Am I too late for Austin Commercial Real Estate market?

Question

I am reading topics in this forum and everyone agrees that there was too much of an price appreciation in Austin market in the last 10 years or so. Do you think it is too late to get in?

I was particularly interested in buying a commercial warehouse and rent it out. I live in Houston but I have no hopes for Houston due to low oil price expectation. Austin on the other hand has nothing to do with energy and all technology.

Thoughts?

Aaron Gordy · Answer

@Matthew J.I will put my two cents in. Commercial and office is triple net for the most part. According to Cushman and Wakefield's study in June the citywide vacancy for industrial space (warehouse) is 9.5%, net absorption is 209,019 sq ft, 593,130 sq ft under construction with net rents of $12.60. My partner Matt Teifke would know more about this arena as he does more commercial. Matt is active on here. The residential side is less risk though as the citywide vacancy is considerably less than 9.5%. There are so many folks moving here a day...where are they going to live? Not in my places as I am full.

Will Kiesling · Answer

@Matthew J - I am a commercial mortgage broker here in Austin. I'll make a few comments relative to industrial & NNN-leased real estate here in town as I see quite a bit of this in my pipeline:1) I think the macro-economics are excellent in the San Antonio-Austin corridor. Over the last 6-7 years, Austin has posted consistent job growth (3-4% TTM job growth is some of the best in the nation), outstanding population in-migration (I've read something like 150 people a day are moving to Austin), good civic leadership, a very aggressive economic development corporation here which is actively recruiting companies here (see the RECA site and Opportunity Austin 3.0 for more details via the Austin Chamber of Commerce), and some excellent structural advantages (i.e. flagship UT 50,000 + students, temperate climate, relatively low cost of living, music culture, etc.). I'm pointing all of this out to say that Austin has seen tremendous appreciation in part due to these factors but I believe they will persist. I don't have a crystal ball of course but we've got a lot of factors in our favor here.2) Whether or not it is wise to purchase a commercial warehouse here is going to be highly deal specific and I don't think we could provide any substantive feedback until you have more information or a deal-in-hand. That said, some factors you should consider are as follows:Acquisitions are very competitive now in Austin. For smaller warehouses, you'll be competing with users as well as smaller investors. Sellers are very proud of their assets and are requiring more earnest money up front as well as shorter close time frames (30/30 is common but in some cases 30/15 with earnest money hard up front could be required). This will be a capital intensive endeavor. Consider the tenant improvement costs, leasing commissions, cap. ex requirements, and ongoing maintenance involved with warehouse properties. I can provide more feedback on these items when you've found your deal. Financing will be more difficult to obtain if this is your first commercial purchase. Assuming this is your first purchase and you are buying a warehouse sub $1 MM , I think lenders would require more equity up front (30% or more), a shorter amortization (20 years), and full recourse. Of course, the debt component will impact your cash flow and returns so bear this in mind.3) NNN leased real estate is a much lower return proposition and in my opinion is more of a capital preservation tool and/or passive income play than something to build tremendous wealth with. The characteristics of a NNN lease are as follows: 1) Typically a credit-tenant.2) The lease is long term in nature (10+ years) with multiple option renewal periods and rental-bumps structured throughout. The lease structured such that landlord has no responsibilities for property level expenses such as taxes, insurance , or CAM/maintenance costs and the tenant will manage the property/pay the expenses themselves. In some cases , LL is responsible for structural costs like roof/foundation but it is very limited exposure. 3) The cap rates and purchase prices for NNN leased assets are priced according to the terms of the lease, credit of the tenant, etc. and are often priced at a premium given how much perceived safety their is for the income stream. For example, you could buy a Dollar General Store and the cap rate would probably range from 6-7% depending on the location. Walgreens/CVS are some of the priciest NNN leased deals with cap rates from 4.50 - 5.75% depending on the location , necessitating either a large 1031-exchange or big capital outlay to acquire these assets. That said, it is true "mail-box" money. Hope this helps! Let me know if you want any more data on the market.

Jojo Joy · Answer

@matthew j. No, a triple net lease is not applicable to Multi family. Imagine everybody in a multi family leasing there apartments for a variable rent every month, but no they are not on month-to-month.

Matthew J. · Answer

Mike, I understand what you are saying. I think everyone knows those ratios and numbers.What everyone does not know is where the market is headed and/or which market will perform better than the other. When I say market I mean city and warehouse/office/industrial/multifamilyIt seems like multifamily and residential will always be there as it is needed all the time. But since I am looking to retire overseas and do not want to deal with maintenance issues, I was looking at commercial warehouses first. Now that I am thinking, can the triple net deal be done with multifamily and residential? Also, why would triple net yield less return? Isn't the maintenance cost should be a part of the revenue stream anyway? Either rent is lower and tenant pays for maintenance or rent is higher and owner pays for maintenance? Doesn't this yield the same net cash flow?

Mike Garland · Answer

At the end of the day, the numbers have to work out. I find the best way to determine if a commercial deal is worth doing is to analyze it as a commercial banker would. Look to see if it cash flows with a debt service coverage ratio of at least 1.25x or more based on realistic rental rates on an 80% loan to cost.If it does, it probably is a good deal - assuming the property is in good shape. Make sure when determining the "cost" you include closing costs and any improvement costs.

Matthew J. · Answer

KrisWhat type of properties are common with triple net lease?

Kris Wong · Answer

If you want a commercial investment with low maintenance, look for a property with a triple net lease. Of course, those are typically going to have a fairly low return, but are very passive.

Matthew J. · Answer

Anderson that is bad news for my warehouse dreams :) The reason I was thinking of warehouse is because it has less maintenance issues to deal with.Any other thoughts?

Anderson Horn · Answer

My thoughts about Austin are "When everyone is cautious, be daring...When everyone is daring, be cautious". Prices are way outside the norm in Austin according to a lot of the stuff I read, and most suggestions are to check out San Antonio or anywhere between there and Austin. I'm 100% new to real estate, so don't think that's got any sort of information behind it other than buying and selling 2 houses. Even so, commercial warehouse eh? Our new office was built next to about 15 commercial warehouses on 71 (in Austin) and more than half of them are still vacant...

Stephen Stokes · Answer

Austin still has room for growth. Houston might be more attractive if you think of Warren Buffet value investing approach. Sounds like you view HTX as "on sale" right now.