units in the period, the best first quarter result since
2001. But leasing failed to keep pace
with deliveries of 1,000 units, producing a 20 basis point rise in metro vacancies to 6.8%.
Effective
Rents
The moderate increase in vacant inventory didn’t deter owners from pursuing
aggressive rent hikes. Tenants saw
average asking rents rise $10 (1.2%) to
$844. Landlords did concede a $1 advance in the typical concessions package, holding effective rent growth to
$9 (1.2%) to $762. As a result, overthe-year rent trends were steady at
6.1%, ranking Austin 8th among the
RED 50, up 15 places in a year.
Employment
80 bps
6.1%
Projected
2008
80 bps
4.4%
($762 - 1Q08)
Cap Rate
(6.7% - 1Q08)
(742.2m - 1Q08)
30 bps
24.2m
19m
KEY POINTS
•
Pending supply promises to blunt future occupancy and rent progress. Another 828 units were added to inventory by June 2008, and nearly 7,000
units were under construction. Of this
group, 5,500 units will be completed
by mid-year 2009. As a result, Reis
expect vacancy to rise to 7.9% by yearend 2008 and 8.3% in 2009. With regard to rents, the service forecasts a
deceleration to 4.4% growth this year
and a 3.6% advance in 2009.
•
Investors moved forward intrepidly
nonetheless. Loopnet recorded seven
$10mm+ trades in the first four months
of the year for total proceeds of
$178mm, causing cap rates to decline
90 bps sequentially to 5.2%, according
to NCREIF, thereby generating total
returns approaching 20%. RCR have
mixed feelings about Austin fundamentals, but investors are well advised
to wade cautiously into the Austin
pool. Accumulate quality assets at cap
rates north of 5.5%.
•
•
•
•
The pace of payroll job formation
decelerated in the first quarter, slowing from
2007’s 34,100-job pace to 24,300 (3.2%).
The April year-over-year comparison was
slower still, reflecting a gain of 20,100 jobs.
RED CAPITAL Research expect the rate
of job growth to decelerate a bit more. The
group’s payroll model forecasts average
monthly job growth of 19,000 in 2008,
followed by an 14,000-job advance in 2009.
Tenants absorbed a seasonally strong 703
units in 1Q08, according to Reis, but demand
failed to keep pace with rising supply levels.
Occupancy fell 20 bps to 93.2% and may
decline to fall further to 91.7% in 2009.
Owners continued to experience constructive
pricing power. Effective rents increased by
an average $9 (1.2%) in 1Q08, maintaining
over-the-year rent growth at 6.1%, ranking
Austin 8th among the RED 50 markets.
Sales of Austin properties declined from
2007’s robust $1.4bn pace, but cap rates fell.
The NCREIF index fell 90 bps to 5.2%.
Investors should Accumulate judiciously.
VACANCY TRENDS
•
•
•
Demand for Austin apartments was seasonally strong in the first
quarter. After absorbing 10,600 units during the previous three years,
tenants net leased more than 700 units in the typically soft first quarter.
This was the strongest 1Q lease performance in seven years.
Developers brought 1,000 new units on line, over-balancing the
constructive leasing conditions. Vacancy rates rose 20 bps to 6.8%.
Demand for units in close-in submarkets was excellent. Sequential
occupancy rates increased 50 bps or more in the Near South Central
Austin, East Austin and Southeast Austin submarkets.
Source: Reis, Inc.
14%
Metro Vacancy Rate
•
12%
10%
7.6%
8%
6.8%
6%
4%
AUSTIN
U.S.A.
2%
0%
Reis expect supply to raise the vacancy rate to 7.6% in 2009.
3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
RANK: 32nd out of 50
COMMENT: RCR internal occupancy models are more optimistic than Reis.
00 01 02 02 03 04 05 05 06 07 08
RENT TRENDS
•
•
•
Source: Reis, Inc.
Austin rent levels continued to rise at above average rates. Owners
achieved a $9, 1.2% increase of effective rents, comparing favorably to
the $8 advance recorded in the comparable period of 2007.
Austin’s second consecutive 6.1% y-o-y effective rent increase ranked
eighth among the RED 50. The metro ranked only 23rd in 1Q07.
Effective rents in submarkets surrounding the Center City surged in
1Q08. The Southeast, Near North Central and East Austin submarkets
chalked sequential gains of 2% or more. Dearer Central and Near
South Central submarket rents increased 1.1% and 1.9%, respectively.
15%
YoY Rent Trend
•
Metro Rent Trends
ASKING
EFFECTIVE
10%
6.1%
5%
5.6%
0%
-5%
-10%
Reis expect rent trends to slow to 4.4% in 2008 and 3.6% in 2009.
3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
RANK: 8th out of 50
COMMENT: RCR models suggest rent growth above 4% is likely in 2009.
00 01 02 02 03 04 05 05 06 07 08
•
•
Source: Reis, Inc. / NCREIF
RCR estimate that occupancy and rent gains produced same store NOI
growth of 11.7% in the 12 months ended in March.
Marcus & Millichap report that average cap rates fell 50 basis points in
a year to the “mid-6%” range. NCREIF and Reis trade data suggest
that cap rates are near year-ago levels.
Cap rates probably dropped sharply in the first quarter, however, as
investors shifted focus from value-add situations to higher quality,
class-A and class-B+ properties. The NCREIF cap rate index fell a
remarkable 90 basis points in 1Q08 to the 5.2% level.
COMMENT: RCR are cautious about Austin fundamentals because of the
high level of rental and for-sale development activity currently underway. But
diversified investors should have Austin exposure in their portfolios regardless.
Wade into the pool cautiously at 5.5% or higher initial property yields.
Cap Rate
•
7.5%
Reis Composite
7.0%
NCREIF
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
06
06
06
06
07
07
07
07
08
Property Name
Campus Estates (Southeast)
Pecan Grove (Central Austin)
Anderson Mill Apts (Hwy 183)
Arboleda Apts (Cedar Park)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
B
B
A
Mar-2008
Apr-2008
Apr-2008
Apr-2008
$58.0
$12.8
$23.3
$29.3
$116,466
$66,578
$66,578
$93,803
5.3%
6.5%
6.9%
5.0%
$240
AUSTIN
•
US
Prices (000)
$220
•
$200
$180
$160
•
$140
$120
$100
04
05
06
1Q 2Q 3Q 4Q 1Q
Y
Y
Y
07
07
07
07
•
•
08
Annual Chg (000)
Sales volumes were down, however; the ABR reported that closed
sales in April fell 20% from last year, while pending sales dropped
55% from April 2007.
Austin population increased by 65,880 last year, a series record.
5+ unit permit issue from January through April increased 73% from
the same period of 2007. Trailing 12-month permit issue was up 30%.
Past 12 Months
•
40
30
19
14
10
•
Austin establishments added 29,000 jobs during the twelve months
ended in April. This compares to a 34,100-job add in calendar 2007.
The slowdown was broad-based and cannot be attributed to any industry in particular.
First Quarter 2008
•
0
-10
-20
99 00 01 02 03 04 05 06 07 08f 09f
•
Source: BLS
AUSTIN
USA
8%
6%
•
4%
Rate
The median price of a metro home sold in 1Q08 was $184,500,
representing a 4.7% increase over 2007. The Austin Board of Realtors
reported that the average price of a home sold in April was $263,151,
an increase of 5% year-over-year.
EMPLOYMENT TRENDS
20
After surging 280 basis points to 66.7% in 2006, the Austin
homeownership rate fell to 66.4% last year.
2%
Metro payrolls increased at a 24,300-job, 3.2% pace in the first quarter. The performance represented a slight drop-off from the prior
quarter when establishments hired at a 25,500-job rate. The modest
slowdown was largely attributable to slower expansion in the construction super-sector and a moderate drop in technology manufacturing.
Preliminary estimates of April headcounts exhibited greater slowing
tendencies. Aggregate April payrolls were only 20,100 jobs above
the comparable period of 2007. Weakness in the semiconductor and
electronics segment became more obvious, contributing to the slowdown. Reduced state government hiring also factored in the soft
April data.
The unemployment rate in May spiked 40 bps to 3.7%, suggesting
that recent school graduates were greeted with a more sluggish employment market.
Forecast
0%
•
-2%
-4%
99
00
01
02
04
05
06
07
10.2%
A UST IN ( R A I = 1. 61)
R A LEIGH ( R A I = 1. 98 )
7.7%
5.1%
5%
08
15%
10%
03
In spite of the relatively downbeat recent results, RCR are now more
optimistic regarding pending payroll growth. The group’s model
forecasts payroll growth totaling 19,000 jobs in 2008, and 14,000 jobs
in 2009. Confidence bands range from 17,000-to-21,000, and 9,000to-18,000 in 2008 and 2009, respectively. For 2008, we have a lowside logical bias in view of the softness evident in the April’s high
tech sector data.
