Labor, affordability remain concerns in strong Austin real estate sector

Austin’s diverse and growing economy has kept the Central Texas region one of the most attractive real estate markets in the country in recent years, but local developers see some recurring issues – affordability, land use policy and the local labor supply – impacting the construction of housing and other building types.

A recent Urban Land Institute Austin luncheon looked at the emerging trends in real estate nationally as well as in Austin, which is ranked as the No. 5 market in the U.S. based on a survey of the national ULI membership.

Debt costs from high interest rates and ongoing soft demand for office space due to the shift to hybrid work are national trends that are also at play in Austin. Josh Parks, a partner with financial consultants PwC, said the market for higher-end class A office space will likely remain strong because of the demand for premium features, but lower-margin class B space could be more prone to defaults or the need to convert the space at considerable cost.

This dynamic is significant in Austin because of the ongoing vacancies in some of the most high-profile office towers downtown.

With higher interest rates pushing the typical monthly loan payment for a home up by as much 50 percent, panelists said they’re struggling to deliver projects at a price point affordable to middle-income earners.

“If you’re in single-family (development) you have affordability issues because your median home price in the metro area is about $430,000 and and the costs are substantially higher with interest rates,” said Terry Mitchell, president of Momark Development. “If you’re in multifamily, your typical apartment project has $2 million more in financing costs than it did two years ago and rents haven’t necessarily covered that. If you’re in the development business, you’re driving a tanker. Unfortunately, demand is a speedboat, and speedboats can change direction on you.”

Robert Lee, CEO and principal with Pearlstone Partners, said an ongoing issue in Austin’s housing crisis is the reluctance of many residents to adding density to existing neighborhoods.

“We still have a NIMBY issue and, you know, it befuddles me why people can’t understand basic fundamental economics of supply and demand. You increase supply from the demand and prices should go down,” he said, adding that he sees local land use policy as an obstacle to adding supply.

“Everything that we’re seeing that’s coming out of the city with the economic, with the political environment, is it looks like we’re probably going to get stymied again in terms of delivery. It’s not world-ending, but we are spending a lot of time and effort going around and around over the same issues.”

Lee also said that while recent measures to increase density throughout the city make sense, developers are reaching a “compression point” at which increased borrowing, labor and permitting fees are going to keep rents and purchase prices higher than many would like.

“Everybody’s done spreadsheets … the difference between a yield on a unit at two units, four units, 50 units or 160 units. There’s a fixed cost no matter what to everything that we do and so if you spread that fiscal cost over more units, then you get a cheaper price.

“I personally feel like we’ve reached that point where I call it the compression point that we can’t get compressed any further and that’s because of labor, construction, construction cost, material costs and so forth.”

On the investment side, Jennifer Wenzel, director of the Teacher Retirement System of Texas, said her organization’s allocation of 15 percent of its funds in real estate investments make it a close watcher of local trends. Wenzel said the growth of large technology companies in the area makes the creation of large data centers a need that will likely impact land costs in the outer city limits and suburbs.

“There’s a big planned facility (in) Pflugerville, north of Austin, that could create kind of a new regional power hub for data centers,” she said. “If we could create some sort of data center hub in our region, I think that would be super.”

Photo made available through a Creative Commons license.

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