Austin: an oasis of cool in the US south-west

[caption id="attachment_870934" align="alignnone" width="570"] Downtown Austin, TX[/caption] An enclave of liberalism in one of America’s most conservative strongholds, Austin Texas is a hippie’s haven in the Lone Star state. It’s an eclectic city, a magnet for musicians and artists, with a thriving LGBT community. The unofficial slogan “Keep Austin Weird” is an enthusiastically adopted tribute. Known for being both safe and clean, Austin revels in its status as an open-minded place to be, epitomised by the Hippie Hollow Park nude swimming pool, which authorities have been quietly ignoring since the 1970s. And so, when Austin was named the best place to live in America last month, the locals could not have been less surprised. If anything, they are still struggling to understand why it has taken everyone else so long to join the party. “It’s always been the time for Austin,” says David Steinwedell, head of the city’s Urban Land Institute following the state capital of Texas’s number-one ranking in a US News & World Report published in February. “It’s just that the rest of the world is finally catching on.” Austin’s cultural hub revolves around the internationally-renowned festival South by Southwest (SXSW), a week-long music, film and arts extravaganza. But it is not all festivals and frivolities here on the eastern edge of the American Southwest. Austin is the fastest-growing city in the US. Around 157 new people arrive every day, attracted by its liberal politics and an emerging tech hub – swathes of Fortune 500 companies including Amazon, Apple, eBay, Google, Dell and IBM have headquarters or regional offices in the city. The combination of exponential population growth, an explosion of business and tech in the past few years and no state taxes have seen the city’s property sector fast become one of the most vibrant in the US. So where are the opportunities? And in the wake of Donald Trump’s election to president of the US, how easy is it to do business in the heart of Republican America? A unique place “Austin is unique in many aspects – a business-friendly environment in a liberal political city within a conservative state,” says Steinwedell. “The live music capital of the world is also home to the University of Texas and the state capital. Tech has been a significant sector for Austin for decades and has exploded beyond hardware to include game development and other software and app ventures.” Once a part of Mexico, Austin has seen huge immigration over the past 50 years, with Hispanics now forming around 35% of the population and Asians another 6%. Migration to this so-called “sanctuary city” has helped to fuel the local economy and property market. For now, the city’s huge immigration means real estate growth is inevitable. A million new residents are expected to arrive between now and 2030 to fuel demand, and the population is set to increase from its current level by at least 50% over that time. “Austin is a vibrant city with an active urban core that millennials are attracted to,” says Robert Kramp, director of research and analysis for Texas-Oklahoma, CBRE. “With the growing population, residential and multi-family developers have been spurred into action, creating new housing options that have pushed the boundaries of the city’s borders. “Austin delivered 9,100 new multifamily units in 2016, the fifth-highest total in the country. Additionally, it had one of the highest completions-to-inventory ratios, 4.7%. The average US completions-to-inventory ratio is 1.7%, and Austin absorbed 6,900 units throughout 2016, 76% of new supply.” Commercially, the city has also performed strongly, reporting increasing rents and decreasing vacancies. Leasing rates grew by 5.6% year-on-year, and continued to reach record highs. And at the start of this year, 21 new office projects and 23 industrial projects were under construction. Two projects that broke ground in the CBD at the end of 2016 were the 345,000 sq ft Third + Shoal project and the 100,000 sq ft renovation of the former Texas State Teachers Association Building, now being called Westview. Office demand remains strongest in the CBD, north-west and south-west submarkets, with 61% of tenant requirements in the market looking at these areas. They also boast the most space under construction and the highest asking rental rates, though vacancy is lowest in the CBD. At the end of 2016, JLL says the CBD vacancy rate continued its downward slope to 6.5%, and although more than 800,000 sq ft is set to be delivered in the CBD this year, half is already pre-leased. “Austin has been seeing strong growth across all property sectors with multifamily exhibiting the most mature phase in the market as new supply has slowed rental rate growth in recent months,” says Steinwedell. “CBD office, industrial and some retail submarkets are very tight with limited vacancy and strong rental rate increases.” Tech-powered demand Sustained tech tenant demand has helped kept the city’s vacancy rate low, sitting just above 10% at the end of 2016 after having declined continuously since almost touching 20% in 2009. Major technology employers anchor most of the region’s office submarkets. “Austin has emerged as a tech hub as droves of out-of-staters emigrate to the Live Music Capital to escape rising costs on the coasts,” says Kramp. “With a low cost of living index, business friendly state government, and a large educated population to draw upon, Austin presents the perfect climate for tech companies, particularly start-ups.” The city ranked third on CBRE’s Tech-Thirty 2016 list, which analyses the 30 leading technology markets in North America in terms of high-tech software and services job growth. The agency also placed Austin fifth in its 2016 Tech Talent Scorecard, which rates 50 US markets according to their ability to attract and grow tech talent. Beyond the tech market specifically, a number of other Austin-based companies have expanded in the past year, including Bazaarvoice, which opened a 137,615 sq ft HQ in north Austin, and drinkware company Yeti, which is building a new 175,000 sq ft campus in south-west Austin. Yeti’ facility will offer amenities such as an archery range, barbecue pits, roof