4.5%
6.1%
10.1%
7.7%
1.9%
1.2%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
1Q07
1Q08
Change
1Q07
1Q08
Far South
Near South Central
Southeast
Central Austin
East Austin
Near North Central
Far North Central
North Travis County
Near Northwest
Far Northwest
San Marcos
$781
$818
$624
$827
$578
$593
$547
$700
$772
$801
$686
$712
$670
$829
$885
$676
$878
$623
$668
$572
$732
$798
$857
$731
$766
$705
6.1%
8.2%
8.3%
6.1%
7.8%
12.6%
4.5%
4.6%
3.4%
7.0%
6.5%
7.6%
5.2%
7.1%
7.4%
7.1%
5.5%
6.2%
5.6%
9.4%
6.1%
7.5%
8.4%
8.2%
9.8%
8.4%
5.2%
6.3%
5.5%
6.0%
6.5%
5.7%
8.4%
8.3%
5.9%
6.2%
8.9%
9.0%
5.2%
-190 bps
-110 bps
-160 bps
50 bps
30 bps
10 bps
-100 bps
220 bps
-160 bps
-220 bps
70 bps
-80 bps
-320 bps
$926
$987
6.6%
11.5%
8.2%
-330 bps
$718
$762
6.1%
7.6%
6.8%
-80 bps
Metro
SUPPLY TRENDS
•
Source: Reis, Inc
Supply represents the greatest threat to Austin apartment market
fundamentals. The market stands to absorb the greatest number of new
units in seven years and the second largest vintage in the 19-year Reis
data history in 2008. Next year, supply promises to be nearly as large,
declining from 2008’s estimated 6,400 units to about 4,800 units.
Product currently underway suggest that the realized 2009 figure could
exceed the Reis forecast.
7,000
Completions
Absorption
6,000
5,000
Units
•
Change
Reis identify 16 project currently under construction in the Central
submarket incorporating 3,301 units. This represents a pending 35%
increase of the submarket inventory. Already, surrounding submarkets
are attracting tenants, especially UT students, priced out of Central
submarket properties. Delivery of new, high-rent luxury units may be
greeted by a limited audience.
4,000
3,000
2,000
1,000
0
02
03
04
05
06
07
08f
09f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
614-857-1416
William T. Hinga
614-857-1499
800_837_5100
RED CAPITAL GROUP®
Market Overview
Austin,Texas
April 2008
EXECUTIVE SUMMARY
P
ayroll growth trends were
remarkably robust in 1H07
as 38,500 (5.4%) positions
were added year-over-year. Moderately slower growth took hold in the
second half of the year, resulting in a
22,700 (3.0%) y-o-y gain in December. Still, the pace of job creation was
comparatively strong in 4Q07, ranking third highest among the RED 50.
Scaled back hiring was recorded
among most employment sectors.
Goods producing (construction and
manufacturing) establishments added
3,300 fewer workers y-o-y in February as compared to the 2007 monthly
average. Results from skilled service
firms were mixed with finance and
business service firms adding fewer
workers and health care providers
accelerating the pace of hiring.
Although payroll trends showed only
a moderate degree of slowing in February, our econometric model suggests that the boom cycle is all but
over. RED forecast job growth to
range from 10,000 to 14,000 this year
with a point estimate of 12,000
(1.6%). The rate of growth is forecast
to decelerate to 6,000 (0.8%) next
year. By comparison, Economy.com
are more optimistic, forecasting
18,220 (2.4%) new jobs this year and
20,490 (2.6%) in 2009.
The occupancy rate increased 40 basis
points sequentially to 93.4% in 4Q07,
the metro’s highest rate recorded
since 2Q07. The increase was attributable to positive net absorption of
864 units and supply of only 454
units. The occupancy rate improved
60 bps y-o-y despite significant supply. The 4,024 unit vintage was the
largest since 2003.
Development will pick-up this year.
Reis estimate that 37 rental projects
containing 9,461 units had broken
ground as of March 31st. The source
notes that about 6,700 units should
SNAP SHOT
come on-line this year. A majority of
the units are contained in the Central
(2,262 units), Far South (1,838 units)
and North Travis (1,204 units) submarkets.
Effective rents increased 1.3% sequentially to $753 in 4Q07. On a y-oy basis the average effective rent rose
6.1%, outpacing the 5.4% increase in
asking rents. The robust gains were
attributable to a 4.7% increase in
household income and market tightness. Owners managed to make some
headway in reducing concessions as
the typical value fell from 10.2% of
asking rent in 4Q06 to 9.7%. But the
ratio remains well above the 5.8%
RED 50 average.
Reis expect market conditions to deteriorate this year. The service forecasts a 90 basis point decrease in occupancy as demand falls short of supply. In turn, effective rent growth is
expected to decelerate to 4.5%.
Real Capital Analytics indentify 29
investor grade property trades in the
six-month period ended in February,
totaling $621 million in sales proceeds. While the volume and velocity
figures are on-par with 2007 totals,
cap rates rose from 6.0% to 6.5%.
This is consistent with the increase in
the NCREIF cap rate in the fourth
quarter last year. On the other hand,
trades of large properties in recent
months suggest that high quality
product still commands a premium.
Based on Reis fundamental forecasts
and an assumed 5.2% going-in yield,
RED estimate a 7.7% expected rate of
return. Although the metric ranks in
the top 10, buyers should be cautious
due to Austin’s high historic rent
trend and occupancy volatility, often
related to oversupply. Also, high-end
product appears overbought at cap
rates in the 3 - 4% range. We assign a
cautious “Accumulate” rating for
value-add investors.
Y-o-y
change
Vacancy
(6.6% - 4Q07)
Effective
Rents
60bps
Projected
2008
90bps
6.1%
4.5%
10bps
unch
25.5k
12k
($753 - 4Q07)
Cap Rate
(7.2% - 4Q07)
Employment
(769.1k - 4Q07)
KEY POINTS
•
Vacancy reached a peak of 12.5% in 2Q03
and fell to nearly half that (6.6%) in 4Q07.
The vacancy rate fell 40 basis points
sequentially and 60 basis points year-overyear.
•
Asking and effective rents increased 5.4%
and 6.1% year-over-year, respectively in
4Q07. The most robust gain (9.2%) was
registered in the Near North Central
submarket.
•
In the 2000 to 2002 multifamily construction
boom in Austin, inventory grew at an
average rate of 5.7% per year. Assuming
that completions total 6,724 units, as Reis
forecast, inventory will rise 4.7% in 2008.
But if population increases at a 4.3% rate
again this year, unit absorption could keep
up with supply.
•
On the other hand, slower job growth is
likely to put a damper on demographic
growth. RED expect payroll trends to
decelerate from the 34,100 (4.7%) rate
recorded in 2007 to 12,000 (1.6%) in 2008.
The confidence interval ranges from 10,000
to 14,000 new jobs. Economy.com are more
optimistic, forecasting job formation of
18,220 (2.4%).
VACANCY TRENDS
•
•
According to Reis, solid absorption and limited supply led to a 40 basis
point decrease in the vacancy rate from 7.0% in 3Q07 to 6.6% in 4Q07.
Last quarter’s metric was the metro’s lowest rate since 2Q01. The
market posted a 60 basis point year-over-year improvement, despite
weak demand in 1Q07.
Conversely, O’Connor and Associates report that occupancy fell 50
basis points sequentially and 110 basis points year-over-year to 92.3%
in 4Q07. The source estimate that completions totaled 3,255 units in
2007 while only 1,275 units were absorbed.
Source: Reis, Inc.
14%
Metro Vacancy Rate
•
12%
10%
7.2%
6.6%
8%
6%
4%
Austin
U.S.A.
2%
0%
Reis expect increased supply to result in a 90 basis point increase in
vacancy in 2008. The service forecasts a 70 basis point increase in
2009.
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
00 01 01 02 03 04 04 05 06 07 07
RANK: 33rd out of 50
RENT TRENDS
•
•
•
Source: Reis, Inc.
Effective rents increased 1.3% sequentially and 6.1% year-over-year to
$753. Despite the robust gains, the average rent remains $34 below the
2Q01 peak of $787 .
Asking rents rose at a moderately slower 5.4% annual pace to $834.
The value of the average concession package fell from 10.2% of asking
rent in 4Q06 to 9.7%.
According to O’Connor and Associates the average asking rent
increased 3.5% to $815 in 2007. Class A rents averaged $999 or $1.07
per square foot.
Reis expect effective rent growth to decelerate to 4.5% in 2008 and
3.2% in 2009.
15%
Asking
Effective
10%
YoY Rent Trend
•
Metro Rent Trends
6.1%
5%
5.4%
0%
-5%
-10%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
00 01 01 02 03 04 04 05 06 07 07
RANK: 8th out of 50
PROPERTY MARKET & CAP RATE TREND
•
•
•
Real Capital Analytics count 56 investor grade trades in 2007, totaling
$1,364 million in sales proceeds. The average price per unit rose 5%
to $82,174 and the average cap rate fell 20 basis points to 6.0%.
According to Loopnet, 14 properties traded in 4Q07 for a total of $184
million in sales volume. Preliminary data reveal that five properties
totaling $127 million were exchanged in the first quarter.
NCREIF metro cap rate data indicate that prices moderated in 4Q07.
The average cap rate rose from 5.2% in 3Q07 to 6.1% in 4Q07. Based
on observed trades we expect that the trend reversed in 1Q08.
7.2%
7.1%
Cap Rate
•
Source: Reis, Inc.
7.3%
7.0%
6.9%
6.8%
6.7%
6.6%
RED estimate generic metro asset five-year holding period total
returns of 7.7%, ranking 8th highest among the RED 50.
