Headlines highlighting Austin’s negative rent growth over the past year paint a picture of a struggling market. This trend is real, but the headlines only tell half the story. Austin's correction is a story of supply outpacing robust demand in a market that continues to demonstrate strong absorption, and net positive rent growth over a turbulent period. Nonetheless, the correction has presented challenges for developers whose underwriting was based on rent projections that haven’t held up. Fortunately, there are an increasing number of PropTech solutions that offer a lifeline to improve margins, as long as you’re discerning in your assessment. We see valuation in solutions that focus on optimizing operational efficiency, data-driven actionable insights, and new revenue streams. These are the kinds of solutions that will help developers push through this adjustment period.
In order to tell the story of the Austin market today, we’ll first back up to look at the supply and demand dynamics that existed in 2020.
Austin’s Boom
The pandemic caused a significant shift in housing demands and prices, with many people relocating to more spacious and affordable cities like Austin, and the markets’ pricing adjusting accordingly. Austin saw an unprecedented 30% rent growth as a result, but to put into context this growth, let’s look at supply trends leading up to the pandemic:
- Chart 1 below is from Q2 2020. It shows a drop off in completions, and flattening of new permits in 2019, just before pandemic.
- The tapering off in completions in 2019 was followed by a spike in new supply, that was evident as early Q2 2020.
- Zooming in on Chart 2, Net Deliveries grows, but now nearly enough to keep pace with demand.
Chart 1:
Chart 2:
Supply Catches Up
In response to the city’s remarkable rent growth, developers doubled down on Austin, increasing housing production in the city to 2x the national average. This surge in supply outpaced demand and led to the 6%+ decrease we’ve seen in the headlines, the longest downward rent trend in the last decade. The data on units under construction and new construction starts explains this downward trend in rents:
Chart 3:
- The number of apartments under construction rose sharply from March 2022 to March 2023.
- In mid 2023, we see new apartment openings on the rise, as the number of apartments under construction and proposed for construction drops sharply.
- This trend – high number of completions, and lower number of apartments in progress – which starts in mid 2023, coincides with a drop in median rents, just as one would expect.
Chart 4:
This fluctuation in supply and pricing is part of the natural boom and bust cycle, but it was driven to extremes in Austin during the pandemic. This much is evident to anyone paying attention. But to fully understand the state of the market today, it’s important to put in context
(1) the high water mark of rents in 2022, and
(2) the trend in demand from 2020 to today.
Digging a Layer Deeper
The second part of this story is the resiliency of the Austin market, which has demonstrated enduring demand amid an historic spike in supply. Through the first half of the year, Austin has ranked second for absorption on an absolute basis.
Looking back at Chart 2, Net deliveries are expected to peak this year, and so far, Austin’s demand has held up. The projected demand for 2024 is second only to the pandemic era boom. But if demand alone isn’t enough to convince you of the resiliency of the market, take a look at the rents.
Despite historic negative rent growth, Austin rents are about 15% higher than they were before the pandemic, showing net positive rent growth, despite one of the highest supply spikes in the country during this period.
The Real Problem
Developers that have apartments delivering between now and the end of 2024 face a real problem. The underwriting and loan agreements for most new developments were established during the boom when the market saw unprecedented rent growth. DSCR covenants usually sit around 1.25%, but some developers won’t be able to meet this, even at 99% occupancy, because of the drop in rent rates. Until supply evens out, developers and operators are forced to find new ways to improve NOI during this supply-driven correction, as every dollar of NOI amounts to $20 of appraised value for the refinance or sale that they all go through.
Solutions in PropTech
For developers, the current environment presents a golden opportunity to innovate with PropTech solutions. However, just as an analysis of the Austin market requires nuance, so does one’s assessment of PropTech. The number of PropTech solutions available to developers has grown tremendously in recent years, so navigating through the noise to identify truly impactful tools is essential.
The focus of this article is not on PropTech solutions themselves, but it's worth noting where we see opportunity. There are three main areas of for developers and operators to focus is they want to optimize for NOI growth: operational efficiency, data-driven decision-making, and ancillary revenue opportunities.
- Operational Efficiency: From automating administrative tasks to reducing downtime of vacant units, there are many proptech solutions that increase efficiency and lower OpEx or increase revenue as a result.
- Decision Making: Data analytics platforms and AI-driven insights are at the forefront of PropTech advancements, enabling developers and property managers to make informed decisions quickly which is crucial in a dynamic market environment where it can make the difference between success and failure.
- Ancillary Revenue: PropTech also provides many opportunities for generating additional revenue streams, such as platforms that enable the efficient management of amenities like coworking spaces or short-term rentals; helping property owners to maximize their revenue potential beyond traditional rent collections.
Charting a Path Forward
While Austin's recent rent correction has posed significant challenges for developers, it is important to recognize the underlying strength and resilience of the market. The surge in supply following the pandemic-induced boom has naturally led to an adjustment period, but demand remains robust and absorption rates are high. Nevertheless, developers and operators are feeling the pain from the markets negative rent growth. Charting a path through this correction lies in leveraging innovative PropTech solutions to enhance operational efficiency, make data-driven decisions, and explore new revenue streams. By adopting these technologies and strategies, developers can navigate the current market dynamics, maintain positive NOI growth, and capitalize on Austin's enduring appeal. This nuanced approach will ensure that they not only weather the current downturn but also emerge stronger and more competitive in the long run.
