For years, landlords have had the upper hand in the Austin region’s booming apartment market, where demand for rental housing has outpaced supply and sent rents soaring ever higher.
It appears the COVID-19 outbreak has changed that, at least for the time being.
The shift in the market began with the pandemic-induced stay-at home orders put into place last spring and summer, and it has been extended by a decline in the number of people who typically move to Central Texas from out-of-state, market experts say. At the same time, new apartment projects that were planned before the pandemic continued to be completed, adding even more available units into the market.
The upshot is that, for the first time in years, renters and landlords in the Austin area appear to be approaching equal footing, market experts say.
The point at which tenants and apartment owners have equal sway – that is, with neither having an advantage – is at about a 92% occupancy rate, real estate consultant, Charles Heimsath said.
In Heimsath’s most recent apartment survey, the average occupancy rate among the 244,000 apartment units he tracks was 91%. That’s down from an average of 93.3% at the end of 2019.
When the occupancy rate goes above 92%, rents typically rise, said Heimsath, who is president of Austin-based real estate consulting firm Capitol Market Research. When the occupancy rate slips below that number, rents typically decline, he said.
“Because occupancy has dropped below 92% and there are still many properties in (the lease-up stage), rent concessions are pervasive and this tends to drive rents down,” Heimsath said.
His latest research bears that out.
‘A renter’s market’
In the five-county Austin region that spans Georgetown to San Marcos, rents for one-bedroom apartment units decreased to an average of $1,136 a month as of December. That’s down about 5% from $1,198 a month at the end of 2019, Heimsath’s survey found.
For two-bedroom units, monthly rents fell to $1,443, down about 3.5% from $1,495 in December 2019.
Across all apartment sizes, rents averaged $1,309 a month as of the end of 2020. That’s a drop of almost 4% from their record high of $1,363 a month in December 2019.
By contrast, December 2019’s average rent had jumped 5.7% over December 2018, when rents overall averaged $1,289 a month.
Last year, more than 12,600 new apartment units became available in the Austin-area market, a 25.3% increase over the 10,000-plus units in 2019, according to Heimsath’s data.
Meg Kerr, the Austin and San Antonio market lead for Smart City Locating, said she estimates average monthly rents fell about $34 last year due to the pandemic and the number of new units built.
“Austin really became a renter’s market last summer – which is really unheard of here, especially during the busiest season of the year,” Kerr said.
Sara Glenn, Smart City Locating’s sales development lead in Austin, said many people who planned to move here from out-of-state put those plans on hold.
“Most of our clients were existing Austinites looking to decrease their rent or take advantage of specials or lower prices,” Glenn said.
Heimsath said the pandemic-induced stay-at-home orders in March and April of 2020 “really hurt leasing activity in the spring when a majority of new leases are signed.”
But there are signs the market has started to rebound since June, Heimsath said.
In the weeks after the pandemic hit, “the industry responded well with video tours, Facetime walkthroughs and online leasing applications, but retooling the leasing experience took time and affected the leasing momentum at many properties,” Heimsath said. “Now, most properties are allowing in-person tours (with face masks) and leasing traffic is up and leases are getting signed.”
After a decline last year, the average rent and occupancy rates in downtown Austin have started to trend back upward.
In December 2019, downtown apartment rents averaged $2,561 a month, and units were 92.2% occupied, on average. Six months later, in June of 2020, occupancy had dropped to 88.6% and rents had dropped by more than $200 a month, to $2,356 on average.
In December, the downtown-area occupancy rate had bounced back up to 93%, and rents, on average, moved up slightly, to $2,374 a month.
“You’re already seeing a recovery in the downtown market between June and December,” Heimsath said. “I didn’t expect that at all.”
Market still struggling
Even with those upward trends in the downtown Austin area, the overall Central Texas apartment market has clearly cooled, industry experts say.
The Austin apartment market “continues to struggle,” according to CoStar Group, a real estate data company. CoStar puts Austin’s vacancy rate at 10%, which it says is the country’s fourth-highest level. CoStar said Austin-area apartment rents have seen some of the biggest declines among the nation’s largest markets.