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
05 06 06 06 06 07 07 07 07
Property Name
Arboleda
Campus Estates (Student)
Colonial Grand at Canyon Creek
Great Hills Village
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
A
A
A
April 2008
March 2008
January 2008
November 2007
$29.3
$58.0
$38.0
$48.1
$93,830
$116,466
$113,095
$119,355
4.4%
3.7%
3.8%
5.7%
$240
MSA
Prices (000)
$220
•
US
•
•
$200
$180
$160
$140
•
$120
$100
03
04
05
Y
Y
Y
4Q 1Q 2Q 3Q 4Q
06
07
07
07
07
•
Annual Chg (000)
30
•
12
6
10
0
•
-10
-20
99 00 01 02 03 04 05 06 07 08f 09f
•
•
Source: BLS
8%
Austin
USA
•
Rate
2%
0%
•
-2%
-4%
00
01
02
03
04
The metro registered an 8.0% year-over-year gain in the OFHEO home
price index in 4Q07, ranking 11th highest among the 291 metros
tracked by the source. Four of the top 20 metros were located in Texas
(San Antonio 10th, Austin 11th, Beaumont - Port Arthur 17th and El
Paso 20th).
Job trends continued to accelerate in 2007 as a net of 34,100 (4.7%)
workers were added. The figure was upwardly revised from 29,100
(4.0%) following the re-benchmarking exercise at the BLS.
Modestly slower trends were observed in recent months, however.
Year-over-year growth slowed to 25,500 (3.4%) in 4Q07 and to
24,100 (3.2%) in February.
Reduced demand for locally built computer and electronic equipment
was partially to blame. Sector manufacturers lost 800 workers yearover-year in February. Decreased production also led to slower job
growth among wholesale trade firms.
The slowdown was also attributable to reduced hiring among construction, retail trade and business service firms. The sectors combined to add 15,900 employees in 2007 but only 11,100 year-overyear in February.
On a positive note, local government and health care job trends accelerated in the first two months of 2008.
Forecast
4%
99
The median price of a single-family MSA home rose 6.4% year-overyear to $185,700 in 4Q07. In addition, condo prices increased 7.6% to
$173,200 over the period.
Past 12 Months / Fourth Quarter 2007
40
6%
The homeownership rate edged 30 basis points lower to 66.4% in 2007.
EMPLOYMENT TRENDS
20
For the second consecutive year, Austin posted population growth of
4.3%, largely due to robust net domestic migration. A net of 40,534
residents relocated to the MSA.
05
06
07
08
National City Bank economist Dr. Richard DeKaser forecasts GDP
growth of 2.1% in 2008 and 2.6% in 2009 as the domestic economic
avoids a recession in 1H08 and growth picks-up in the second half of
the year.
Our metro payroll model generates point estimates of 12,000 (1.6%)
new jobs this year and 6,000 (0.8%) in 2009. The confidence intervals range from 10,000 (1.3%) to 14,000 (1.8%) in 2008 and from
3,000 (0.4%) to 9,000 (1.2%) in 2009.
RANK: 3rd out of 50
15%
10%
5%
Austin
Dallas
3.4%
0.9%
5.7%
4.8%
7.4%
7.2%
9.9%
8.7%
10.8%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Effective Rent
Submarket
Far South
Near South Central
Southeast
Central
East
Near North Central
Far North Central
North Travis
Near Northwest
Far Northwest
Physical Vacancy
4Q06
4Q07
Change
4Q06
4Q07
$765
$803
$620
$821
$579
$593
$541
$699
$764
$799
$682
$702
$824
$868
$662
$868
$603
$648
$578
$722
$790
$841
$721
$749
7.7%
8.0%
6.7%
5.8%
4.1%
9.2%
6.8%
3.3%
3.4%
5.2%
5.7%
6.7%
6.5%
6.8%
7.0%
5.2%
6.5%
5.2%
8.9%
6.2%
8.0%
6.4%
7.9%
10.1%
5.3%
7.0%
6.0%
6.3%
7.0%
5.7%
9.0%
6.8%
6.5%
5.9%
7.7%
7.5%
-120 bps
20 bps
-100 bps
110 bps
50 bps
50 bps
10 bps
60 bps
-150 bps
-50 bps
-20 bps
-260 bps
San Marcos
$660
$699
5.9%
9.4%
5.5%
-390 bps
Ranch Road 620 N / FM 2222
$922
$988
7.1%
8.8%
8.8%
unch
Metro
$710
$753
6.1%
7.2%
6.6%
-60 bps
SUPPLY TRENDS
•
•
•
Source: Reis, Inc
Only 454 units were completed in 4Q07, the lowest total since 1Q06.
On an annual basis, developers added nearly twice as many units in
2007 (4,024 units) than 2006 (2,353 units). O’Connor and Associates
reported only 3,255 new units in 2007, contained in 11 properties.
Reis estimate that 9,461 apartment units were under construction as of
March 31st. The service forecast 6,724 unit completions this year and
4,204 units in 2009.
7,000
Completions
Absorption
6,000
5,000
Units
•
Change
O’Connor and Associates estimate that 30 projects containing 7,350
units were under construction and an additional 56 properties with
14,645 units were in the planned or proposed phase.
4,000
3,000
2,000
1,000
0
Reis count 986 condo units slated for completion this year.
02
03
04
05
06
07
08f
09f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
614-857-1416
William T. Hinga
614-857-1499
800_837_5100
RED CAPITAL GROUP®
Market Overview
Austin,Texas
January 2008
EXECUTIVE SUMMARY
T
he recent performance of
Texas’s high tech hub recalled
the halcyon days of the dot.com
boom. Employment growth trailed only
the Inland Empire and Salt Lake City
among top metro areas. Based on its
performance in 2005-06, Austin moved
up 36 positions in the Milkin Institute
Best-performing Cities rankings, reaching 20th spot. But if the study had incorporated 2007 data, the outcome
would have been considerably better.
After a five-year hiatus, semiconductor
manufacturers embarked on a new
round of investment in Austin component capacity. The revival of the tech
manufacturing sector gave rise to follow-on gains in tech services, finance,
law and accounting. Venture capital
flowed again, fertilizing start-ups and
boot-strapping early stage companies.
Austin establishments hired a net of
29,500 workers year-over-year through
November, 1,700 more jobs than were
created in 2006, making Austin one of
the few metro areas in the country to
experience accelerating growth last
year. Payrolls in five super-sectors
grew at more than 5%, including a remarkable 9.1% advance in the construction sector. State finances are back in
order, contributing to robust government
and U.T. hiring, and tourists flocked to
the city, boosting leisure service headcounts by 4,200 (5.7%).
While payroll expansion proceeded at a
steady pace through the third quarter,
trends cooled moderately in the fall.
After creating 29,200 (4.0%) jobs y-o-y
in 3Q07, metro payrolls expanded at an
23,700-job, 3.2% average pace during
the three months ended in November,
and 22,500 (3.0%) jobs y-o-y in November. Manufacturing and wholesale
trade led the slowdown, evidencing
cooler trends in the tech factory sector.
Although the cheap greenback will promote Austin exports and foreign investment in metro plant and equipment, the
sputtering U.S. economy will exert a
degree of restraint on the local job mar-
ket. By way of forecast, RED’s payroll
model produces a projection of 20,000
jobs in 2008, in a confidence interval of
16,000 to 23,000. Economy.com, by
comparison, forecast a 20,250-job crop.
Strong job and population growth fueled
rising apartment demand. Tenants net
leased 3,776 units during the first nine
months of 2007, the best results observed in a comparable period since
2003. Absorption in 3Q totaled 2,031
units, nearly double the 3Q06 results.
Supply increased as well, limiting occupancy gains. According to Reis, developers completed 3,565 units from January through September, up from 1,706
units in the same period of 2006, holding the increase of average occupancy to
10 bps y-o-y to 92.6%.
Owners hiked asking rents and rescinded lease concessions liberally in
3Q07, generating materially higher
revenue growth. Asking rents increased
$9 (1.1%) sequentially and $32 (3.9%)
y-o-y. Concessions fell $2 in the third
quarter and $5 over-the-year, giving rise
to 1.5% sequential and 5.4% y-o-y effective rent growth.
In spite of recent momentum, Reis question the rally’s longevity. The service
forecasts higher vacancy rates and
slower rent trends for the balance of the
decade. Reis expect occupancy to fall
50 bps in 2008 and 30 bps in 2009, lowering the market average to 91.8%. Effective rent growth is projected to slow
to 3.6% in 2008 and 3.1% in 2009.
Investors grew more cautious in 2H07.
While buyers snapped up more than
$600mm properties valued at $5mm or
more in the first half, preliminary data
show 2H proceeds totaled only
$271mm. Cap rates were mostly in the
high-5% range, although strategically
located recent construction properties
traded at or below the 5% threshold.
RED view Austin fundamentals positively, but maintain an “Opportunistic”
rating due to high degree of observed
NOI volatility.
SNAP SHOT
Y-o-y
change
Projected
2008
10 bps
50 bps
5.4%
3.6%
Vacancy
(7.0% - 3Q07)
Effective
Rents
($742 - 3Q07)
Cap Rate
(7.2% - 3Q07)
20 bps
Employment
(750.2m - 3Q07)
29.2m
20m
KEY POINTS
•
•
•
•
•
•
Each of the three pillars of the Austin
economy — high tech, government and
tourism—thrived in 2007, producing some of
the strongest job and output growth in the
country. Austin created nearly 30,000 (4.1%)
payroll jobs last year, representing the
largest employment gain since 2000.
RED expect the rate of 2008 job growth to
moderate, falling within an 16,000 to
23,000-job range, with mid-point of 20,000.
Apartment absorption trends surged in 3Q07,
reaching a 3-year high 2,031 units. Metro
occupancy increased 40 bps over 2Q07,
reaching a six-year high 93.0%.
