TEXAS SNAPSHOT, MARCH 2012

AUSTIN LAND MARKET

The land market in Austin, like the rest of the country, is driven by future expectations of real estate. Therefore, the same underlying fundamentals driving demand for new construction will also drive the demand for land development.

Fortunately, Austin continues to outperform the nation economically. Most metro areas throughout the country have yet to recover the employment losses sustained through the Great Recession. Austin, with a net job growth of 16,300 in 2011, has now surpassed its pre-recession employment peak of 770,000 in August 2008. Current estimated employment is more than 787,000, according to the Bureau of Labor Statistics.

Austin remains attractive to employers because of its educational infrastructure, young educated workforce, IT infrastructure and concentration of technology industries. While not the lowest cost of doing business, it is far and away more affordable than other tech centers such as San Jose, California, Boston and northern Virginia.

This underlying strength and economic growth will continue to propel the Austin real estate market through the recovery and into the development phase of the real estate cycle during the next 2 years. Tech employers will continue to either expand, like Dell and Samsung, or to relocate like Altera. Based on strong underlying fundamentals, Austin should experience one or two announcements of major relocations from higher cost areas during the next several years as employers chase more attractive business costs.

Austin’s economic appeal continues to place upward pressure on the available space in office and industrial real estate. Office vacancy has declined to 14.6 percent from a high of 20 percent while rents have rebounded 3.6 percent in 2011 to an average of $22.65 from lows hit in 2010, according to CBRE. Industrial vacancy has declined to 14.4 percent from a high of 16.6 percent while rents have rebounded by 4.6 percent, according to CBRE. Prices for land suitable for both office and industrial are expected to rebound from their lows, especially for preferred sites for corporate, tech-serving industrial and value-oriented office as the best locations for these uses are quickly acquired.

The apartment market has taken off with more than 4,800 units under construction with several other projects planned in 2012, according to the Austin Business Journal. Apartment vacancy rates have rebounded to 5.1 percent from a high of 8.6 percent according to CBRE and are forecasted to tighten further to 4.3 percent. This should continue to attract development during the next few years. Despite current economics, market fundamentals should be watched closely to avoid oversupply of new apartment construction. In addition, with 6,115 new home starts in 2011, Metrostudy forecasts a second straight year of expansion in home construction in 2012. Growing demand for housing should place upwards price pressure on well-located land for residential use, particularly lots for single-family housing. With a limited number of developed lots available to builders in prime locations, upward pressure on lot and home prices is expected for the first time in years.

As an example of new development in the South Austin submarket, Stratford Land has begun marketing the first phases of Estancia, a 600-acre mixed-use master-planned community in South Austin at the intersection of Interstate-35 and Highway 45 Outer Loop. Four years in the planning process, the first phase, expected to break ground in the middle of 2012, will provide commercial sites, including property for large-scale corporate users and residential. In addition to excellent access to roads and Bergstrom Airport, land for tech uses will be available that provides the potential for redundant power — key to most tech users. The location of the Formula-1 facility, currently under construction to the east, will further attract users to South Austin. Both projects are expected to be an anchor for future development of South Austin. Other submarkets to the north will continue to grow as well.

Overall, Austin remains attractive to both corporate users and a young labor force seeking an affordable high-quality life. Land prices should continue their upward climb as well-located sites become scarcer. Nationally communicating the benefits of an Austin location will remain critical as users evaluate options across the country. At the same time, public-private development vehicles will also remain essential in financing the expansion of needed infrastructure.

— Mark Drumm, chief risk officer and director of research for Stratford Land

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