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In the first month of 2022 alone, Austin Business Journal has reported on thousands of new apartment units under construction or planned in the metro. Despite the intense development activity, rent prices are higher than ever — although rent appreciation could slow significantly in the coming months with all the additional inventory.

Nationwide, average rent for a one-bedroom apartment grew about 22% in 2021, according to Rent.com. In Austin, the increase was roughly 41%.

Geography mattered in terms of rent appreciation, according to the Austin Apartment Association’s recently released “state of the industry” report. Prices climbed fastest in the past year in Northwest and Southwest Austin, as well as some of the northern suburbs, all clocking in at more than 25%. Central Austin, the report notes, experienced rental rate spikes of about 7%.

The median rent in the Austin metro reached $1,569 this month, according to ApartmentData.com.

As with the single-family market, these price spikes are being driven by an acute lack of supply. National apartment occupancy rates reached an all-time high of 97.5% last year. That meant that less than 3% of the country’s apartment stock was unoccupied, leaving few options for renters looking for units.

In Austin, the occupancy rate is 92.5%, per ApartmentData, lower than the national rate but still fairly high, especially when compared with 2020 rates.

Experts attribute the increase in apartment renters to factors including older residents cashing out on their homes — amid historic sales prices — and downsizing to apartments. The market might also be experiencing the pendulum swing of pandemic living: Many people who moved in with family during the pandemic are now looking for independent living options once more.

But there may be light at the end of the tunnel, as many of the units under construction in Austin will come online within the next two years. CoStar estimates Austin’s 2022 rent appreciation will be around 4.7%, a far cry from 2021’s staggering rate.

There are currently about 13,000 units under construction in Austin, and another nearly 37,000 proposed, according to ApartmentData. And the pipeline has already expanded significantly in 2022.

OHT Partners LLC, previously known as Oden Hughes, is developing more than 300 apartments just north of the Domain. Austin-based Stratus Properties Inc. (Nasdaq: STRS) is in the early stages of developing a 270,000-square-foot, 317-apartment community at 7113 Burnet Road. TRG North Lamar LP is working on Aura Avery Ranch, a 339-unit community near Cedar Park.

Austin-based Lincoln Ventures LLC recently revealed plans to develop a mixed-use community on East Fifth Street, which will include 625 apartments. Inspire Real Estate Development LLC, another Austin company, quietly broke ground on a more than $2 billion mixed-use project in Williamson County last week, which will include three apartment communities with an undisclosed number of units.

Building a large apartment community is an extensive process from start to finish, which helps explain why, despite the robust development pipeline, the Austin area is still seeing such rapidly rising prices. Building timelines have ballooned in the past year, as supply chain issues hamstring builders of all sizes, from those working on single-family homes to large-scale apartment developers.

The association’s report also states that about half of the existing multifamily stock was built before 1989, more than 30 years ago, and that renovations will become more necessary in the coming years.

Staggering rental rates do not bode well for Austin’s ongoing affordability crisis. Bob Pinnegar, president and CEO of the National Apartment Association, noted in the report that developers have more incentive to build class A apartments than affordable ones, often driven by the need to repay investors.

Katya Watson, 2022 president of the Austin Apartment Association’s board of directors, said government policy also contributes to rising rent costs. She gave the example of parkland requirements, which mandate that developers reserve a certain percentage of their land as open space. She said while those kinds of standards are worthwhile, it may be time to revisit the calculations behind them, considering the extreme housing dearth in Austin.

“Anything that comes [through the city] that may affect a developer or an owner, in the end — just like any business — it starts to trickle down and affect the consumer,” Watson said.

She said developers need to be able to make money off their properties in order to maintain what she called the “cycle of life” in the rental industry, where developers can use profits from one project to help kickstart another.

Theresa Ebner is director of asset management for LDG Development. The company — based in Louisville, Kentucky, but with offices in Austin — focuses solely on developing affordable apartments and senior communities.

“It is really hard with the cost of land, the cost of construction, the cost of insurance … and not all lenders want to lend to affordable housing, because the profit margins are very small,” Ebner said.


Publication: Austin Business Journal

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