Effective rent levels surged, particularly in
submarkets west and northwest of
Downtown, where sequential gains exceeded
3%.
Overall, sequential effective rents
increased $11 (1.5%) to $742. Over-theyear, effective rents increased $38 (5.4%),
the largest 12-month advance in six years.
Investors grew cautious in 2H07 and sales
slowed. Cap rates were mostly near 6%,
although two properties in western Travis
Co. exchanged hands at 5% or lower yields.
RED maintain an “Opportunistic” rating.
VACANCY TRENDS
•
Austin’s rejuvenated economy and tightening single-family housing
market fueled a demand surge in 3Q07. Tenants absorbed a three-year
high 2,031 units in the period, sending vacancy down 40 bps to a sixyear low 7.0%. Vacancy was 10 bps lower year-over-year.
Tenant interest near Downtown and the Lake Travis area was
especially strong. Vacancy in the Near North Central submarket fell
120 bps and effective rent rose 2.0% in 3Q07. In spite of a 380 bps
increase in inventory, Central occupancy increased only 90 bps. ON
the West Side, vacancy in the Ranch Road 620N submarket plummeted
160 bps and rents increased 2.8%. Occupancy also increased 100 bps
or more in the San Marcos, Round Rock and Southeast submarkets.
Source: Reis, Inc.
14%
Metro Vacancy Rate
•
12%
10%
7.1% 7.0%
8%
6%
4%
AUSTIN
U.S.A.
2%
0%
1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q
RANK: 39th in the RED 50
COMMENT: Reis expect vacancy rates to rise to 8.2% by 2009, as rising
supply levels are met by tepid tenant demand. RED are more optimistic.
00 00 01 02 03 03 04 05 06 06 07
RENT TRENDS
•
•
Effective rent increased $11 (1.5%) in the third quarter, down
moderately from a $13 (1.8%) advance recorded in 2Q07. In spite of
the slowdown, over-the-year rent trends accelerated from the 5.3%
metric registered in 2Q07 to 5.4%. The 3Q07 level represented the
fastest pace of year-over-year rent growth observed since 2Q01.
Rents in Ranch Road 620N submarket increased by $30 or 2.8% in
3Q07, the largest sequential advance recorded in that volatile area.
Rents in the adjacent Far Northwest submarket were stronger still,
rising $27 (3.2%). Neither submarket benefited from new supply.
Source: Reis, Inc.
15.0%
Asking
Effective
10.0%
YoY Rent Trend
•
Metro Rent Trends
5.4%
5.0%
4.2%
0.0%
-5.0%
Reis expect rent growth to slow to 3.6% in 2008 and 3.1% in 2009.
-10.0%
RANK: 10th in the RED 50
1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q
COMMENT: RED CAPITAL Research expect Austin to deliver effective rent
growth exceeding 4.0% in 2008.
00 00 01 02 03 03 04 05 06 06 07
•
•
•
RED observed 15 broker-assisted property exchanges valued at $5mm
or more in the second half of 2007 for gross proceeds of $271mm.
This compares to 23 transactions for total proceeds of $601 mm
recorded in 1H07. Notably, Loopnet reported no large trades recorded
in December, perhaps a result of the developing credit constraints.
Acquisitions of 1990s vintage, class-A properties that we reviewed
were priced to yield 5.7% to 6.0%. Investors were willing to pay a
premium for class-A assets located west of center city. For example,
properties in the Ranch Road 620N and Far Northwest submarkets
were priced to yield 5% or less.
The median price of unit sold in 2H07 was $75,195.
Source: Reis, Inc.
7.5%
Cap Rate
•
7.0%
6.5%
6.0%
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
Real Capital Analytics report total Austin sales of $797mm in 2007.
The average price per unit and average cap rate were $79,535 and
6.0%, respectively.
05 05 06 06 06 06 07 07 07
Property Name
Steeplechase Downs (Rnd Rock)
Meadow Ridge (Round Rock)
Lakeline Villas (Hwy 183 / CP)
Sonterra PH III (Ranch Road)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
A
A
A
Nov-2007
Nov-2007
Nov-2007
Oct-2007
$24.8
$16.6
$20.0
$33.3
$76,389
$71,659
$64,580
$110,833
5.7%
5.7%
6.0%
4.7%
$240
AUSTIN
•
U.S.
Prices (000)
$220
$200
$180
•
$160
$140
$120
$100
03 04 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
Y
•
Y 05 05 06 06 06 06 07 07 07
Austin-Round Rock population increased by 58,859 people in the 12
months ended July 1, 2006, a record high. The growth surge was
supported by net domestic in-migration exceeding 30,000 persons,
most likely the highest figure observed since the mid-1980s. By way
of percentage growth, Austin population increased by 4.0%, the fastest
rate reported since the 2001 apogee of the dot.com boom.
Prices for existing single-family homes increased at one of the fastest
rates observed among the top 50 U.S. metro areas. According to the
NAR, the median price of an Austin home advanced 7.2% year-overyear in the third quarter to $188,200. Only Salt Lake City, San
Francisco and San Jose reported demonstrably stronger trends.
The Office of Federal Housing Enterprise Oversight reported a 9.67%
average price gain for the 12 months ended in September, ranking 7th
among the 287 largest U.S. metros. Prices increased 1.21% in 3Q07.
EMPLOYMENT TRENDS
Past 12 Months
Annual Chg (000)
40
•
28.8
30
20
20
•
10
0
-10
•
-20
99 00 01 02 03 04 05 06 07 08f
AUSTIN
USA
•
Rate
4%
2%
0%
•
-2%
-4%
99
00
01
02
03
04
05
06
Employment in the skilled business services also surged. Professional
and technical services companies hired 1,200 employees (5.6%). Net
employment at holding companies, a figure closely associated with
venture capital activity, was up 2,000 (3.9%) jobs.
Booming tourism helped boost accommodation and food service
headcounts by 3,300 workers, representing a 5.0% advance.
Third Quarter 2007
Source: BLS
6%
A new round of investments in semiconductor production and R&D
capacity was the principal catalyst. Total manufacturing employment
increased by 1,800 (3.6%) workers during the period; about one-half
of that number was directly employed in the semiconductor segment.
•
8%
A high tech revival helped power the strongest payroll job growth
observed sine 2000. Austin MSA establishments created an average
of 29,800 jobs (4.2%) during the twelve months ended in November,
up from 27,800 jobs in calendar 2006.
07
Hiring showed no sign of deceleration in 3Q07, bucking the flagging
national average. Establishments expanded at a 29,200 (4.0%) job
over-the-year rate, immaterially slower than the 31,800-job, 4.5%
first-half average. Any slowing observed in 3Q was attributable to
the construction sector. Builder optimism plummeted, as indicated by
a 31% decline in single-family permit issue year-to-date, causing
payroll growth in the sector to fall. Austin may see net construction
cuts in 2008, after homes currently under construction are delivered.
Over-the-year growth slipped to 3.0% in November, the weakest annual comparison since September 2004. Unemployment increased 20
bps in November to 3.5%
Forecast
•
RED Estimated Generic Unlevered Asset Total Return Probabilites
15%
10%
5%
RED forecast job growth totaling 20,000 (2.7%) in 2008.
Austin
3.7%
10.2%
Dallas
4.9%
6.2%
7.6%
7.8%
14.1%
11.6%
9.3%
0.8%
0%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Submarket
3Q06
Effective Rent
3Q07
Physical Vacancy
Change
3Q06
3Q07
Change
Far South Austin
$759
$801
5.6%
6.0%
5.8%
-20 bps
Near South Central Austin
$792
$829
4.7%
7.3%
6.5%
-80 bps
Southeast Austin
$629
$648
3.0%
6.8%
7.1%
30 bps
Central Austin
$815
$854
4.7%
5.9%
6.7%
80 bps
East Austin
$568
$598
5.2%
7.1%
6.9%
-20 bps
Near North Central Austin
$568
$620
9.0%
7.4%
4.7%
-270 bps
Far North Central Austin
$537
$567
5.6%
9.4%
7.7%
-170 bps
North Travis
$698
$723
3.6%
5.9%
6.5%
60 bps
Near Northwest
$759
$809
6.6%
7.3%
7.4%
10 bps
Far Northwest
$783
$830
6.0%
6.0%
7.0%
100 bps
Hwy 183/Cedar Park
$677
$702
3.7%
7.5%
9.4%
190 bps
$675
$738
9.4%
9.6%
7.3%
-230 bps
San Marcos
$658
$684
4.0%
9.5%
6.0%
-350 bps
$915
$982
7.4%
8.1%
8.2%
10 bps
Metro
$704
$742
5.4%
7.1%
7.0%
-10 bps
SUPPLY TRENDS
•
•
Source: Reis, Inc
Supply concerns are omnipresent in this metro. Land price inflation
notwithstanding, developers find Austin’s population growth and
youthful demographic characteristics hard to resist. Currently, Reis
forecast investor grade supply of approximately 5,500 units in 2008
and 3,500 units in 2009. This compares to about 4,300 units reported
to delivered in 2007.
6,000
Completions
Absorption
5,000
4,000
Units
•
Currently, 7,056 units are under construction in garden apartment
complexes and mid-rises, of which 5,669 have tentative 2008
completion dates. About one-half are located in the Central
submarket. Although demand for units Downtown is strong,
submarket vacancy is likely to rise under supply pressure.
3,000
2,000
1,000
0
Another 1,300 units located in the Central submarket are currently in
the planning phase.
