Central TX Roundup | JLL Multifamily | 3/11/24

Summary

• BTR units are earning a 15-20% rental premium over comparable garden-style apartments, attracting billions of investment from institutions like Blackstone.

• Due to the scarcity of larger parcels, apartment developers have started to build higher.

• Powell predicts no immediate recession risk, as the market expects three to four rate cuts this year.

• Central Texas is experiencing a rise in data center markets, leading to economic growth and job opportunities.

• Construction is underway for a new green community in East Austin.

• Austin is actively working on expanding its airport to keep pace with the rapidly growing metro area.

• New utility fees imposed by SAWS could significantly increase development costs by millions.

• San Antonio city officials are considering reintroducing incentives for housing downtown, after the expiration of the CCHIP tax abatement program in 2020.

• The La Villita building in San Antonio, famous as the location for Fiesta's NIOSA, has changed ownership.

National and State News

With Billions Invested, Build-To-Rent Brings Changes to Apartment Industry (CoStar)

• Why it matters: Institutions like Blackstone are betting billions on BTR, with BTR units earning a 15-20% rental premium over comparable garden-style apartments.

• Blackstone's recent deal to acquire Tricon Residential for $3.5 billion, along with a $1 billion investment in new BTR developments, demonstrates the driving force behind this growth.

• Build-to-rent offers unique advantages like fast construction times, early tenant move-ins, and higher rental rates compared to similar-sized apartments, as explained by Andy Brewer, COO at Legacy MCS.

• The vertical construction in BTR projects is faster than conventional multifamily, allowing for 40 units to be completed in a month and move-ins to happen in as little as eight months, leading to cost savings and revenue generation at an earlier stage.

• Research shows that BTR rates have a premium of 15-20% over traditional multifamily units, supporting the success and potential of this emerging market.

America’s Apartment Buildings Are Getting Bigger and Taller (WSJ)

• Why it matters: With larger parcels being harder to come by, apartment developers have begun to reach higher.

• The traditional dominance of office towers in shaping American city skylines is shifting, as developers now focus on building taller apartments. High-rise apartments accounted for only 2% of new supply in the 1990s, but this figure rose to 14% in 2022.

• Increasing construction and other costs have prompted developers to create smaller apartment units, allowing them to maximize the number of units within each building. The average size of new apartments has decreased by 6% from 2013 to 2022.

• The scarcity of available land has also contributed to the rise of taller buildings. In Dallas, the limited availability of 4-acre parcels required for traditional block-style apartment buildings has prompted developers to construct taller structures on smaller lots, according to Ben Brewer, senior managing director at developer Hines in the Dallas-Fort Worth area.

• Some cities are adjusting zoning and building codes to facilitate larger-scale construction. Austin, Texas, for example, became the largest city in the country to eliminate parking minimums for new construction projects, reducing a significant expense for developers.

Jerome Powell Says Fed on Track to Cut Rates This Year (WSJ)

• Why it matters: Powell foresees no immediate risk of recession as the market predicts three to four rate cuts this year.

• According to Powell's testimony to the House Financial Services Committee, rate cuts will only be considered once officials are confident that inflation is moving sustainably towards the central bank's 2% target.

• Powell emphasized the need for more data to gain confidence and not necessarily better inflation readings than what has been observed.

• Powell expressed optimism that the economy is currently on a good path and sees no immediate risk of a recession.

• Based on interest-rate futures markets, investors are currently expecting the Fed to implement three or four rate cuts throughout the year.

Austin News

Austin playing key role in 'insatiable' nationwide demand for data centers (ABJ)

• Why it matters: Central Texas is rising in the ranks among data center markets in the U.S., leading to economic and job growth for the area.

• Austin is positioned to play a significant role in meeting the high demand for new data center projects, as the nationwide market remains hot and experts describe the demand as "insatiable".

• The construction of these projects in Austin can contribute to filling the gap in new data center developments across the country. In the second half of 2023, the vacancy rate for primary data center markets nationwide was at a historically low level of 3.7%.

• In terms of secondary data markets, the Austin-San Antonio region ranked as the second-largest inventory, surpassing regions like Southern California, Seattle, Houston, Denver, and Minneapolis, and trailing only Central Washington.

• The Austin area has the potential to bring online hundreds, and possibly even thousands, of megawatts of data center space in the coming years.

Construction begins on first apartment complex in Whisper Valley in East Austin (ABJ)

• Why it matters: New green community in East Austin is under construction.

• AOG Living, a Houston-based developer, is embarking on the first multifamily project within the 2,067-acre zero-energy capable master-planned community developed by Taurus Investment Holdings based in Boston. This addition of hundreds of apartments will contribute significantly to the residential space within the community, which is expected to encompass thousands of homes upon completion.

