Austin and Dallas are seeing turnarounds, Houston has an interest in condo conversions, and San Antonio remains healthy.
Don Ostroff

Over the years, the four major multifamily markets in Texas — Austin, Dallas, Houston and San Antonio — have proven to be very cyclical with each market changing its place in the cycle yearly as the wheel turns and markets evolve. Four years ago, Dallas was at the top of the list, with a nation-leading 110,000 new jobs, a staggering 24,000 new units and an even more impressive absorption of 27,000 units. Not surprisingly, acquisition activity was frenzied. San Antonio, ever slow and steady, was too slow for most, and, in reality, not on anyone’s radar screen.

Then the tech market heated up, and with weekly job additions in the tech-heavy Austin market, multifamily demand far surpassed new supply. The results exceeded everyone’s projections as occupancy climbed to the mid- and even upper 90s citywide, rates increased 7 percent to 8 percent during the year and everyone wanted to buy in Austin. That is, until the tech wreck sent multifamily occupancies plummeting overnight. At the same time rates declined by 25 percent and continuing construction, albeit modest, increased the unused supply.

In 2003, it was suddenly the highly volatile Houston’s turn. With new supply of only 3,000 units and demand above 6,000, occupancies rose, investor interest returned, and Houston was hot again — but not for long. When Houston received an “A” at the National Multi Housing Council conference, developers returned by the dozens and, within 12 to 18 months, the new supply far exceeded dwindling demand.

Suddenly in San Antonio, that slow and steady city we’ve all ignored for years, annual, never-changing rent growth of 2.5 percent to 3 percent looked very attractive, annual absorption hovered at 3,000 units and new supply was steady at about the same level. Investors came in droves to buy everything in San Antonio, while at the same time, paradoxically, nearly every major institutional owner decided it was time to exit the market. Private buyers were more than happy to take their place, bidding up prices to record levels on every class of property. Then, in January 2004, San Antonio received an “A” rating at the annual National Multi Housing Convention and was listed by some as one of the top three multifamily investment markets in the nation. (And this was the first year San Antonio was even rated.)

As they had done in Houston the year before, developers came in record numbers to San Antonio, increasing the pipeline from its customary 3,000 units yearly to more than 6,000. With many of those now delivered, occupancy has retreated somewhat.

As the 4- to 5-year cycle now comes full circle, Dallas has captured the interest of many institutional, REIT and private buyers. Everyone is eyeing Austin for opportunistic buys ahead of the continued increase in rates and occupancy; Houston is slowly recovering from 15,000 completions in 2004, which pushed vacancy to 14 percent; and investors are evaluating San Antonio to see if the increased business climate can generate demand adequate to absorb the rising supply.


Many factors are suddenly converging to make Austin a hot market once again. Leading the way is growth in tech employment after several years of huge layoffs and decline. Overall employment is expected to grow 3 percent with 22,000 new jobs in the next 12 months. In addition, state government jobs in the capital city increase annually and currently account for 68,000 positions while federal employees number 78,000. Not to be overlooked are the more than 20,000 staff members at University of Texas at Austin, the nation’s largest university with 51,000 students.

Population, which has already increased 41 percent since the 1990 census, is expected to add another 13.3 percent, or 1.6 million persons, by 2009. Finally, the continuing growth of Interstate 35 (the “NAFTA Corridor”), which runs right through Austin, brings additional commerce to the city.

Multifamily construction has been especially strong in the far north and northwest as well as in the Barton Creek area in the southwest, where sites are limited by aquifer constraints. Of particular note is expansion in the southern part of downtown finally jumping across Interstate 35, for-rent and for-sale product on the north edge of Town Lake and the Rainey Street district, and numerous for-sale projects as stand alones or part of a mixed-use project just south of the CBD core.

Overall, 4,230 units were completed in 2004 and a minimal 1,596 units are currently under construction, boding well for continuing increases in occupancy and rents. AMLI has developed AMLI Downtown, a 220-unit high-rise nearing lease-up after averaging 15 to 20 units per month since its April 2004 debut. Also downtown is ZOM’s high-rise near Town Lake and the 250-unit Fairfield project called Rainey Street Apartments, which is scheduled for completion next summer.

AMLI may build another 14-story high-rise with 220 units and 35,000 square feet of retail, just a few blocks from its first project. Simmons Vedder has an ambitious 22-acre mixed-use project in the works near the heart of the University with the first two phases of what will eventually be 650 apartments already well underway. The initial 335 units should be complete by fall of this year. Several condo projects have also been added recently with sales prices from the low six figures reaching to more than a million dollars.