02
03
04
05
06
07f 08f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
614-857-1416
William T. Hinga
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Chicago, IL_Fort Worth, TX
Fredericksburg, TX_Jupiter, FL_Linwood, NJ_Nashville, TN_Newport Beach,CA
Philadelphia, PA_Reston, VA_San Diego, CA_Syracuse, NY_Voorhees, NJ
Market Overview is a publication of RED CAPTIAL GROUP. If you are interested in other metro areas we cover or would like to
RED CAPITAL GROUP®
Market Overview
Austin,Texas
September 2007
EXECUTIVE SUMMARY
T
he Capital City boom continued, albeit with less vigor.
The pace of employment
growth fell from 32,800 (4.6%) in
1Q07 to 30,800 (4.3%) in 2Q07.
Among the RED 50, only Salt Lake
City (4.5%) experienced a faster rate
of expansion. Seasonally adjusted
employment data from the Federal
Reserve Bank of Dallas indicate that
employment growth cooled from
4,800 month-over-month in June to
1,800 in July. The loss of 600 construction and mining jobs was to
blame.
The slower year-over-year growth
metric in 2Q07 was attributable to
reduced hiring among construction,
finance, retail and business service
firms. The sectors combined to add
13,500 jobs in 1Q07 and 10,600 jobs
in 2Q07. Conversely, manufacturing,
wholesale trade and state government
payrolls expanded at a faster rate,
adding a net of 5,600 1Q07 jobs and
7,200 employees in 2Q07.
RED forecast job growth to decelerate in 2H07, bringing the annual metric down to 29,000 (4.0%). Our
econometric model generates a point
estimate of 20,000 (2.7%) jobs in
2008, with a confidence interval of
17,000 (2.3%) to 23,000 (3.1%) jobs.
By way of comparison, Economy.com
forecast job growth of 33,570 (4.6%)
in 2007 and 26,900 (3.5%) in 2008.
At 92.6%, the average occupancy rate
in Austin ranked 39th among the RED
50. Rapid absorption of 1,236 units
easily outpaced supply. This resulted
in a 20 basis point quarter-overquarter advance in occupancy.
Absent a significant surge in tenant
demand, supply pressures will cause
occupancy to fall in 2H07. Reis identify more than 3,100 units that are
slated for completion by year-end.
The service estimates that absorption
will fall nearly 1,200 units short, re-
SNAP SHOT
sulting in a 70 basis point decrease in
occupancy. Moderately stronger demand in 2008 is forecast to fall short
of development. Therefore, Reis expect occupancy to fall another 50 bps
to 91.4%.
Stout demand and light supply allowed owners to achieve some of the
largest rent gains in recent history.
The average effective rent reached
$731 in 2Q07, a 5.3% y-o-y advance.
Asking rents grew at a slower 4.4%
rate as concessions were reduced
from 10.8% of asking rent in 2Q06 to
10.0%. Reis expect effective rent
growth to decelerate dramatically in
2H07 due to significant supply
growth.
After posting sequential
gains of 1.1% in 1Q07 and 1.8% in
2Q07, the service forecasts sequential
growth averaging 0.35% in the third
and fourth quarters.
Real Capital Analytics estimate that
21 investor grade property trades occurred in the first five months of
2007, totaling $601.9 million in proceeds. The source report an average
price of $99,985 per unit and a 6.1%
average cap rate.
The largest 2Q07 transaction involved
the 352-unit Alexan City Lights, located in the Far South submarket.
The buyer paid $46 million or
$130,682 per unit for the 2006 vintage property. RED estimate a goingin yield of 4.6%.
The estimated generic metro asset 5year holding period total return of
7.9% ranks 6th highest among the
RED 50. High historic volatility,
however, yields the 6th lowest measure of risk-adjusted returns. Consequently, RED assign a rating of
“Opportunistic” to metro assets with
supply as the chief risk. Reis forecast
significantly slower development
from 2009 to 2011. Should this fail to
materialize, realized returns will fall
short of expectations.
Y-o-y
change
Projected
2007
(7.4% - 2Q07)
20bps
70bps
Effective
Rents
5.3%
3.7%
20bps
unch
30.8k
29k
Vacancy
($731 - 2Q07)
Cap Rate
(7.1% - 2Q07)
Employment
(748k - 2Q07)
KEY POINTS
•
The metro vacancy rate fell 20 basis points
from 7.6% in 1Q07 to 7.4% in 2Q07. The
metric was up 10 bps year-over-year.
•
and 5.3% year-over-year, respectively. Reis
forecast year-over-year effective rent growth
to decelerate to 3.7% in 2007 and 3.3% in
2008.
•
The for-sale segment of the housing market
remained healthy in 2Q07. According to
OFHEO, metro home prices increased 10.8%
year-over-year in 2Q07. The inventory of
homes for sale rose to 4.1 months in June but
remains below the mid-year 2005 level.
•
According to Real Capital Analytics sales
volume totaled $601.9 million from January
to May 2007. On an annualized basis this
represents a 34% increase from 2006. The
average per unit price, moreover, was up
45% to $99,985.
•
RED forecast job growth of 29,000 (4.0%)
in 2007 and 20,000 (2.7%) in 2008.
VACANCY TRENDS
•
•
Tenant demand rebounded in 2Q07, following a weak first quarter. As
a result, the metro vacancy rate fell 20 basis points to 7.4%. The
metric was up 10 basis points year-over-year.
According to O’Connor and Associates the metro occupancy rate rose
60 basis points from 92.4% in 2Q06 to 93.0% in 2Q07. Class B
occupancy was 94.1% in 2Q07, up from 93.0% in the comparable
period of last year.
Reis expect supply growth to total 3,122 units in 2H07, resulting in a
70 basis point increase in vacancy by year-end. The service anticipates
a 50 basis point increase in vacancy in 2008.
Source: Reis, Inc.
14%
Metro Vacancy Rate
•
12%
10%
7.3% 7.4%
8%
6%
4%
Austin
U.S.A.
2%
0%
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
2008 VACANCY RATE OUTLOOK: Increase to 8.6%
99 00 01 02 02 03 04 05 05 06 07
RENT TRENDS
•
•
Source: Reis, Inc.
The average effective rent increased 1.8% sequentially in 2Q07, the
largest sequential gain since 1Q01. Effective rents were up 5.3% yearover-year to $731. Asking rents advanced 1.6% quarter-over-quarter
and 4.4% year-over-year.
O’Connor and Associates report a 2.9% increase in average rent from
$0.93 per square foot in 2Q06 to $0.96. Class A rents were up 0.6%
year-over-year to $1.05 per square foot.
Reis expect effective rent growth to slow to 0.7% in 2H07 from $731 at
mid-year to $736 at year-end. The service anticipates 3.3% effective
rent growth in 2008.
15%
Asking
Effective
10%
YoY Rent Trend
•
Metro Rent Trends
5.3%
5%
4.4%
0%
-5%
-10%
th
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
RANK: 11 out of 50
2008 RENT GROWTH RATE OUTLOOK: Decreasing
99 00 01 02 02 03 04 05 05 06 07
•
•
Real Capital Analytics report 21 investor grade property trades in the
first five months of 2007, totaling $601.9 million in sales proceeds.
The average price was $99,985 per unit.
Loopnet identify 8 trades of properties priced at or above $5 million in
2Q07. Volume totaled $179 million and the average price was
$102,470.
RED estimate generic metro asset 5-year holding period total returns
of 7.9%, the 6th highest among the RED 50. Based on a review of
recent large transaction we estimate an indicative cap rate of 5.5%, 20
basis points rich to the Texas metro average.
Cap Rate
•
Source: Reis, Inc.
7.4%
7.3%
7.2%
7.1%
7.0%
6.9%
6.8%
6.7%
6.6%
6.5%
2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2008 CAP RATE OUTLOOK: Stable
05 05 05 06 06 06 06 07 07
Property Name
The Estate on Quarry Lake
Alexan City Lights
The Marquis at Iron Rock Range
Barton Lodge Apartments
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
A
A
A
April 2007
June 2007
May 2007
July 2007
$31.5
$46.0
$34.9
$42.0
$104,305
$130,682
$116,333
$70,000
5.9%
4.6%
5.2%
5.4%
$240
MSA
Prices (000)
$220
•
US
•
$200
$180
$160
$140
•
$120
$100
03
Y
04 4Q 1Q 2Q 3Q 4Q 1Q 2Q
Y
05
06
06 06
06 07
Past 12 Months
•
40
Annual Chg (000)
The metro registered a 10.8% year-over-year gain in the OFHEO home
price index, ranking 2nd among the RED 50. Metro appreciation
exceeded the RED 50 average for the fourth consecutive quarter.
EMPLOYMENT TRENDS
29
20
20
•
10
The pace of job growth remained robust in July as a net of 33,000
(4.6%) jobs were created year-over-year. By way of comparison,
gains totaled 22,400 (3.2%) in the comparable period last year.
The Dallas Fed report job growth fell to 1,800 month-over-month in
July, owing to a 600-job drop in construction and mining payrolls.
Second Quarter 2007
0
•
-10
-20
•
99 00 01 02 03 04 05 06 07f 08f
•
Source: BLS
8%
Austin
6%
Rate
The median price of a single-family MSA home increased 5.6% yearover-year to $186,600 in 2Q07. The median condo price grew at a
faster 14.9% rate, ranking 3rd among the 60 metros tracked by the
National Association of Realtors. Only Salt Lake City (25.2%) and
Reno (17.0%) experience greater appreciation in the condo sector.
