Top 5 Reasons to Invest in Austin's Multifamily Market
The multifamily market has been on fire for the past few years, but the Lone Star State’s capital shows few signs of stopping. Here are five considerations for investing in the Austin multifamily market.
As one of the fastest-growing multifamily markets, Austin is in a unique position. Rents and costs of living have skyrocketed, yet the city remains a magnet for relocation. This is especially true for companies and individuals leaving higher-cost cities in California. This is due to many factors, including Texas’s lower tax rates and Austin’s vibrant atmosphere.
This has, of course, led to a wave of multifamily development and investment over the past few years. Now, cap rates have begun to compress. CBRE’s latest cap rate survey shows that yields fell to an average of 3.0% at the market level. That’s on par with Boston and well below other major cities including New York City, Washington, D.C., and even San Francisco.
Given these dynamics, why does it make sense to invest in Austin today? Smaller, more dynamic markets with higher capitalization rates may look more appealing. That may be true even if those potential yields come with an elevated risk profile. Read our five key reasons why Austin remains attractive to multifamily investors.
Image by Mitchell Kmetz from Unsplash.
1. Austin’s Population Growth
Austin’s population is growing — and growing fast. Last year alone, the metro’s gains registered at more than 3%, the fastest rate across Texas. The Real Deal reports the Austin metropolitan area has been the fastest-growing large metro in the entire country for each of the past 10 years nationwide. Nearly 580,000 people moved to the area between 2010 and 2020, the Austin Chamber of Commerce highlights. That means the population has seen gains of more than one-third since the start of the last decade.
Image by Markus Spiske from Unsplash.
What’s telling is the source of a lot of Austin’s migration. Census data indicates that the metro’s largest source for new residents — outside of other Texan cities — is the state of California. The market’s population is highly educated, too. In 2020, 53.4% of residents had a bachelors or higher degree, compared to the national average of 37.9% in 2021.
2. Business Relocations to Austin
Companies eager to take advantage of this well-educated population have moved into Austin. The Austin Chamber of Commerce keeps a relocation and expansion log, and the scale of growth is stunning: In February alone, 16 companies announced expansion plans with the metro, with another 10 opening or relocating. These announcements could create 5,100 new jobs, and come after 200 companies signaled expansions last year of about 27,000 jobs. These aren’t small companies — Google, Amazon, Tesla, and Facebook are all growing here.
The metro’s employment base has shown itself to be resilient, too. Employment growth has consistently occurred — even after the initial shock of the pandemic in 2020. The Bureau of Labor Statistics show total non-farm employment recovered at one of the fastest rates nationwide. And it hasn’t stopped there, with employment this February 6.7% above March 2020. Unemployment was at 3.3% in February, a solid 50 basis points under the national average.
3. Austin’s Increasing Property Values
Amid population and job growth, it’s not surprising that property values have increased, too. Zillow reports that single-family home values have increased 40.9% for the year ending in February, but is the same true in the multifamily sector?
Looking at sales transactions, yes. A Yardi Matrix report shows that Austin multifamily sales prices averaged more than $196,000 per unit for the year ending in January. That's a gain of 20.7% over the year and a bit north of the national per-unit average of $191,000. Large-scale investment generally tends to favor higher-end, Class A multifamily assets. This means there are likely value-add opportunities, provided you invest in capital improvements. These prices are also likely rising, so explore your acquisition financing options.
4. Rent Growth in Austin
One of the biggest investment draws to Austin is the market’s rent growth. A fourth-quarter Newmark report indicates rents increased 22% last year alone. That staggering figure doubled the national growth.
Some of the growth is due to the release of pent-up demand from the early months of the pandemic. Rent increases this year are likely to be much lower. The same report anticipates rents will still grow by 10% by the end of the year. That's mainly due to added demand pressures from ongoing population and employment growth.
Image by Milivoj Kuhar from Unsplash.
