Do you think the Austin market is still worth investing in right now?

Question

The average vacancy rate in Austin is hovering around 15%.

Dave Meyer · Answer

I flew to Austin a little while back to consider investing and decided against it. Too expensive, too much multifamily supply as @Scott Trench mentioned. Long term fundamentals are great, but personally I'd wait for a few years and see how this multifamily glut plays out before doing anything. Felt the same way about San Antonio FWIW.

Scott Trench · Answer

Austin is increasing multifamily unit supply by 10% year over year, with more on the way next year.

This does not account for the also large supply of new construction single family inventory hitting the market in 2024 and 2025.

I don’t care how great the city is, how many companies are moving to it or surrounding areas in Texas, or how much people love it there.

Rents and prices are going down.

30 years? Yes, prices will be higher.

But, this market is getting wrecked, and will continue to get wrecked, as far as the owners of rental property investments are concerned. Hopefully the pain abates in 2025 as the onslaught of new supply slowly abates.

Scott Trench · Answer

Let’s talk about data.

There is a complicated set of assumptions that go into calculating demand. That includes income growth, net migration, jobs growth, qualitative assumptions about desirability of an area, etc.

I am sure that many of these look great for Austin. I am sure that people are moving there, I am sure that people are getting good jobs, I am sure that Austin is a wonderful place to live, and the very high expectations for the city’s bright future are all realized without obstacle.

However, I prefer to start my analysis with supply. Supply data and forecasting, unlike demand data and forecasting, is easy. There are no qualitative assumptions. There are no mysteries. There are no complicated models to build out. All new supply is permitted, and easily traceable. Developers usually have expensive bridge debt on their construction projects, and a heavy incentive to deliver their inventory as rapidly as possible. While it is possible that some construction gets abandoned, the reality is that most projected supply will be completed, and will immediately get absorbed by the market.

Here is the supply forecast for 2024 for the largest metros in the country:

I don't need someone's demand forecasts.

I can tell, right here, right now, that Austin is the worst major metro to invest in rental housing stock in 2024. Rents are going down. Or if they go up, they will lag behind virtually every single other large metro in this country.

Again, I don’t care how great someone thinks Austin is, or how much relatively worse someone thinks a city like Chicago is.

Austin is going to perform worse, both for multifamily asset values and rent growth, than Chicago, in 2024, and likely into 2025 as well.

Sometimes, it’s that easy.

When there is 5.5 times as much relative inventory getting introduced to Austin compared to Chicago, the “growth” of Austin relative to Chicago really doesn’t matter much. ALL of the demand side analysis will be overwhelmed by the cruel reality (for landlords) of the supply onslaught facing that city.

On the bright side, affordability for renters will definitely be going up!

I know I will not make friends with investors, syndicators, realtors, and lenders in Austin by sharing this brutal reality with them. But, it’s far worse to leave people confused about what’s going to happen. I have tried to be as vocal about this as possible for the last two years including in Q1 2024, and Q1 2023.

Now, when supply stops coming in at this incredible rate, Austin investors will see a return to rent and price growth. In 15-30 years, this will all be noise, and properties values and rents will have increased.

In the meantime, buckle up. It will not be fun.

All this said, I know nothing of the other types of real estate in the sector. It is very possible, for example, in Austin, that valuations of office, retail, industrial, self-storage, or something else responds favorably to the changes happening in the city and could be a great buy.

But housing? I’m a bear.

Let’s come back in a year and see how it goes though. Could always be wrong!

Jordan Moorhead · Answer

I will continue to invest in the area but only in deals that make sense right now, have good debt terms and are in areas of the metro that are growing quickly.

Jason Taken · Answer

Let the lowered rates do their thing and maybe ask again in 6-9 months.

Gino Barbaro · Answer

@Rene Hosman

A lot of noise on this thread. If you're a long term investor with a certain buy criteria, and have faith in the market, then you invest. I was just in Nashville, and by all metrics, is over priced, over supplied. The city is booming, and long term will be okay. It's not for me, but I can understand why some investors love it.

Investors have been over paying for deals for years in Austin, especially the older vintages. The market cycle caught up with them. It' a function of price now, and if you can find a deal that is priced accordingly, then you buy it, especially if you like the fundamentals long term

Aaron Gordy · Answer

Opinions with out data is ...... opinions. Is the average vacancy rate of 15% for Houses? Apartments? Industrial? Office (its higher than 15%  and is roughly 23%https://www.commercialedge.com/blog/national-office-report/)? Retail (retail is very good btw)? and so on. Also some submarkets are doing very well in several of the categories above. There is a reason why Blackstone is now one of the largest commercial owners in the metro. They aren't dummies. Being a contrarian has usually played out well historically or you could look in the rear view mirror in a year or two and sang Coulda, woulda shoulda : ).

Jonathan Klemm · Answer

I love the Supply data perspective @Scott Trench.  I was just in Austin a couple of months after moving away 12 years ago, and it's scary different.

I am a Chicago investor through and through, so it's great to see the "% of stock" at 1.5%  here.

Evan Polaski · Answer

@Aaron Gordy, I do totally agree with you, that submarkets make a huge difference.  As does asset class.  Would I invest in an in-fill strip center on a major retail corridor with signalized access and strong incomes?  Very likely I would.

Would I buy a suburban 80s built multifamily surrounded by cranes putting up thousands of new multifamily units?  Probably not.

But to your comment about investing like a contrarian: I am confused by which way you are meaning that.  Many on this thread seem to think Austin is overheated, so being contrarian is investing more in Austin.  But you note that Blackstone is a major investor in Austin, so the contrarian point is to NOT invest in Austin.

I have no skin in the game either way.  Back to your point, I don't think Austin is about as neutral as can be.  There are a lot of positives to it.  There are certainly risks to it.  But I don't rank it higher or lower than any other market in the US.  It all comes down to the actual opportunity presented, and understanding those risks while balancing the possible reward.

Aaron Gordy · Answer

The folks that are on the ground know. @Jordan Moorhead

I had written out out a response that was documented with statistical evidence across the asset classes that are good ones... but on 2nd thought. No. More for me and my company. Stay away. : )

Do you think the Austin market is still worth investing in right now?

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