2008 DEMOGRAPHIC OUTLOOK: Stable
07
30
Metro population increased 4.0% in 2006, up from the 3.1% mark in
2005. An increase in net domestic migration to 33,374 contributed to
the faster rate of growth.
USA
Employment growth moderated to 30,800 (4.3%) in 2Q07 from
32,800 (4.6%) in the previous quarter. Despite the slowdown, job
growth ranked 2nd highest among the RED 50.
Slower growth in the second quarter was partially attributable to reduced hiring among business service firms. The super-sector added
3,800 employees in 1Q07 and only 2,000 in 2Q07.
Manufacturers and related wholesale trade service providers accelerated hiring efforts in recent months. Employment in the manufacturing industry increased 2,000 year-over-year in 2Q07, up from a
monthly average of 1,300 jobs in 2006. Wholesale traders added 700
positions in 2006 and 2,100 in 2Q07.
4%
Forecast
2%
•
0%
-2%
-4%
99
15%
10%
5%
00
01
02
03
04
05
06
RED expect slower job growth in the final months of 2007 to bring
the annual average down to 29,000 (4.0%). In 2008, we anticipate
job growth to range from 17,000 (2.3%) to 23,000 (3.1%), with a
point estimate of 20,000 (2.7%)
RANK: 2nd out of 50
07
2008 EMPLOYMENT GROWTH RATE OUTLOOK: Decreased
Austin
3.7%
Dallas
6.2%
4.9%
7.6%
7.8%
10.2%
9.3%
14.1%
11.6%
0.8%
0%
90%
70%
50%
30%
10%
RED CAPTIAL Research
SUBMARKET TRENDS
Effective Rent
Submarket
Far South
Near South Central
Southeast
Central
East
Near North Central
Far North Central
North Travis
Near Northwest
Far Northwest
Physical Vacancy
2Q06
2Q07
Change
2Q06
2Q07
$750
$779
$614
$792
$576
$575
$527
$686
$743
$770
$684
$679
$793
$814
$643
$850
$585
$613
$561
$721
$784
$819
$697
$730
5.7%
4.4%
4.7%
7.4%
1.6%
6.7%
6.4%
5.2%
5.5%
6.3%
1.8%
7.5%
5.8%
8.0%
7.3%
5.4%
8.0%
7.1%
10.2%
6.5%
7.9%
6.2%
6.7%
10.1%
6.6%
6.8%
8.1%
5.8%
5.3%
5.9%
8.5%
5.9%
7.4%
7.8%
9.5%
8.4%
80 bps
-120 bps
80 bps
40 bps
-270 bps
-120 bps
-170 bps
-60 bps
-50 bps
160 bps
280 bps
-170 bps
San Marcos
$650
$673
3.5%
8.8%
7.5%
-130 bps
$895
$947
5.8%
8.6%
9.8%
120 bps
Metro
$694
$731
5.3%
7.3%
7.4%
10 bps
SUPPLY TRENDS
•
•
Source: Reis, Inc
Developers delivered 968 units in 2Q07 bringing the 1H07 total to
1,997 units. Reis expect faster 2H07 supply growth to total 3,122
units. This compares to an annual average of 1,802 units from 20042006. Construction is forecast to remain active in 2008 as 4,865 units
are completed.
Reis report more than 2,000 units under-construction in the Central
submarket and another 2,144 units in the planned / proposed stage.
6,000
Completions
Absorption
5,000
4,000
Units
•
Change
3,000
2,000
Multifamily permit issuance, measured on a trailing 12-month basis
was down 18% in June.
1,000
2008 SUPPLY TREND OUTLOOK: Increasing
Completions are forecast to total 5,119 units in 2007 and 4,865 units in 2008.
Reis expect supply to decrease to an average annual of 2,056 units from 2009 to
2011.
0
02
03
04
05
06
07f
08f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
614-857-1416
William T. Hinga
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Chicago, IL_Fort Worth, TX
Fredericksburg, TX_Jupiter, FL_Linwood, NJ_Nashville, TN_Newport Beach,CA
Philadelphia, PA_Reston, VA_San Diego, CA_Syracuse, NY_Voorhees, NJ
RED CAPITAL GROUP®
Market Overview
Austin,Texas
May 2007
EXECUTIVE SUMMARY
A
ustin is reasserting itself as
an economic dynamo and
job creating machine. Employment growth accelerated from
24,800 (3.7%) in 2005 to 27,800
(4.0%) last year, ranking 6th among
the top 50 metro areas tracked by
RED CAPITAL (RED 50).
Job growth accelerated to 32,800
(4.6%) year-over-year in 1Q07, ranking as the 2nd highest rate of growth
among the RED 50. On a sector-bysector basis, government and leisure
service hiring contributed the most to
job creation. State and local government payrolls increased 2,000 and
3,500 y-o-y, with federal agencies
adding 800 jobs. In addition, expectations for increased tourism lead leisure service providers to add 4,300
positions to payrolls.
The foregoing gains were partially
offset by slower hiring among business service providers. Sector growth
slowed to 3,800 employees, down
from 4,700 in 4Q06 and an average of
4,600 in 2006. Retailers also scaled
back hiring efforts, increasing headcounts by only 2,800.
RED forecast moderately cooler job
growth through 2008. Our econometric model generates a point estimate
of 30,000 (4.2%) jobs in 2007, with a
confidence interval of 28,000 (3.9%)
to 31,000 (4.3%). RED expect 2008
growth to range from 25,000 (3.3%)
to 30,000 (4.0%), with a point estimate of 28,000 (3.7%).
The 1Q07 metro occupancy rate decreased 40 basis points sequentially to
92.4%, ranking 39th among the RED
50. The decrease was attributable to
weak absorption (478 units), increased supply (1,029 units) and the
reversion of 128 condo units back to
the competitive rental stock. The
occupancy rate was up 50 basis points
y-o-y, attributable to strong tenant
demand last summer.
Reis anticipate tenant demand will
fail to keep pace with the robust development pipeline. As a result, occupancy is forecast to fall 50 bps to
91.9% in 2007. Reis expect further
deterioration in 2008, forecasting a 20
bps decrease in occupancy to 91.7%.
Effective rents increased 4.1% y-o-y,
from $690 to $718 in 1Q07. Asking
rents grew at a moderately slower rate
of 3.2% to $799. The value of the
average concession package fell to
10.1% of asking rent from 10.9% in
1Q06. Reis forecast year-over-year
effective rent growth of 3.2% in 2007
and 2.9% in 2008.
Market conditions in the Central submarket improved in 1Q07. Owners
managed to achieve effective rent
growth of 7.2% year-over-year, bringing the average rent to $827. The
occupancy rate increased 20 bps y-o-y
to 94.5%.
SNAP SHOT
Y-o-y
change
Vacancy
(% - 1Q07)
Effective
Rents
50bps
Projected
2007
50bps
4.1%
3.2%
20bps
unch
32.8k
30k
($718 - 1Q07)
Cap Rate
(7.1% - 1Q07)
Employment
(736.6k - 1Q07)
KEY POINTS
•
The average vacancy rate increased 40 basis
points to 7.6% in 1Q07 as supply outpaced
demand. The metric was down 50 basis
points year-over-year.
•
and 4.1% year-over-year, respectively. Reis
expect year-over-year effective rent growth
of 3.2% in 2007 and 2.9% in 2008.
Loopnet identified eight investor
grade trades in 1Q07, selling for a
total of $226.7 million. The average
price was $95,554 per unit and cap
rates typically ranged from 5.5% to
6.5%.
•
Reis identify five property trades in 1Q07,
totaling $205 million in proceeds. The
average price was $102,466 and the average
cap rate was 6.4%. The source calculate an
average price of $85,463 per unit, in the
twelve months ended in March.
We estimate probable returns on generic metro assets of 7.3%, ranking
29th among the RED 50. In addition,
above average historic volatility gives
rise to the 5th lowest measure of riskadjusted returns. As a result, RED
assign an “Opportunistic” ranking for
metro assets. Economic and demographic characteristics make investment attractive but supply concerns
limit total return potential.
•
RED forecast job growth of 30,000 (4.2%)
in 2007 and 28,000 (3.7%) in 2008. By way
of comparison, Economy.com predict job
growth of 4.3% in 2007 and 3.7% in 2008.
According to Real Capital Analytics,
58 investor grade properties traded in
the twelve months ended in March,
totaling $1,382.2 million in sales proceeds.
The average price was
$73,189 per unit and the average cap
rate was 6.2%.
Austin, Texas MSA - 1Q 2007
VACANCY TRENDS
•
•
The vacancy rate in Austin increased 40 basis points to 7.6% in 1Q07.
The increase is attributable to increased supply, condo reversion and
weak demand. Apartment inventories increased by 1,157 units overthe-quarter, due to 1,029 unit completions and net reversions of 128
units. Only 478 units were absorbed.
Vacancy is 50 bps below the 1Q06 level, largely due to strong leasing
activity in the spring and summer months of 2006. Between April and
September, absorption outpaced supply 2,981 units to 1,706 units.
Source: Reis, Inc.
14%
Metro Vacancy Rate
•
12%
10%
8.1%
8%
6%
4%
Austin
U.S.A.
2%
Reis expect significant supply gains through the end of 2007, forcing
the vacancy rate up 50 basis points to 8.1%. In 2008, the service
forecast another 20 basis point increase in vacancy to 8.3%.