5. Austin’s Extensive Multifamily Development
As a direct result of sky-high demand, multifamily construction activity is expanding in Austin. At the end of 2021, the metro had 11,295 units under construction, a report from Northmarq shows. Beyond that, developers completed more than 7,600 units last year. Is this good or bad news for a multifamily investment opportunity? Well, it depends.
With a high amount of construction activity, it’s possible that a flood of new supply could slow rent growth. But it could also drop per-unit pricing when it comes to transactions, especially at Class B and C assets. Given Austin's demographic growth, any downward movement would likely only be very temporary. At the same time, it could amplify opportunities for value-add plays and possibly even mitigate high prices at the Class A level.
Multifamily Investment Outlook for Austin
Austin’s market fundamentals are strong, and nothing appears likely to change soon. While oversupply issues may exist, it would likely only be in the short term. The market as a whole — and a well-managed investment property — wouldn't feel much impact.
Of course, it's important to identify any risks. This is particularly true if you plan to invest in the upper tier of the quality spectrum. That said, the overall investment outlook for Austin's multifamily market is overwhelmingly positive.
Related Questions
What are the benefits of investing in Austin's multifamily market?
Investing in Austin's multifamily market has many benefits. According to a fourth-quarter Newmark report, rents increased 22% last year alone, which is double the national growth. This is due to the release of pent-up demand from the early months of the pandemic. Rent increases this year are likely to be much lower, but the same report anticipates rents will still grow by 10% by the end of the year due to added demand pressures from ongoing population and employment growth. Additionally, Austin's market fundamentals are strong, and nothing appears likely to change soon. While oversupply issues may exist, it would likely only be in the short term. The market as a whole — and a well-managed investment property — wouldn't feel much impact.
What are the risks associated with investing in Austin's multifamily market?
The main risk associated with investing in Austin's multifamily market is the potential for oversupply in the short term. This could slow rent growth and drop per-unit pricing, especially at Class B and C assets. However, given Austin's demographic growth, any downward movement would likely only be very temporary. It's important to identify any risks before investing, particularly if you plan to invest in the upper tier of the quality spectrum.
For more information, please see this article from Multifamily.Loans.
What are the current trends in Austin's multifamily market?
The current trends in Austin's multifamily market are positive. Sky-high demand has led to an expansion in multifamily construction activity, with 11,295 units under construction at the end of 2021, according to a report from Northmarq. Developers also completed more than 7,600 units last year. This could lead to a temporary drop in rent growth and per-unit pricing, especially at Class B and C assets, but the demographic growth in Austin would likely only cause a short-term dip. This could amplify opportunities for value-add plays and mitigate high prices at the Class A level. Additionally, a well-managed investment property would not feel much impact from any oversupply issues.
What are the best strategies for investing in Austin's multifamily market?
The best strategies for investing in Austin's multifamily market include identifying any risks, investing in the upper tier of the quality spectrum, and taking advantage of the market's rent growth. According to a fourth-quarter Newmark report, rents increased 22% last year alone, and are expected to grow by 10% by the end of 2021. Additionally, it is important to invest in a well-managed property and take advantage of pent-up demand from the early months of the pandemic.
For more information, please see the following sources:
What are the most important factors to consider when investing in Austin's multifamily market?
When investing in Austin's multifamily market, the most important factors to consider are the market fundamentals, potential risks, and rent growth. Austin's market fundamentals are strong, and nothing appears likely to change soon. However, it is important to identify any potential risks, particularly if you plan to invest in the upper tier of the quality spectrum. Rent growth in Austin is also a major draw, with a fourth-quarter Newmark report indicating rents increased 22% last year alone. This year, rent increases are likely to be much lower, but the report still anticipates rents will grow by 10% by the end of the year.
What are the tax implications of investing in Austin's multifamily market?
Investing in Austin's multifamily market can have a variety of tax implications. According to the Texas Tribune, Texas has some of the highest property taxes in the nation. Property taxes are based on the value of the property, so as property values increase, so do the taxes. Additionally, investors may be subject to capital gains taxes when they sell the property. It is important to consult with a tax professional to understand the full implications of investing in Austin's multifamily market.