Apartments Outpace Condos Downtown
New developments are popping up downtown to accommodate the thousands of people moving to Austin each year, but most of the new construction is rental units.
A combination of economic factors has pushed apartments ahead of condos, at least for now.
“There’s no question that we are in a rapid development mode for apartments right now,” said Charles Heimsath with Capitol Market Research, a real estate tracking firm in Austin. “Condominium development has kind of taken a back seat to apartment development for the short run.”
So why is this happening? Well, for one, the apartment occupancy rate is high. Capitol Market Research says it’s at 97 percent in Austin right now and reports that rents downtown are twice as expensive as the city average.
“Higher density development is more expensive, consequently the rents have to be higher,” Heimsath said.
But there’s another factor at play. Jim Gaines at the Texas A&M Real Estate Center says it’s just harder to get a loan to buy a condo.
“Many, many, many of the financial institutions that traditionally have lent money to condominium buyers, just as they do to single family detached homebuyers, they are out of the condominium market because condominium values tend to fluctuate and are much more volatile for the traditional single family home,” Gaines said.
At the same time, it has become harder for developers to borrow money to construct a condo building. Much of the financing for the commercial market comes from institutional lenders, such as life insurance companies and pension funds. Since the recession hit, they’ve been more interested in generating a steady flow of income, according to local real estate investor Richard Kooris with Pegalo Properties.
“It’s not of much use to them, even if they could make a higher return, to get involved in a condo project, which is going to monetize in two or three years, and then they’re going to have a big chunk of cash, but then they’ve got to find another way to put that to work,” Kooris said. “Whereas if they just purchase and own a multifamily project, they get this stabilized, slightly increasing cash stream out into the future, and they use that to service their pension obligations.”
Some projects in Austin that were initially planned as condos have actually been converted into rental units. The most famous case is probably the 300 units being constructed at the Seaholm development. Meanwhile, as the number of apartments grows, investors may become increasingly concerned about overbuilding rental units in Central Austin, because that would lead to a drop in rental prices. That might be welcome news to people who complain about how downtown living is a lifestyle increasingly reserved for the wealthy. Then again, investors could always flip the switch and sell off the apartments as condos.