0%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
2008 VACANCY RATE OUTLOOK: Increasing
00
01 01
RENT TRENDS
•
•
•
05
06 07
Asking rents increased 3.2% over-the-year to $799. The value of the
average concession package fell from 10.9% in 1Q06 to 10.1%,
approximately 1.2 months free-rent on a twelve-month lease.
Reis expect effective rent growth to decelerate in 2007 and 2008. The
service forecasts year-over-year growth of 3.2% in 2007 and 2.9% in
2008. The latter ranks 35th among the RED 50.
Asking
Effective
10%
4.1%
5%
3.2%
0%
-5%
-10%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
00 01
02 03
04 04
05
06 07
Source: Reis, Inc.
The 1Q07 Reis indexed average cap rate was unchanged sequentially
at 7.1%, but up 20 basis points year-over-year.
7.8%
According to Real Capital Analytics, transaction velocity increased
from 50 in 2006 to 58 in the twelve months ended in March. Volume
totaled $1,382.2 million, up from $1,075 million in 2006. Prices
averaged $73,189 per unit and the average cap rate was 6.2%.
7.4%
Loopnet identified eight property trades with assets priced at $10
million or more in 1Q07. Proceeds totaled $226.7 million and prices
average $95,554 per unit.
01
7.6%
Cap Rate
•
04
15%
RANK: 23 out of 50
2008 RENT GROWTH RATE OUTLOOK: Decreasing
•
03 04
Source: Reis, Inc.
For the first time since 3Q01, year-over-year effective rent growth
exceeded 4.0%. The average effective rent was $718 in 1Q07, up 1.1%
quarter-over-quarter and 4.1% from 1Q06. The metric remains $69
below the series high of $787, recorded in 2Q01.
rd
•
02
Metro Rent Trends
YoY Rent Trend
•
7.6%
7.2%
7.0%
6.8%
6.6%
6.4%
RED estimate generic metro asset 10-year holding period total returns
of 7.3%, below the national average.
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
05 05 05 05 06 06 06 06 07
Property Name
Monterone Round Rock
Monterone Steiner Ranch
Monterone Canyon Creek
McNeil House
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
A
A
A
January 2007
January 2007
January 2007
February 2007
$69.9
$60.2
$39.8
$19.8
$119,972
$119,972
$119,972
$103,665
6.2%
6.2%
5.9%
5.3%
$240
MSA
•
US
Prices (000)
$220
•
$200
$180
$160
•
$140
$120
$100
03
Y
04 3Q 4Q 1Q 2Q 3Q 4Q 1Q
Y
05
05
06 06
06 06
07
Past 12 Months
•
40
Annual Chg (000)
faster 14.4% rate, ranking 3rd among the 60 metros tracked by the
National Association of Realtors. Only Salt Lake City (25.6%) and
Albuquerque (17.9%) experience greater appreciation in the condo
sector.
EMPLOYMENT TRENDS
30 28
20
•
10
0
Payroll employment in Austin increased by 27,800 (4.0%) in 2006,
the metro’s best performance since the end of the tech boom. Job
growth was 24,800 (3.7%) in 2005.
Contract construction payrolls increased 2,400 (10.6%) in 2006, up
from 900 (4.1%) in 2005. Likewise, leisure and hospitality establishments added 4,300 (6.2%) positions in 2006, compared to 2,600
(3.9%) in the prior year.
-10
First Quarter 2007
-20
•
99 00 01 02 03 04 05 06 07f 08f
•
Source: BLS
8%
6%
Austin
•
USA
4%
Rate
The rate of homeownership was 67.9% in 2006, up 150 basis points
from 2005. By way of comparison, the national rate was down 10
basis points to 68.8%.
2008 DEMOGRAPHIC OUTLOOK: Stable
30
Job creation accelerated in the first quarter as net hiring totaled
32,800 (4.6%) year-over-year.
Faster hiring among merchant wholesalers contributed to the acceleration. The sector added 1,300 more jobs in 1Q07 (2,000) than in 2006
(700). The reason for higher headcounts among wholesalers can be
traced to increased production among durable goods manufacturer’s,
especially among semiconductor and other electronic goods producers. The industry added 900 employees in 2006 and 1,300 in 1Q07.
State and local government payrolls expanded in 1Q07, adding a
combined 5,500 jobs. By way of comparison, the sector added only
2,800 employees in 2006.
2%
Forecast
0%
•
-2%
-4%
99
00
01
02
03
04
05
06
RED forecast payroll growth of 30,000 (4.2%) in 2007, with a confidence interval of 28,000 (3.9%) and 31,000 (4.3%). RED expect
2008 job growth between 25,000 (3.3%) and 30,000 (4.0%), with a
point estimate of 28,000 (3.7%).
07
RANK: 2nd out of 50
2008 EMPLOYMENT GROWTH RATE OUTLOOK: Stable
15%
10%
5%
0%
Austin
4.4%
0.0%
Houston
4.3%
6.8%
7.1%
8.4%
9.7%
9.9%
13.2%
12.1%
-5%
90%
70%
50%
30%
10%
SUBMARKET TRENDS
Submarket
Far South
Near South Central
Southeast
Central
East
Near North Central
Far North Central
North Travis
Near Northwest
Far Northwest
Effective Rent
Physical Vacancy
1Q06
1Q07
Change
1Q06
1Q07
$746
$787
$617
$771
$562
$564
$528
$691
$742
$774
$669
$676
$781
$818
$624
$827
$578
$593
$547
$700
$772
$801
$686
$712
4.7%
3.9%
1.2%
7.2%
2.8%
5.2%
3.5%
1.4%
4.0%
3.5%
2.5%
5.4%
6.4%
8.7%
8.2%
5.7%
9.0%
8.1%
11.3%
7.1%
8.3%
7.6%
7.4%
10.9%
7.1%
7.4%
7.1%
5.5%
6.2%
5.6%
9.4%
6.1%
7.5%
8.4%
8.2%
9.8%
70 bps
-130 bps
-110 bps
-20 bps
-280 bps
-250 bps
-190 bps
-100 bps
-80 bps
80 bps
80 bps
-110 bps
San Marcos
$645
$670
3.8%
9.7%
8.4%
-130 bps
$879
$926
5.3%
9.2%
11.5%
230 bps
Metro
$690
$718
4.1%
8.1%
7.6%
-50 bps
SUPPLY TRENDS
•
•
Source: Reis, Inc
Supply totaled 2,533 units in 2006, up from 1,389 units in the prior
year. In 1Q07, 1,029 units were completed, the largest single quarter
tally since 3Q03. Reis expect 4,330 more unit deliveries by year-end.
O’Connor and Associates count 23 properties containing 5,807 units
under construction in Austin. Seven of the properties, accounting for
1,283 units, are considered “affordable”. The source expects delivery
totals to reach 3,500 in 2007.
6,000
Completions
Absorption
5,000
4,000
Units
•
Change
3,000
2,000
According to Apartment Realty Advisors, there were 6,672 units under
construction as of April and an additional 5,953 units in the pipeline.
The North / Northwest portion of the metro has the most robust
pipeline, accounting for 3,279 of the units under construction and 2,879
of the units in the planned / proposed stage.
1,000
0
02
2008 SUPPLY TREND OUTLOOK: Increasing
03
04
05
06
07f
08f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
614-857-1416
William T. Hinga
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Fort Worth, TX
Fredericksburg, TX_Jupiter, FL_Nashville, TN_Newport Beach,CA
Philadelphia, PA_Reston, VA_San Diego, CA
RED CAPITAL GROUP®
Market Overview
Austin,Texas
February 2007
EXECUTIVE SUMMARY
A
ustin job growth totaled
21,800 (3.2%) in 2006,
down from 25,900 (3.9%) in
2005. The slower rate of job growth
in 2006 is largely attributable to reduced hiring in wholesale and retail
trade and business services. The sectors combined to create 10,400 jobs in
2005, but produced only 6,000 in
2006. Payroll growth also was hampered by the loss of 1,000 computer
manufacturing and telecommunications jobs.
Despite slower job growth in 2006,
unemployment continued to recede.
In spite of labor force growth of
3.1%, metro unemployment fell to
4.0%, the lowest annual rate since
2000.
Payroll growth is likely to decelerate
further in 2007. RED forecast job
creation between 15,000 (2.1%) and
23,000 (3.2%) with a point estimate
of 19,000 (2.7%). Looking to 2008,
RED expect steady job growth of
about 20,000 (2.7%) with a confidence interval of 15,000 (2.0%) and
24,000 (3.3%).
At 92.8%, the occupancy rate ranked
13th lowest among the 50 metro areas
tracked by RED CAPITAL (RED 50)
in 4Q06. The occupancy rate increased 40 basis points year-over-year
owing to robust tenant demand of
2,860 units. By the same token,
apartment development activity was
moderate as only 2,533 (1.9%) units
were completed in 2006 down sharply
from a 4,282-unit average in the previous five-year period.
Reis anticipate even stronger absorption in 2007 totaling 3,020 units. On
the other hand, development activity
is expected to spike as 4,083 units are
delivered. As a result, the service
anticipate metro occupancy to fall 60
basis points to 92.2% by YE2007.
Reis expect further deterioration in
2008. Occupancy is forecast to de-
cline to 92.0% by YE2008.
Asking rent growth slowed to 2.9%
year-over-year in 4Q06, down from
the cyclical peak of 3.3% recorded in
the previous period. Effective rent
growth remained firm, posting a 3.7%
gain for the second consecutive quarter. The average concession package
consumed 10.3% of asking rent or
$81 per month in 4Q06, fourth highest among the RED 50.
