Austin faces mounting challenges of being a rare real estate ‘supernova’

If the last decade of meteoric real estate growth has earned Austin the designation of being one of four “supernova” markets, according to the national Urban Land Institute (Nashville, Raleigh/Durham and Charlotte being the others) , then the onset of expected growth The slowdown will likely be accompanied by an increase in growing pains related to affordability, infrastructure and changes in the labor market.

At least that’s the opinion of real estate and planning experts who took part in last week’s ULI Emerging Trends Roundtable, which looked at broader national trends and their impact on a still supportive market like Austin.

Moderator Josh Parks, a partner at business services giant PWC, said as inflation and interest rate hikes took hold following the Covid-19 pandemic, some asset classes, particularly office and retail, have become less desirable, while multi-family residential and industrial buildings are expected to remain strong. For Austin, Parks said there’s a question of what will happen as an increase in construction to meet population increases interacts with a drop in purchases and investments for all types of projects.

Panelists discussed a variety of factors at play in Austin’s development world, with Jamil Alam, Managing Director of Endeavor Real Estate Group, joining the chorus of developers seeking the city to take a more collaborative approach. to encourage the construction of more housing.

“If they could just take their foot out of the throat on the regulations and let us try to be part of a solution and be a little more collaborative in their approach…we’re not the enemy,” he said. he declared. “Speaking for Endeavour, we think we have to be part of the solution because if we ignore it, it’s really going to create serious social problems and so we want to be part of the solution, but man, it’s hard. ”

Gerry Gutierrez, CEO of DDelta Real Estate Investments, said there was growing uncertainty around existing financial models for complex types of projects, including deals with utility companies. The possibility of increased risk for these projects will likely cause builders to turn to more reliable and stable types of transactions.

“We have seen many PFC projects recently, providing the land and leasing it to 75-99, and due to the lack of leverage available, these are collapsing,” he said. he declares. “We haven’t seen the whole cycle of a full PFC, so we don’t really know how the market is going to take sales from this type of project, or how the market is going to react. In terms of affordability, this could be a good solution as it helps the developer to do calculations.

Alam said there was no getting around the looming downturn for the city’s office space market, which is already seeing a decline in rentals thanks to spending cuts by tech giants such as the parent company. from Facebook, Meta.

“Austin may have historically absorbed 750,000 to 800,000 square feet per year of office space. In recent years, because of technology, it may have increased to 1.4 million on average, but it was all due to about seven or eight very large tenants. And we were worried that those tenants might stop renting, but we had increased the supply to about twice what it needed to be,” he said. “Turns out they pulled the brakes at a time when we had increased supply by about four times what we needed. It’s just going to take time to absorb. And unfortunately, unlike multifamily and storage and to a few others, office leasing is mostly in the realm of long-term leasing.

Regarding the lack of “missing middle” housing in the city, Alam said the city council and other leaders are moving in the right direction by taking steps to reduce compatibility requirements.

“There’s almost an inverse relationship between our compatibility regulations in Austin and the ability to produce affordable housing because that’s exactly where you want to create it, along the suburban corridors, which shoot to be right next to it. of a single-family residence,” he said. .

“The way we think about affordable housing nationally and locally is also very formulaic. And I don’t think the old way of thinking about it really solved the problem because we just had this huge gap of missing mid-range housing that in Austin there really isn’t any zoning that supports development of missing intermediate housing, which can go a long way to tackle affordable housing for the little ones.

Photo made available via a Creative Commons license.

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