Central Texas Roundup | JLL Multifamily | 12/16/24

Summary

• Markets rally on anticipated Fed rate cut, ignoring weak job data; upcoming inflation reports may alter sentiment

• CPI report shows the path to bringing down price pressures remains bumpy

• The ECB reduced its key interest rate to 3% from 3.25%, widening a gap in benchmark borrowing costs with the Federal Reserve

• Red Stone raises $1.3B for affordable housing

• Sun Belt leads Build-to-Rent construction nationwide

• Mortgage rates fall, boosting housing market outlook

• Retail is booming in Williamson County

• Williamson County attracts first-time homebuyers

• Hays Commons seeks annexation into Austin

• San Antonio apartment market faces oversupply challenges

• Developer explores mixed-income housing in downtown SA

• Nonprofit builds affordable apartments on West Side

National

Market Anticipation of Fed Rate Cut Amid Mixed Economic Signals (Kensington Capital Advisors – No Link)

• Why it matters: Markets rally on anticipated Fed rate cut, ignoring weak job data; upcoming inflation reports may alter sentiment.

• The recent economic reports and market reactions have presented a complex picture:

• The December 6th Nonfarm Payroll and Unemployment Reports showed some concerning trends, with unemployment rising to 4.3% from 4.1%. Despite this potentially negative indicator, both stock and bond markets rallied. This suggests that investors are prioritizing the possibility of a Federal Reserve rate cut over concerns about job market deterioration.

• Current market sentiment strongly favors a 0.25% reduction in the Federal Funds rate, with an 86% probability implied for the upcoming Federal Open Market Committee meeting on December 18.

• Since mid-November, we've observed a significant rally in the 5-year and 10-year Treasury markets, coinciding with a decline in West Texas Intermediate oil prices. The correlation between 10-year Treasury yields and oil prices indicates that continued oil price declines could support further short-term gains in the 10-year Treasury market.

Inflation Ticked Up to 2.7% in November (WSJ)

• Why it matters: CPI report shows the path to bringing down price pressures remains bumpy.

• The latest economic indicators reveal a nuanced picture of the U.S. economy:

• The Consumer Price Index (CPI) increased by 0.3% compared to the previous month, marking the most significant monthly rise since April. This uptick was primarily driven by ongoing inflationary pressures in key sectors including housing, food, vehicles, and healthcare.

• Consumer spending maintained a steady pace in October, reflecting increased optimism among consumers in the wake of the U.S. presidential election.

• Apprehensions about a weakening labor market were somewhat alleviated by the Labor Department's November payroll report. The data showed that unemployment rates remained low, while year-over-year wage growth held steady at 4% for the second consecutive month.

ECB Cuts Rates by Quarter Point in Attempt to Boost Flagging Growth (WSJ)

• Why it matters: The ECB reduced its key interest rate to 3% from 3.25%, widening a gap in benchmark borrowing costs with the Federal Reserve.

• The European Central Bank (ECB) is currently prioritizing economic growth stimulation over inflation control, as inflation fluctuates around its 2% target. While inflationary pressures haven't completely subsided, the risk of recession is increasing due to political uncertainties in France and Germany, as well as potential U.S. tariffs on European exports.

• Europe's economic outlook has deteriorated recently. Business confidence indicators have continued to weaken, and headline inflation rose for the second consecutive month, reaching 2.3% in November. This combination of stagnant growth and rising prices is creating a challenging stagflationary environment for the region.

Red Stone Equity Partners Raises $1.3 Billion for Affordable-Housing Investments (CoStar)

• Why it matters: Firm’s latest fund targets $263 million for 19 apartment projects across 11 states.

• The Sun Belt region, particularly Texas, is at the forefront of Build-to-Rent (BTR) development in the United States, with approximately 57,000 units currently under construction. This trend underscores the area's significant contribution to meeting rising housing demands.

• Investment in affordable housing has seen a marked increase, with notable activity from firms such as Hudson Valley Property Group and Turner Impact Capital. These investors are particularly focused on developing and preserving workforce housing options.

• The persistent high mortgage rates and economic uncertainty continue to fuel demand for rental properties. In response, developers are increasingly concentrating their efforts on creating affordable rental units and expanding BTR communities to cater to the growing renter population's needs.

Roughly 90,000 Build-to-Rent Units Underway Across U.S. (RealPage Analytics)

• Why it matters:  Build-to-Rent (BTR) remains a practical option for renters unable to achieve homeownership due to tight housing inventory and volatile mortgage rates, supported by persistent housing demand and a resilient U.S. economy.

• The Sun Belt region is leading the nation in Build-to-Rent (BTR) construction, with nearly 57,000 units currently underway. This figure is more than double that of the West, the next closest region. Nationwide, approximately 90,000 BTR units are under construction.

• BTR encompasses various types of single-family housing specifically constructed for rental purposes. This distinguishes it from traditional single-family rentals, which were initially designed for homeownership. Projections indicate that the South is expected to complete the highest number of BTR units through the second quarter of 2027.

• Despite challenges in the single-family homeownership market, including high mortgage rates and economic uncertainty, the BTR sector continues to be viable for both developers and renters. RealPage is currently tracking around 10,000 planned BTR units, further indicating the sector's ongoing growth and potential.

Housing Market Outlook Improves as Mortgage Rates Decline, Freddie Mac Says (CoStar)

• Why it matters: Mortgage rates have fallen for the third consecutive week, with the 30-year fixed-rate mortgage averaging 6.6%.

