Multifamily Texas Update: Apartment Executives Focus on the Next Wave in Texas
With a strong cycle behind, apartment executives focus on the next wave in Texas.
The Texas apartment industry’s recent turn signaled optimism that high demand will continue for the next few years.
Industry leaders offered updates on leasing, management, and operations at September’s 3rd Annual Interface Multifamily Texas Conference in Dallas. Discussions centered on new supply delivery, healthy rents and fast lease-ups that many are experiencing, and what the next wave of apartments will bring.
Executives at companies who have a big stake in the Lone Star State agreed that the first cycle has fared well and that the focus now needs to be on how well projects coming on line after the first of the year will fare in terms of rent growth and occupancy.
All eyes have been on Texas, which has been a pacesetter in apartment demand ahead of Atlanta and Washington D.C. in recent months. Among the top six apartment markets identified by MPF Research that are gaining momentum in the second quarter of 2014, Houston and Dallas topped the list. Houston ranked first with 15,400 units absorbed in the past year, and Dallas second at 12,300 units. Occupancy rates in both cities were slightly better than 94 percent.
So far so good with the first cycle
Steve Hallsey, president and CEO of AMLI’s management group, said demand and lease-ups for a large project that delivered in Austin, has exceeded expectations. Austin, an area where supply is growing, finished the second quarter with 3,100 new apartments, boosting its 2014 total to 8,700.
“The cycle has been very good,” says Hallsey. “We find that it’s been encouragingly well received through this cycle. Obviously a second wave of new construction will be hitting at the beginning of next year and it will be interesting to see how that new wave of supply impacts rents, concessions and absorption.” AMLI Residential has developed several assets in Dallas, Houston and Austin and so far so good.
Concessions haven’t played much into lease-ups and it may be a while before they do. Hallsey said his company hasn’t seen the usual industry wave of move outs that chase concessions following lease-ups. In fact, renewal ratios and percentages have been higher on new developments than stabilized assets.
Hallsey believes AMLI’s retention performance is indicative of more sophisticated managers and developers who are using pricing systems to help determine rental rates.
“We’re not seeing concessions impacting renewals or market rents, and I think people are being more strategic in terms of how they’re pricing their units,” he said. “They’re being smarter and I think they are really pricing the market well. There’s not the panic that we see in other cycles.”
High pricing at the top end has given firms like The Milestone Group room to boost rents in their segment, too. “Leases are still coming up stronger and we’re not getting pushback, and I think that will remain for the foreseeable future,” said COO Steve Lamberti.
Construction delays the only real slowdown in momentum
Developers say the only real hiccup is with the construction process, which has slowed the delivery of units. Even though construction spending nationally hit its highest level in July in five and half years, build-out times have taken longer because crews have been noticeably slimmer.
According to the Associated General Contractors of America, construction employment has been on the rise, but it is not keeping pace with construction demand. A recent survey revealed that 25 percent of construction firms are turning down work because of labor shortages. Gary Mann, a senior vice president for Trammell Crow Co., said a big challenge has been getting new product released in time from builders. Nonetheless, Trammell Crow Co. is looking past what may be only growing pains in a changing economy, to a seemingly bright future in the Lone Star State.
“We’re excited about the next few years here in the Dallas area and Austin and Houston,” Mann says. “We think the momentum and the job growth is there. And we’re bullish on the State of Texas.”
Time to get away from urban myths and legends
Pinnacle President/CEO Rick Graf says leasing velocity, absent of any construction delays, is ahead of budget at many of the company’s projects under way in Texas and nationally. The story could be different, however, depending on what lies around the corner and just how high rents may climb.
He says the real challenge is what form the second wave will take, how will the product look and how will it mesh with affordability. Because of this, marketing strategies may need to shift away from urban myths regarding the ideal type of renter.
Companies like AMLI Management Co., are looking ahead and tweaking marketing efforts to focus on more established renters by choice rather than Millennials who want to be in downtown urban areas.
Hallsey says, “The industry spends too much time talking about product type and what kind of renter it wants to attract that we kind of talk ourselves into a certain demographic that we want inhabiting our assets.
We build these sophisticated marketing plans around this phantom renter who is going to be coming in to occupy these units. That is not proving out statistically.”
“So, I think we need to kind of get away from some of these urban legends and the myths we’ve been trying to attract.”
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