Austin deals with growing pains of being rare real estate ‘supernova’

If the last decade of booming real estate growth has earned Austin the designation of being one of four “supernova” markets, according to the national Urban Land Institute (Nashville, Raleigh/Durham and Charlotte being the others), then the onset of an expected slowdown will likely come with an increase in growing pains related to affordability, infrastructure and changes in the labor market.

That, at least, was the opinion of the real estate and planning experts who participated in last week’s ULI Emerging Trends panel discussion, which looked at broader national trends and their impact on a still-favorable market like Austin.

Moderator Josh Parks, a partner at business services giant PWC, said as rising inflation and interest rates have taken hold following the Covid-19 pandemic, certain asset classes including office space and retail have become less desirable while multifamily residential and industrial building are expected to remain strong. For Austin, Parks said there’s a question of what will happen as an uptick in building to meet population surges interacts with a downturn in purchasing and investment for all types of projects.

Panelists discussed a variety of factors at play in the Austin development world, with Jamil Alam, managing principal at Endeavor Real Estate Group, joining the chorus of developers looking for the city to take a more collaborative approach to encourage the construction of more housing.

“If they could just take their foot off the throat on regulation and let us try to be a part of a solution and be a little bit more collaborative in their approach … we’re not the enemy,” he said. “Speaking for Endeavor, we feel like we need to be a part of the solution because if we ignore it, it’s going to really create some severe social issues and so we want to be a part of the solution, but man, it’s hard.”

Gerry Gutierrez, CEO of DDelta Real Estate Investments, said there is growing uncertainty around the existing financial models for complex project types including public facility corporation deals. The possibility of increased risk for those projects will likely make builders retreat to more trusted, stable deal types.

“We have seen lately a lot of PFC projects, providing the land and leasing it to 75-99 years, and because of the lack of leverage available those are penciling down,” he said. “We haven’t seen the whole cycle of a complete PFC so we don’t really know how the market is going to take the sales of that type of project, or how the market is going to react. In terms of affordability, it might be a good solution because it helps the developer to make the numbers pencil down.”

Alam said there is no getting around the downturn that’s coming for the city’s office space market, which is already seeing a pullback in leasing thanks to spending cuts by tech giants such as Facebook parent company Meta.

“Austin maybe historically has absorbed 750,000 to 800,000 square feet a year of office space. The last few years because of tech, maybe that’s jumped up to 1.4 million average, but that was all by about seven or eight really large tenants. And our concern was that those tenants might stop leasing, yet we had ramped up the supply to kind of two times what it needed to be,” he said. “As it turns out, they slammed on the brakes at a point in time where we had ramped up supply about four times what it needed to be. It’s just going to take time to absorb. And unfortunately, unlike multifamily and storage and some others, office leasing is for the most part in the long-term lease business.”

Regarding the city’s lack of “missing middle” housing, Alam said City Council and other leaders are moving in the right direction with steps to reduce compatibility requirements.

“There’s almost an inverse relationship between our compatibility regulations in Austin and the ability to produce affordable housing because that’s exactly where you want to create it, along the commuter corridors, which is tapping to be right next to single-family residential,” he said.

“The way we think about affordable housing nationally and locally is also very sort of formulaic. And I don’t think that the old way of thinking about it has really addressed the issue, because we just had this huge gap of missing middle housing that in Austin there’s not really zoning that supports development of missing middle housing, which can go an awful long way to addressing lower-case affordable housing.”

Photo made available through a Creative Commons license.

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