• Mortgage rates have recently declined, spurring increased homebuyer demand and a significant uptick in refinancing activity. This shift has resulted in a 5.4% weekly increase in mortgage loan application volume.

• However, despite these positive developments, housing affordability remains a substantial hurdle for many prospective homebuyers. This persistent affordability issue is likely to maintain strong demand for multifamily rental properties.

• Industry experts anticipate that mortgage rates will remain relatively stable in the near future, fluctuating within a narrow range. This period of stability could significantly influence the decision-making process for both potential homebuyers and those considering renting, potentially affecting both the housing and rental markets.

Austin

Grocery stores are leading the retail charge in booming Williamson County (ABJ)

• Why it matters: Retail follows rooftops, and that's what's happening as new residents flock to the growing job base and quality of life north of Austin.

• Williamson County's population reached nearly 700,000 residents in 2023, as reported by the U.S. Census Bureau. This represents a significant growth of almost 15% from its 2020 population of 610,000.

• The county has emerged as a focal point for new retail development in the Austin metropolitan area, accounting for 56% of all retail construction in the region.

• HEB, a prominent grocery chain, is expanding its presence in the county. The company is planning to open its third store in Georgetown at the intersection of Ronald Reagan Boulevard and Ranch Road 2338. This follows the 2023 opening of an HEB store at Wolf Lakes Village. Additionally, the company is making substantial investments to upgrade its existing store at 603 Louis Henna Boulevard in Round Rock.

First-Time Homebuyers Flock to Williamson County (ABJ)

• Why it matters: In October, the median home sales price was $420,000 in Williamson County, $510,000 in Travis County, and $565,000 in Austin.

• Williamson County's appeal to first-time homebuyers stems from its relatively affordable housing inventory and robust job market, which is powered by major employers such as Apple and Samsung.

• The county's expanding economy and population growth, fueled by these significant employers, are anticipated to sustain strong housing demand in the foreseeable future.

• Although Williamson County's housing inventory remains below the metro average, it experienced positive trends in October. The county saw increases in new listings, active listings, and pending sales, indicating a dynamic real estate market despite the overall inventory constraints.

Developer Aims to Flip the Script and Bring Big Hays Commons Project Within Austin's City Limits (ABJ)

• Why it matters: The Hays Commons project, a 498-acre development including 700 single-family homes and commercial space, is seeking annexation into Austin after previously deannexing from Hays.

• MileStone Community Builders, the project's developers, are proposing a development plan that includes the establishment of a municipal utility district (MUD) and limited-purpose annexation.

• The proposed development's impervious cover of 25% exceeds the limit set by Austin's Save Our Springs ordinance. However, this percentage is still lower than the standards typically applied in county jurisdictions.

• This development case highlights the continuing effects of Senate Bill 2038. The bill has made it easier for properties to be deannexed from extraterritorial jurisdictions, potentially affecting how development projects like this one are regulated and approved.

San Antonio

How San Antonio’s Apartment Oversupply is Reshaping the Market (SABJ)

• Why it matters: San Antonio's apartment market is experiencing oversaturation, with a record number of new units expected this year, leading to extended lease-up periods.

• Properties with more competitive rental rates are experiencing quicker lease-up rates compared to luxury units in the current market.

• The Northwest Side has emerged as the leader in new unit deliveries since January 2023, introducing nearly 4,700 units. This area also boasts the lowest vacancy rate among new properties, at under 40%.

• The stabilization period for new properties has extended to approximately two years. This prolonged timeline, coupled with high interest rates, is creating significant challenges for developers who are planning to sell stabilized properties. These factors are impacting investment strategies and project timelines in the real estate development sector.

After Floodgate, Developer Hopes to Dig Deeper into Downtown Housing (SABJ)

• Why it matters: Developer Keller Henderson, after completing the 63-unit Floodgate apartment tower, is exploring opportunities for mixed-income housing in downtown San Antonio.

• Henderson promotes the integration of workforce and luxury housing in downtown projects, with the goal of fostering a more inclusive and economically diverse urban core that better represents San Antonio's overall socio-economic composition.

• This vision aligns with recent recommendations from HR&A Advisors, which suggest incentivizing affordable housing in the downtown area. This convergence indicates a growing emphasis on mixed-income developments in the city center.

• In pursuit of these development goals, Henderson is considering underutilized properties for potential multifamily projects. One such property under consideration is the defunct Solo Serve site, highlighting the developer's strategy to revitalize and repurpose existing urban spaces.

San Antonio Nonprofit to Build 30 Affordable Apartments, Renovate Former Funeral Home on West Side (SA Express)

• Why it matters: San Antonio Alternative Housing Corp. is developing 30 affordable apartments on the West Side.

• The Memorial Apartments development will provide housing for residents earning below the area median income, with monthly rents ranging from $388 to $1,475. This pricing structure reflects a diverse mix of affordability levels within the project.

• This $6 million initiative showcases innovative approaches to urban development. It includes the conversion of a historic funeral home into a community center and the relocation of an existing house, demonstrating creative use of existing structures.

• The nonprofit developer's strategy combines selling some properties to self-fund new developments with utilizing public funding sources such as the city's housing bond. This approach presents a potentially sustainable model for affordable housing development in competitive urban markets, balancing financial viability with community needs.