• Responsible for both development and general contracting, AOG Living has already commenced construction on The Evergreen, the name given to the 348-unit apartment complex. The apartments will range from studio to one- and two-bedroom units, with sizes varying from 595 to 1,395 square feet. The overall project will encompass approximately 325,000 square feet.

• In line with Whisper Valley's commitment to environmental sustainability, The Evergreen aims to achieve a bronze rating through the National Green Building Standards, as well as a two-star rating from Austin Energy Green Building.

• Beyond the plans for the new multifamily development, Whisper Valley aims to feature 7,500 homes upon completion, with at least 867 homes already delivered. The development will be executed in six planned phases, with an estimated completion timeline of 15 years.

Millions of dollars of work available for architects, engineers for Austin's airport expansion (ABJ)

• Why it matters: The city continues to progress airport expansion plans to keep up with the rapidly growing metro.

• Austin-Bergstrom International Airport has opened requests for qualifications from architects and engineers interested in securing lucrative contracts. These contracts, estimated to be worth around $60 million, are intended to support the airport's ongoing operations and long-term expansion plans.

• The city is seeking up to six firms to provide consulting architectural and engineering services that will play a vital role in enhancing the airport's infrastructure and laying the foundation for its expansion.

• Alongside these initiatives, the airport is currently undertaking the West Gate expansion project. This project, with an estimated cost of $165 million, involves the addition of three new gates to the main Barbara Jordan Terminal's west end. The expansion will provide approximately 82,000 square feet of additional space, accommodating the new gates, a lounge, offices, an outdoor patio, and concession areas.

San Antonio News

New utility fees could ramp up development costs by millions (SABJ)

• Why it matters: The good – SAWS’ service area population will increase by 25% in just 10 years. The bad – impact fees are proposed to increase by 23% to support this growth.

• During its March meeting, the board governing the San Antonio Water System (SAWS) voted to propose an approximately 23% increase in fees charged to new developments to cover utility costs.

• The proposed fee increase will require approval from the city council, which is expected to discuss it in late spring. If approved, the increase would take effect in June.

• Under the current fee structure, developers in San Antonio can expect to pay a minimum impact fee of $5,902 per typical home lot, with a maximum of $8,548, depending on the location. However, under the proposed increase, these numbers would rise to $7,343 at the lower end and $11,528 at the higher end.

• According to assessments, the population within SAWS' service area is expected to grow by approximately 25%, from around 2 million to 2.5 million, by 2033.

• While San Antonio's proposed fee structure would position it towards the higher end among Texas cities, it remains significantly lower than the impact fees imposed in 2023 by New Braunfels. New Braunfels implemented an increase of over 100% to manage the substantial growth that the city has been struggling to sustain.

City to refresh 'outdated' strategic framework plan to support downtown (SABJ)

• Why it matters: City officials contemplate bringing back incentives for housing downtown, after CCHIP (tax abatement program) expired in 2020.

• City officials, along with Centro San Antonio and Visit San Antonio, presented a roadmap to City Council for updating San Antonio's downtown strategic framework plan. The current plan, which was developed in 2011, focused on housing and placemaking.

• Officials indicated that incentives for downtown housing development may make a comeback. The CCHIP program, which provided incentives for urban core housing projects, expired in 2020. There is a possibility of a new version of the program. Council members expressed concerns about prioritizing market-rate and upper-income housing over mixed-income developments. City Manager Lori Houston emphasized the need for a balanced approach that supports different types of housing.

• Houston highlighted the importance of considering the types of jobs that downtown San Antonio aims to attract. While the hospitality industry plays a significant role, there are opportunities for other job sectors, particularly with UTSA's investment in downtown, such as IT and AI fields.

La Villita building home to NIOSA under new ownership (SA Report)

• Why it matters: Local group plans to revitalize historic building downtown, bringing new life to the River Walk near Hemisfair.

• San Antonio development firm GrayStreet Partners has recently sold the historic building at 401 Villita St. to private equity firm MLSA Ventures. MLSA Ventures is led by managing principals Bobby Magee and Charles Leddy, and principal Billy Freed.

• The building, designed by architect O'Neil Ford and constructed in 1958, features a distinctive concave roof. Previously owned by CPS Energy, the building served as event space and is recognized as the venue for the annual Night In Old San Antonio (NIOSA) during Fiesta. Situated in La Villita Historic Arts Village along the River Walk, it is in close proximity to new and upcoming developments at Hemisfair and the forthcoming Kimpton Santo hotel.

• Magee expressed MLSA Ventures' intention to transform the Villita Assembly Building into a space for the enjoyment of San Antonio residents. While he did not disclose specific plans for its use, he confirmed that NIOSA will proceed as scheduled this year.

• MLSA Ventures raised over $10.1 million in equity from 48 investors to facilitate the purchase, as reported in a recent Form D filing submitted to the Securities and Exchange Commission. The 1.2-acre property has a last recorded assessment value of $5.3 million according to tax records.

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