terraces and a jogging trail. Software giant Oracle is also building a south-east Austin campus on a 25-acre site in the East Riverside Drive corridor. According to JLL, 46 entities are actively looking for nearly 1m sq ft of space in the south-west submarket, 68 are seeking 2.8m sq ft in the north-west market and 57 are seeking 1.1m sq ft in the CBD. Of these, 22% are technology-based companies, 17% are engineering or architectural firms, and 13% are healthcare-related. As the traditional manufacturing core slows, these new industries will fuel the city’s economic expansion. The ULI’s Emerging Trends in Real Estate 2017 report picked Austin as “top city” for its depth of economic diversity, which embraces manufacturing, education, healthcare, and technology. “Viewed as a fluke when it hit the study’s top-ten list five years ago, Austin’s rise to the top of the list signals the durability of the city’s long-term appeal to investors,” says Mitch Roschelle, PwC real estate research leader. What more’s in store? But can this durability hold form? Travis County voted for Democratic nominee Hillary Clinton by 66.3% to 27.4% in the 2016 election. Thousands turned out to protest during Trump’s inauguration speech. Political uncertainty is never good for business, and new proposals over tax changes and immigration could affect both the property and the tech sectors. “While the market has shown only limited price movement since the post-election interest-rate spike, pricing pushback from buyers remains strong,” says Spencer Levy, head of research for the Americas at CBRE. “Monitoring fundamental indicators such as rent growth and vacancy will be equally important in 2017, as will the trajectory of cap rate movement. In the meantime, we are keenly focused on the policies of the incoming Trump administration, in particular potential tax changes that will impact the commercial real estate industry.” Local officials have already clashed with the president over his crackdown on immigrants, and Austin’s tech city status could be threatened by the controversial travel ban. Some of world’s biggest technology companies have already expressed concerns. Aside from broader US politics, the local government has a few challenges of its own to consider. The city’s population is expected to double by 2040, creating opportunities for housing, commercial development, and infrastructure. But along with integration and maintaining the city’s “weirdness”, authorities also need to boost levels of affordable housing and improve infrastructure; it is already revamping its land development codes to help Austin’s future growth by encouraging development along major transit corridors. “Austin needs to continue to adapt to its dramatic growth rate while maintaining the cultural uniqueness that made us a desirable city in the first place,” says Steinwedell. “The metro area has been insulated from the oil downturn and would be only modestly affected by major changes in trade policy. Limits to the area will be seen if housing affordability cannot be maintained and if transportation solutions from across the spectrum of mass transit, bike, pedestrian and car are not put into place.” Austinites are determined that as Austin grows, they will preserve its unique culture and innate liberalism. As the late, great comedian Bill Hicks, an Austinite himself, summed up: “To me, Texas is Austin, a bunch of cool people trying to make a difference.” Comment: Austin’s exciting, ongoing story. By Spencer Hayes, Austin Managing Principal, Cushman & Wakefield When I think of Austin, what quickly comes to mind is the availability of risk-oriented private capital to invest in businesses, and the intellectual capital to grow them. The metropolitan area is home to more than 2m people who are young – the median age is 33.5 years – and smart, as Austin has the third-most educated workforce in the US. People want to be here, so companies want to be here. That, in turn, attracts more people. This self-perpetuating cycle of growth has Austin on track to double in size by 2040. California tech giants like Google, Apple, and Facebook have migrated to Austin. Oracle just acquired a 300-unit apartment complex for employees and is building a new 560,000 sq ft cloud-computing campus nearby. Home-grown Dell Computer, which employs 16,000, has created dozens of so-called “Dellionaires” who continue to invest in Austin. The city’s vibrant tech and start-up communities are balanced by the depth and stability of its education and government sectors – Austin is the state capital of Texas and the University of Texas is based here. The market’s diversity has protected it from the kind of downturns Houston is now experiencing owing to troubles in the oil and gas industry. Austin’s office market saw more than 2m sq ft in net absorption last year, even with 914,000 sq ft in new development. The vacancy rate currently stands at 8.2%; average class A rents are $36.95 per sq ft and continue to rise. Job and population growth have driven strong retail and multifamily activity, too. Entertainment and tourism also play a significant role in the local economy, with Formula 1 racing (the only US stop), the South by Southwest (SXSW) media and music conference, and Austin City Limits venue, show, and festival. The appeal of Austin has not gone unnoticed; US News & World Report recently ranked the city top of its “Best Places to Live” list for 2017. All of this positivity is not to say that Austin is without its challenges. It is behind the curve on transportation infrastructure, and escalating housing costs are chipping away at the affordability advantage the city has long enjoyed. With a total inventory of just 50m sq ft, Austin’s relatively small office market is typically overlooked by the largest institutional investors, which focus on major cities like London, Tokyo, New York, and Los Angeles. Getting a decent-sized deal here is tougher for them, so when assets do become available, the competition is fierce and, thus, yields are compressed. People will continue to invest in Austin, though, because its drivers are almost impossible to find elsewhere and its prospects for the future are solid. When it comes to long-term, core buys, Austin has a very good story to tell.