Feb 2, 2017, 7:46am CST – Jan Buchholz Senior Staff Writer Austin Business Journal

The newest Austin Multi-Family Trend Report hints that supply is starting to catch up with demand in some parts of the apartment sector, particularly east and southeast of downtown.

Occupancy rates were down substantially in those two areas in the fourth quarter of 2016, according to the report compiled by locally-based Austin Investor Interests LLC.

The southeast central submarket is dominated by the East Riverside Drive corridor. The east central submarket north of Lady Bird Lake encompasses rapidly gentrifying neighborhoods between Cesar Chavez Street and Martin Luther King Boulevard, as well as the Mueller master-planned community northeast of downtown.

Overall, however, apartment performance across the metro area was flat.

“Last quarter, usually the strongest quarter of the year, left many units unoccupied, and absorption at year-end saw the first negative rate seen in three years at [minus] 290. Not a good sign for the short term,” the report states.

In other words, renters did not lease apartments at the rapid clip in year’s previous and inventory is beginning to build in certain areas.

One locale that appears to be bucking that trend is The Domain where hundreds of upscale apartment units have been delivered in the last couple of years and more are in the works.

Surrounding by new shopping and dining options, apartments at The Domain “reported both a 25 percent increase in inventory and still held impressive rent and occupancy gains for the year.” Recent declines in other neighborhoods don’t necessarily portend a larger transaction, but the situation bears watching.

The report acknowledges that Austin continues to draw positive press and strong business reviews — so the latest numbers may just be a blip on the bigger picture.

Developers evidently aren’t deterred, as another round of construction is underway. Many economists do indeed expect strong population growth to continue for the foreseeable future.

“Despite a plethora of delayed starts during the quarter because of permitting, financing constraints and market concern, eight new projects totaling 2,345 units started construction,” the report states.

Investors, including many new to the area, seem bullish about long-term returns.

“Sales transactions in the Austin area flourished during 2016. Over 11 percent of the inventory changed hands during the past 12 months, which is on par with 2015 totals,” the trend report states.

Here are some other highlights of the Q4 data dive:

• Based on projects under construction and those in the pipeline, 10,000 new apartment units will be delivered in the next two years.
• Rents dropped about 1 percent last quarter across the market, to an average of $1.40 per square foot.
• As expected rents are highest in new luxury developments downtown, in South Austin and near the University of Texas. Downtown the average price per square foot of new product is about $2.62.
• Renters can expect significant incentives — up to two months free rent — in new Class A product in the southeast, southwest, east central, west and south submarkets.
• The apartment size most in demand is the efficiency floor plan — commonly referred to as studios and micro-units. Rents in that product type are up nearly 10 percent to an average of $990 per month.
• About 103 apartment communities changed hands in the past year, many of them rebranded and upgraded.
• The northwest submarket recorded the most investment sales: five transactions for 1,359 units.
• The largest transaction by units sold was the Preserve at Rolling Oaks near North MoPac Expressway and State Highway 45 in North Austin — 494 units. The 498-unit University Estates in the southeast central submarket was slightly larger, but it’s classified as student housing.