Overall, Austin was recently ranked as the Number 2 multifamily investment market during the next 5 years by MPF/Yield Star, a market research firm that provides apartment data.


The San Antonio apartment market continues to outperform other Texas markets with an unbroken record of positive rent growth, absorption and high occupancy. With expanding employment opportunities, facilitated by the Toyota plant under construction and other new businesses, the apartment market’s occupancy rate remains relatively stable in spite of increased supply. In fact, rents increased 2.7 percent in 2004. As a result, investment activity will remain strong during the next year.

Driven out of California by inflated prices for multifamily properties, investors are going to San Antonio, where the prices are much lower and the capitalization rates are higher. At the end of 2004, the city’s average apartment occupancy rate stood at 92 percent, according to Austin Investor Interests. Since 2000, the occupancy rate in the local apartment market has averaged 91 percent to 93 percent. Local companies hired a total of 11,300 employees during 2004, a gain of 1.55 percent.

There was a net gain of more than 1,300 conventional units during 2004. With the record number of starts that occurred, coupled with the units that were pushed into 2005 by construction delays, nearly 4,700 conventional units and more than 1,700 affordable units are expected to come on line during 2005.

Given this, 2005 will be challenging for the San Antonio apartment industry. Once the influx of new units has hit, there will be a bit of a delay in new construction as the list of proposed product for 2006 is minimal, and the opportunity for absorption will commence throughout the second half of 2005.

Buyers recognize the relative stability of the market, as the occupancy rate in the San Antonio apartment market did not dip below 90 percent during the most recent economic downturn. They are optimistic about employment opportunities during the next few years as many new corporate announcements will prove to enhance the employment situation and increase population figures throughout the region. This is especially evident with the opening of Toyota’s facility. Investors have already begun to focus on the South Central submarket, which will be home to Toyota’s San Antonio plant upon completion in 2006.

Occupancy has historically remained in a narrow band between 92 percent and 94 percent, while rents have increased 2.5 percent to 3 percent nearly every year. With increased construction (currently 6,400 units) occupancy has dipped slightly to 91 percent, but rates are remaining stable. Unlike Houston, there has been minimal activity in condo conversions, and few projects have been built as condominiums. A significant number of new projects are affordable housing, which somewhat reduces the overall competition for the high-end renter at new Class A properties.

Development has been focused largely in the Medical Center and across the city’s northern perimeter along Loop 1604 in the North Central and Northwest submarkets. Bristol Development, the Hanover Company, Embrey Partners, Archon, Birkel Development, Easterling Development and Godfrey Residential have been active in these areas.

Job growth remained steady with a gain of 1.6 percent in 2004 and a similar gain is projected in 2005. The population, which already increased 30 percent since the 1990 census, is anticipated to add another 9 percent — or more than 150,000 persons — during the next 5 years.


After several years of declining rents and occupancy caused in part by job losses and an exodus to homeownership, the Dallas multifamily market has begun what is likely to be an impressive comeback. For the first time in several years, many submarkets have seen occupancies return to the low to mid-90s and concessions falling from the lofty 2 months’ free rent on a year lease, which had become the norm in many areas. Currently, overall city occupancy is at 90 percent.

After construction peaked in 2000 with 24,000 units delivered, new supply has averaged about 10,000 units annually. However, during 2005 only 7,300 are scheduled to be delivered, the lowest total in more than a decade. With even modest job growth, it is forecast that absorption will be even higher, and with a strengthening economic recovery, occupancy should continue to rise citywide.

Economists estimate the Dallas/Fort Worth area gained nearly 50,000 jobs in 2004 and projections are for job gains in excess of 100,000 during 2005. Should those levels be achieved, there will be significant upward pressure on both rates and occupancy across the region.

Population growth continues to escalate, and substantial increases are expected across the 16-county north Texas area. With a current population of 6 million, it is anticipated to boom by 2020 to more than 8 million persons, an increase of 33 percent. More specifically, the DFW Metroplex population is expected to increase by 632,000 from 2004 to 2009.

Dallas occupancy increased a half point from year-end 2003 to 90 percent for year-end 2004. Two-thirds of the Dallas submarkets reported increases in average occupancy for 2004, a significant improvement over 2001 to 2003. The Intown Dallas area averaged the highest overall gross occupancy at 94.6 percent.

