City Profile: Austin
Stephen Porter, Principal of Real Estate at Kiddar Capital, looks at promising markets across the United States.
If “Texas” conjures images of cowboy hats and tumbleweed, you’ve probably never been to Austin. Not only is the state capital young, diverse, and (dare I say it) hip, the metro and surrounding areas have benefited enormously from the burgeoning opportunities of technology. Austin is one of the newly fashionable “18-hour cities” which bridge the gap between sleepy suburb and 24/7 megalopolis. It’s also the Live Music Capital of the World, so called because the city is home to over 250 live music venues. The annual South by Southwest (SXSW), a series of music, film, and interactive media festivals and conferences, books local hotels solid for weeks every year. In 2016 alone, the event generated $325 million for the Austin economy.
Austin is also pretty impressive in national rankings. US News and World Reports named Austin the best place in live in the United States for 2017 (edging out Denver, which took the top spot in 2016). Wins from 2016 include No. 1 Place to Start a Business (CNBC) and No. 1 City for Small Business (American City Business Journal). Austin also grabbed first place for Expedia’s list of 21 Super Cool US Cities to Visit. Young people certainly find the city attractive: according to Costar, about a quarter of Austin’s population is 20–34 years old. Graduates of the University of Texas at Austin’s 50,000-plus student body, recruited by local tech companies, often stay in the area post-graduation.
At Kiddar Capital, we invest in real estate all across the United States. We use data-driven processes to identify the best cities for our capital, and curate product that aligns with market demand.
Here’s why we’re interested in Austin.
Single-family home values in Austin have shot up 65.5% since the 2007–2008 recession, growing at a breakneck pace that is only now starting to slow. Home values increased 7.2% in 2016 to a record median of $284,000, and Zillow rates the market a “very healthy” 8.9/10. New home and resale are both strong as demand continues to outstrip supply: while a balanced market has a 6.5 month supply of houses available for sale, Austin has only had a 4-month supply for the past 4 years.
The multifamily residential market is also growing quickly, driven by Austin’s population and job growth. According to CBRE, dense living, access to amenities, and alternative means of transportation like walking and biking appeal heavily to the city’s large millennial crowd. The city’s urban core added 5,824 multifamily units just since the end of 2015. Rent levels are already a third above prerecession highs even as developers rush to deliver more supply: as of March 2017, the Austin multifamily pipeline was no less than 10,000 units. More recently, developers are moving away from downtown apartments and starting to look at building condos or moving into the suburbs (Costar).
The same strong local economy driving Austin’s residential markets has also created a thriving retail sector, rated 11th in the world. High customer confidence and faster-than-average income growth have pushed vacancy rates below 4%, and continued population growth means that retail demand continues strong (Costar). High income and “cultural preference” have driven the success of local brands like Alamo Drafthouse as well as an expanded luxury market for stores like Nordstrom and Burberry (CBRE). Austinites take pride in the city’s unique small businesses and culture, epitomized in the eclectic shops and food trucks of South Congress Street. The phrase “Keep Austin Weird,” both slogan and movement, represents the city’s support of their small businesses and unique character.
Austin’s office market is on fire, setting record positive net absorptions (over 2 million sf) and rents ($35.81/sf for Class A offices), with sublease availability under 1% of total market space. The city’s office market size has essentially doubled since 1990, forcing development into submarkets. There’s no doubt that tech companies, making up 35% of Austin’s office tenants, are the driving force behind this growth. Life science companies like Hospira are especially prominent, taking up 1.1 million sf mostly along Research Boulevard in south Austin (CBRE).
Costar lists the low cost of doing businesses, favorable policies towards businesses, and high quality of life as some of the reasons why businesses are gravitating to Austin. Many of these are technology companies: Austin is home to the headquarters of giants like Dell, IBM, Apple, Google, Oracle, AT&T, and Samsung. The University of Texas at Austin provides a strong local talent pipeline, tempting companies to relocate or expand into the city — 119 since 2015 alone, a full 80% of which have been technology companies (CBRE). The city also has a strong startup scene, earning the nickname “Silicon Hills” and taking the top spot on the Kauffman Foundation’s list of Hottest Cities for Entrepreneurs in 2017.
The latest trend to watch is coworking, which is gaining popularity in step with the city’s young creatives. Austin already has around 15 in operation.
Austin is riding the wave of a hotel boom in Texas, spurred by the healthy US economy, an influx of corporate headquarters, and local population growth. The city’s hotels enjoyed 72.1% occupancy rates in 2016; however, new development may already be reaching the limits of what the market can handle without significantly raising vacancies. In January 2017, a 6.2% supply increase caused a 2.0% average decline in occupancy (National Real Estate Investor).
In November 2016, Austin’s Mayor Steve Adler passed a $720 million bond for corridor, regional and local transportation infrastructure including active transportation like walking and biking. The bond, intended to relieve congestion, will also transform Guadalupe Street into a major corridor and improve access between the University of Texas at Austin and the rest of the city (The Daily Texan). Alternative transportation accessibility via walking or biking is crucial to dense development of city centers.
CONCLUSION: A CITY TO WATCH
With no small thanks to the technology revolution, Austin has quickly risen to become the best state capital to live in. What’s more, PwC named the city #2 in US Markets to Watch: Overall Real Estate Prospects in their Emerging Trends 2016 report for the US and Canada. Commercial real estate investment in Austin from 2014–2016 was $9.5 billion (CultureMap), and will only grow in the coming years. Between the city’s incredibly low unemployment (3.5% as of January 2017), growing population (Austin is the second-fastest growing large metro area in the United States), and high tech-sector salaries (the highest in the US when adjusted for cost of living), there isn’t a weak real estate market in the city.