Reis anticipate year-over-year effective rent growth of 3.2% in 2007 and
3.0% in 2008, bringing the average
effective rent to $754. The service
expect asking rent to increase at a
moderately slower pace, lowering the
value of the average concession package to 10.0% of asking rent.
At 7.1%, the fourth quarter Reis cap
rate index is slightly below the Southwest region average of 7.3%. Lower
investment yields did little to deter
investor interest. Loopnet identify 34
trades of properties valued at $10mm
or more in 2006. Of these, seven
were recorded in the fourth quarter
totaling $203mm.
Real Capital Analytics reported an
average cap rate of 5.7% in 1H06,
down 50 basis points from the 2H05
rate. The source attributed the decline
in cap rates to fierce buyer competition for the few metro assets that were
available.
The total return profile for metro assets is below average and the risk
adjusted return are even less promising, owing to high historic revenue
volatility. RED assign a rating of
“Opportunistic” to metro assets. This
indicates that total returns are too low
to warrant an active buying program
but should prices moderate, investment returns would attract buyers
who anticipate revenue up-side in the
Austin market.
SNAP SHOT
Y-o-y
change
Vacancy
(7.2% - 4Q06)
Effective
Rents
40bps
Projected
2007
20bps
3.7%
3.0%
30bps
unch
19.7k
19k
($709 - 4Q06)
Cap Rate
(7.1% - 4Q06)
Employment
(726.1k - 4Q06)
KEY POINTS
•
•
•
•
Vacancy fell 40 basis points year-over-year
to 7.2% in 4Q06. Reis expect vacancy to
rise to 7.8% in 2007.
and 3.7% year-over-year, respectively. The
increases marked the fifth consecutive
quarter of positive asking rent movement and
the seventh consecutive quarter for increases
in effective rents.
The fourth quarter Reis cap rate index was
7.1%, up 30 basis points over the
comparable period of 2005. The NCREIF
average cap rate was 5.3% in 3Q06.
RED forecast payroll job growth of 19,000
(2.7%) in 2007 and 20,000 (2.7%) in 2008.
VACANCY TRENDS
•
•
Vacancy fell 40 basis points year-over-year as demand outpaced
supply by a count of 2,860 to 2,533. Condo conversions played a
relatively minor role, removing only 115 apartment units from
inventory in 2006.
The metro vacancy rate increased 10 basis points in 4Q06 due to
sluggish net absorption of 426 units and 647 unit deliveries. Weaker
demand in the fourth quarter is not abnormal in Austin as absorptions
totaled 147 in 4Q03 and 428 in 4Q04.
Source: Reis, Inc.
14%
Metro Vacancy Rate
•
12%
10%
7.6%
8%
6%
4%
Austin
U.S.A.
2%
Reis expect an active leasing period (3,020 units) in 2007.
Nevertheless, demand will fall shy of development (4,083) causing
vacancy to increase 60 bps to 7.8%.
0%
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
2008 VACANCY RATE OUTLOOK: Increasing to 8.0%
00
01
RENT TRENDS
•
•
•
Asking rents were moderately cooler in 4Q06 increasing 2.9% yearover-year after posting a 3.3% gain in the third quarter.
The value of the average concession package was 10.3% of asking rent
or $81 per month in 4Q06. The metric is down $3 from the
comparable period of 2005.
Reis expect year-over-year effective rent growth of 3.2% in 2007 and
3.0% in 2008, lifting the average effective rent in Austin to $754 per
month, still $33 below the previous peak of $787 recorded in 3Q01.
10%
04
05
06
Asking
Effective
5%
06
3.7%
2.9%
0%
-5%
-10%
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
00
The supply of assets for sale remains tight. A review of current listings
uncovered one Class A asset for sale priced at $181,818 per unit at a
proforma cap rate of 5.4% (4.1% based on historic NOI).
02
03
03
04
05
06
06
Source: Reis, Inc.
7.8%
The Reis average cap rate index increased 10 basis points in the fourth
quarter to 7.1%. The metric is up 30 basis points over the comparable
period of 2005.
According to the NCREIF metro cap rate index, Austin yields fell 30
basis points in 3Q06 to 5.3%. The yield was down 10 basis points
year-over-year.
01
7.6%
7.4%
Cap Rate
•
03
15%
•
03
Source: Reis, Inc.
Year-over-year effective rent growth reached 3.7% for the second
consecutive quarter, the largest gains since 3Q01.
2008 RENT GROWTH RATE OUTLOOK: Decreasing to 3.0%
•
02
Metro Rent Trends
YoY Rent Trend
•
7.2%
7.2%
7.0%
6.8%
6.6%
6.4%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
At 7.1%, the Reis cap rate index for Austin is below the Southwest regional
average.
05
05
05
05
06
06
06
06
Property Name
Sterling University West Campus
1007 South Congress
Alexan Cityview
McNeil House
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A / Student Housing
A
B+
A
December 2006
Listing
Listing
Listing
$27.4
$46.0
$27.5
$19.6
$360,719
$181,818
$89,286
$102,083
5.0%
5.4%
6.4%
N/A
$240
MSA
Prices (000)
$220
•
US
•
$200
$180
•
$160
$140
$120
•
$100
03
04
Y
Y
2Q 3Q 4Q 1Q 2Q 3Q
05
05
05
06
06
06
Annual Chg (000)
The rate of homeownership was 63.9% in 2005, up 920 basis points
since 2000.
faster 8.8% rate.
According to the Real Estate Center at Texas A&M, the metro median
home price increased 4.9% year-over-year in December to $176,300.
2008 DEMOGRAPHIC OUTLOOK: Increasing
Austin remains an attractive relocation destination, thanks to strong job trends.
Past 12 Months
•
40
30
19 20
20
EMPLOYMENT TRENDS
•
10
0
•
-10
Payroll job growth totaled 21,800 (3.2%) in 2006, down from 25,900
(3.9%) in 2005.
The decline of job creation in 2006 is attributable to slower hiring in
wholesale and retail trade and the professional service sector. The
sectors combined to produce 10,400 jobs in 2005 and 6,000 jobs in
2006.
Job losses in the computer manufacturing and telecommunications
sectors also contributed to slower payroll growth.
Fourth Quarter 2006
-20
99 00 01 02 03 04 05 06 07f 08f
Source: BLS
8%
Austin
•
•
USA
Year-over-year job growth averaged 19,700 (2.8%) in 4Q06 the seventh fastest rate among the RED 50. The metric was up slightly from
the 19,300 job pace observed in 3Q06.
The moderately stronger fourth quarter indicated improving trends in
multiple sectors including construction, wholesale trade and financial
activities.
Forecast
6%
•
4%
Rate
2%
•
0%
RED expect 2007 payroll growth between 15,000 (2.1%) and 23,000
(3.2%) with a point estimate of 19,000 (2.7%).
In 2008, RED forecast job growth between 15,000 (2.0%) and 24,000
(3.3%).
-2%
RANK: 7th out of 50
-4%
99
00
01
02
03
04
05
06
2008 EMPLOYMENT GROWTH RATE OUTLOOK: Stable
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
Far South
Near South Central
Southeast
Central
East
Near North Central
Far North Central
North Travis
Near Northwest
Far Northwest
4Q05
4Q06
Change
4Q05
4Q06
$738
$771
$612
$766
$559
$566
$520
$676
$745
$760
$684
$664
$765
$803
$620
$821
$579
$593
$541
$699
$764
$799
$682
$702
3.7%
4.2%
1.3%
7.2%
3.6%
4.8%
4.0%
3.4%
2.6%
5.1%
-0.3%
5.7%
6.1%
8.2%
7.6%
5.8%
8.3%
8.5%
10.1%
6.6%
9.5%
6.7%
6.6%
10.2%
6.5%
6.8%
7.0%
5.2%
6.5%
5.2%
8.9%
6.2%
8.0%
6.4%
7.9%
10.1%
40 bps
-140 bps
-60 bps
-60 bps
-180 bps
-330 bps
-120 bps
-40 bps
-150 bps
-30 bps
130 bps
-10 bps
San Marcos
$627
$660
5.3%
8.9%
9.4%
50 bps
$889
$922
3.7%
8.0%
8.8%
80 bps
Metro
$684
$709
3.7%
7.6%
7.2%
-40 bps
SUPPLY TRENDS
•
•
Source: Reis, Inc
Supply totaled 2,533 units in 2006, a 1.9% increase in apartment
inventories. Net conversions totaled 115 units in 2006, having little
impact on metro inventory.
Reis project the delivery of 4,083 units in 2007 with an additional
2,539 units slated for completion in 2008. The service forecast the
delivery of 2,149 units in the Central submarket, 1,116 units in the Far
South submarket, 696 units in the Cedar Park submarket and 629 units
in the Ranch Road submarket.
6,000
Completions
Absorption
5,000
4,000
Units
•
Change
3,000
2,000
Reis identify one affordable property in the planning stage that will
offer 200 units in the San Marcos submarket.
1,000
0
2008 SUPPLY TREND OUTLOOK: Stable
Supply will peak in 2007 at 4,083 and fall to an average of 2,212 through 2011.
02
03
04
05
06
07f
08f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
614-857-1416
William T. Hinga
614-857-1499
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Fort Worth, TX
Fredericksburg, TX_Jupiter, FL_Nashville, TN_Newport Beach,CA
Philadelphia, PA_Reston, VA_San Diego, CA

Austin Reports - RED Capital Group

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