A total of 10,980 units were delivered in Dallas/Fort Worth in 2004, but net inventory change was lower due to demolitions and condo conversions. Completions were slightly higher than expected in 2004 as some projects delivered early. However, with less than 7,300 units expected to come on line in 2005 and absorption forecast at a minimum of 10,500 units, the market is poised for a robust recovery to begin during 2005.

Geographically, construction is either very close in — Intown, Uptown and Downtown — or it is increasingly farther out. While sites are available in some Fort Worth submarkets less than 10 miles from the CBD, in Dallas, few sites exist within 12 to 15 miles of downtown. This is especially true in the area north, including North Dallas, Plano, Addison, Carrollton, Farmers Branch and Richardson. As a result, developers have moved south.

Some developers have sought re-zoning to create infill sites. However, the cost of infill sites almost necessitates mixed-use projects and extremely high rents ($1.50 to $1.60 per square foot), causing a lessened impact on nearby Class A properties.

The Dallas economy maintained a steady pace throughout 2004, although job growth remained sub par. The government sector grew the most — adding 7,100 jobs this year. Another industry of note was the construction industry. Although gaining only 1,800 jobs this year, it was the industry’s first year-over-year employment increase since August 2001.

New residential development in Uptown and redevelopment/conversions in downtown Dallas exploded in 2004. More units are under construction or are in planning now than ever before. The downtown (Intown submarket) attracts primarily single persons or families without children. The average household income totals $96,470 per year, and the majority of the population in downtown ranges from 25 to 44 years old. In order to attract more individuals within this demographic, projects such as the Main Street Master Plan are underway. This plan has expanded the presence of retailers and restaurants downtown.

Additionally, developers began redevelopment of the Interurban Building, located at 1500 Jackson. Plans for this redevelopment project include opening a 20,000-square-foot grocery store on the ground floor and converting the balance of the space to 134 rental units. Another conversion begun last year included the redevelopment of the Dallas Power and Light Building by Hamilton Properties into 158 apartment units and more than 25,000 square feet of retail space. In addition, the conversion of Republic Center I, a $35 million project by Gables, is projected to begin by the end of this year.

Camden is completing Phase II of its Farmers Market project with an additional 284 units. In addition to the existing 1,700 units in the Dallas CBD, more than 1,000 units are currently under construction/renovation in 11 additional projects. Several hundred units are for-sale condominiums.


Absorption gained significant ground during 2004 in the Space City, with an impressive net gain of 5,600 units. Class A properties actually absorbed more than 9,000 units, with Class C and D properties showing net losses. Should employment growth sustain anything close to the 6,700 jobs gained in December alone, absorption will continue its upward ascent. The heaviest concentrations of new construction are in Uptown/Galleria, West Houston, the Inner Loop and along major freeway corridors. Overall city occupancy stands at 87 percent, with a range among the four classes of 83 percent to 88 percent.

In spite of less-than-stellar market conditions, investor interest has remained strong, with buyers paying record high prices for properties — especially for condo conversions in and around the downtown core. Others look for turnaround potential in foreclosure sales and performing assets in every class type. Gross rents ticked up slightly but rising concessions held net rents to similar or even lower levels than in 2004.

The biggest news in Houston multifamily has been the dramatic increase in condo conversions with properties sold or offered for sale by developers, including Hanover, Martin Fein, Archstone-Smith, Simmons-Vedder and Sueba USA. Submarkets with the highest levels of activity have been the Galleria, Medical Center, Museum District and the fringe of the CBD. Simmons-Vedder sold the 253-unit Museum District property, 3333 Allen Parkway, to BCN Development for a reported $367,000 per unit. BCN plans to convert the property to condos, offering units for $300,000 to $2.2 million.

Recently on the market are Hanover’s 351-unit Lofts on Post Oak in the Galleria, Archstone-Smith’s 276-unit Braeswood Park in the Medical Center and Martin Fein’s 224-unit The MacGregor in the Museum District. Also in the Galleria area is Alliance Residential’s Lofts at Broadstone. The combination of a longer commute, historically low interest rates and buyers eager to give up home and yard maintenance has suddenly made condominium ownership an attractive and viable option for many.

Don Ostroff, CCIM, is senior director of Multi-Housing Investments with Cushman & Wakefield of Texas.

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.

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