A significant factor is that the area’s boom in apartment building hasn’t slowed down, even as the COVID-19 outbreak has led to a drop in demand.
Austin was one of the busiest markets for apartment builders last year, according to RealPage, a real estate data analytics firm. In Central Texas, crews started work on more than 10,700 apartment units – the fifth-highest level among major metro areas nationwide, according to RealPage.
On top of that, the 14,000 apartment units under construction in the market represent 6% of existing inventory – the fifth-highest level nationwide among major markets, CoStar said.
One of the many projects underway is Siena Round Rock, a luxury apartment complex that will have 198 units. Siena, which is about 2 miles west of Texas 130, is being developed by RightQuest Residential in Round Rock.
Another example is Aspen Heights Partners, which plans a large mixed-use project at 12th and Red River Streets in Austin. Aspen Heights will redevelop the site of the former Health-South rehabilitation facility to make way for a 36-story residential tower, a 15-story office building, retail spaces, and a half-acre elevated public park.
“That’s a lot of new construction coming,” said Sam Tenenbaum, director of analytics in Central Texas for CoStar. “With this much construction, it’s likely that vacancies will rise well into the double digits from the current roughly 10% level today.”
Tenenbaum said there’s no doubt that developers and investors “who have deployed a large amount of capital in Austin are hoping for brighter days in the apartment market, but with more than 6% of inventory underway, the market will need to see some significant improvements in the months to come.”
Robin Davis, another consultant who tracks the Austin apartment market, said that despite the best efforts of owners and managers, “the year concluded with annual declines of 3.3% in occupancy and 4.4% in rent.”
Once the pandemic hit, “amenities that had been carefully cultivated to create social interaction were now verboten and seen as a liability for the near future,” said Davis, owner of Austin Investor Interests. “The adjustments were swift – an industry-wide shift to online/virtual leasing, payment plans to help mitigate losses and keep tenant goodwill, shutting down common amenities but finding other perks to offer residents,” such as bundled media, concierge deliveries, tech packages and chat boxes.
Davis is tracking 316 projects, totaling 70,673 units, that are under construction or going through the permitting process.
“The coming year will be challenged by the heavy addition of new units,” Davis said. “Gratefully, there is encouraging news for job and population growth, both of which are expected to rise (this) year.”
Tenenbaum and others point to recent Austin-area expansions involving major tech companies including Tesla, Oracle, Apple and Amazon, as reasons for optimism.
“Investors and developers as well are certainly hopeful that these economic wins will lead to more apartment demand in the future,” Tenenbaum said.
Impact on rents
Heimsath, of Capitol Market Research, said he doesn’t think Austin-area rents will increase in the near-term. Rents could rise in the second half of the year in some parts of the metro area, he said, but any increase is likely to be small, because so much new supply is coming onto the market.
“A chronic shortage of labor and materials is driving up costs and slowing down the delivery of new units to the market,” Heimsath said. Many projects are two to six months behind their originally scheduled timetables, “which actually is better for the market as a whole, but obviously not for individual project owners,” he said.
The region “may see a small amount of rent growth as we come out of recovery from COVID, but we don’t anticipate a large increase just yet,” said Cindi Reed, vice president of sales and development for ApartmentData, a marketing and data services company for the multifamily industry.
Reed said in many U.S. cities, apartment renters seem to be moving into the suburbs where they can get more for their money.
“Austin is no different, as we are seeing positive rent gains in outlying metro areas,” Reed said. Those include Bastrop, Dripping Springs, Kyle, Buda, Hutto, Georgetown and Round Rock.
Neil Gerstein, an analyst for online rental marketplace Zumper, said it’s possible renters might return to more expensive markets as the economy improves and the COVID-19 vaccine rollout occurs – but it’s also possible they might continue to prefer lower-cost options.
“There are some early signs of the former happening,” he said, “but it’s too early to tell at this point if it is truly an inflection point.”