How aging housing stock offers multifamily opportunities

 —  Article by JLL Staff Reporter
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Boston, Massachusetts and Austin, Texas. The two markets may seem like opposites: one is located in the Southwest, the other in the Northeast region.

One is known for its eclectic music and entertainment scene, the other as a renowned ‘meds and eds’ research hub. But if you take a look at each city’s multifamily sector, the same dynamics are driving development and investment.

These dynamics come against a backdrop of mixed signals from the multifamily sector in the U.S. JLL figures show that inventory is expanding at a pace of 2.9 percent annually, which is nearly 50 percent higher than the office sector and twice the pace of industrial.

In Austin and Boston, as well as Washington D.C. and Raleigh-Durham, deliveries are beginning to outpace absorption, yet asset pricing and rental growth remains strong. For example, during the third quarter of 2015 Boston saw its overall vacancy soften by 60 basis points since the end of 2014. But rental rates are 23 percent higher than the previous peak in 2007.

JLL Managing Director Travis D’Amato points to the need for new apartment stock. “Nearly half of Boston’s rental stock was constructed pre-1940, creating a real demand for Class A product,” he says. “Developers should take heed that they are not building too much of the same product and also vet their options in Boston’s outer-urban market, near transit. But at the end of the day, job growth in tech, medical and education industries remains strong and multifamily units will continue to be absorbed.”

Same story, different city

The case is very similar in Austin. Many assets were constructed during the 1980s, especially those in the outer-core area, and they now need to respond to the dramatic shift in renter preferences. This is particularly important as the renter pool is being increasingly priced out of Austin’s core.

The proof is in the numbers: two years ago, the highest multifamily rents in Austin were hitting $2.50 per-square-foot (PSF). Today, the high marks are at $3.48 PSF.

“Austin’s core is the place to be, but development opportunities are hard to come by,” says Scott LaMontagne, Managing Director at JLL. “So any new delivery is going to be very well received and command high rent – if you are seeing vacancy levels soften, trust me, it’ll be short-lived.”

And that’s not the only common factor that Boston and Austin share. There’s also the “build-to-core” paradigm shift, which is fuelling high-rise development, and can be attributed to the scarcity of land available for development – not to mention the ‘live, work, play’ dynamic, which is still in full force as today’s renter demographic wants to live by work, retail, restaurants and more.  This all bodes well for the multifamily market in 2016. JLL notes that development is expected to remain robust and rental growth will continue to exceed forecasted expectations. Indeed, multifamily remains in high demand and the key driver will be the amount of diversity in the local economy.

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