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Aug 16

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Austin Real Estate Market Mid Year 2015 Update

dr dotzourPresentation at Real Estate Council Austin by Dr. Mark Dotzour. Dr. Dotzour is the Chief Economist and Director of Research for the Real Estate Center at Texas A&M University in College Station, Texas.

He earned his Ph.D. in the Department of Finance at the UT Austin in1987 and served as Associate Professor of Real Estate and Finance at Wichita State University for 10 years. As Chief Economist, he is currently doing market research to monitor how global and national trends are likely to impact residential and commercial real estate markets.

3b08249Article and Insights provided by Patrick Johnson, President of First State Bank Central Texas, patrickj@fsbcentex.com (512) 899-2212.  Patrick has extensive knowledge of the commercial lending process and is a dedicated, results oriented commercial banker. His bank delivers first class deposit, treasury management, and loan solutions throughout Central Texas. His specialties include Commercial real estate, equipment, and general commercial/industrial lending; bank depository and treasury services.

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Yesterday, I had the opportunity to attend RECA Exchange, a great program. Dr. Mark Dotzour, Chief Economist for the Texas A&M Real Estate Center, spoke. Dr. Dotzour is always a good show, and his research center is an excellent resource for all of us – I encourage you to become familiar with the resources available on their website. As part of RECA Exchange, we received some helpful data from Capitol Market Research and Cushman & Wakefield/Oxford Commercial on the various commercial real estate classes and their 2015 occupancy rates. I always appreciate these firms providing such good summary information. Please see their summaries, and Dr. Dotzour’s presentation, attached.

Here, I take some liberty to blend some data from the RECA Exchange breakout sessions and, with permission, Dr. Dotzour’s comments with my own observations.

Overall, the commercial real estate market is very strong in Austin in all areas and asset classes, and that is a very good indicator that the Austin economy is strong. Job growth contributes to continued real estate demand and absorption. But, it feels a lot like 2006. Do a crane count, and listen to all the bulls say it’s not going to end. Granted, as long as Austin continues to create jobs, the real estate market and economy will remain healthy. The trick is, usually events outside of Austin, at unknown times, cause the job market to stall. Additional points:

Austin and Texas

  • Acquisition, Construction and Development Loans, even at conservative loan to values (65% or less) typically granted by smaller regional and community banks, are constrained by oppressive, broadly applied, federally mandated regulatory rules that do not account for regional demand, conservative leverage levels, or market expertise. Despite high demand for housing in Texas, regulated banks simply can’t meet the demand for lot development loans and construction loans. This has particularly constrained single family lot supply. In many cases, these loans are being made in the private sector, at higher rates, which, in combination with limited supply, leads to higher real estate development costs (and ultimately – higher costs to the end user/consumer).
  • The Austin Multi-family (Apartment) market is still 94% occupied, but I would keep an eye on this asset class. Will we overbuild here? Probably. The question is when. If job growth slows, apartments will feel it first.
  • Texas has created, net, more than 2.5 million jobs since 2001 and leads the nation in job creation. Illinois has lost 150,000 jobs since 2001. Make your own conclusions on the types of economic policies and tax environments that create jobs, and those that destroy jobs.
  • Home affordability in Austin is increasingly becoming an issue. Overall, affordability in Texas has greatly contributed to companies relocating here. In order to continue to have that competitive advantage, we need to be able to build enough affordable housing, of all types.
  • Affordability, infrastructure improvements, and traffic, if not addressed, will ultimately limit Austin’s ability to continue to attract jobs and grow.
  • It is still difficult to get commercial projects through the City of Austin. Mayor Adler is focused on this, and some improvements are noted. The long promised, new development code, CodeNext, isn’t coming anytime soon. More of the same here, for the foreseeable future.
  • In Texas, the construction industry continues to have a labor shortage, both in residential and commercial construction. There are simply not enough trained trades people to meet demand. Skilled labor is demanding a higher wage. Subcontractors, as a result, have pricing power. Subcontractors that can deliver skilled crews on time are able to charge a premium. Overall, construction costs (based on client feedback) have risen by 15% to 20% in the past 2 years – largely driven by increased labor costs.

USA and Global

  • Dr. Dotzour’s very good point: The American Consumer is spending, has less debt as a % of income, and has more capacity to spend. Regardless of what politicians or the Federal Reserve does, the American Consumer is the ultimate driver of our economy. The American Consumer, with its $84 Trillion net worth, can buy China’s $1.6 Trillion in US bonds in heartbeat. We, the People, vastly outpower the Federal Government and Federal Reserve Bank. The American Consumer is in a relatively good mood, which is a good thing. As the American Consumer goes, so will our economy.
  • There are more than 5 million job openings, of all types and skill levels, in the United States of America. We don’t need more jobs; we do need more qualified workers. We do need more people willing to work.
  • The rest of the world is suffering from major headwinds. Although these headwinds certainly don’t, on balance, help the USA, they have a much broader and deeper effect in the rest of the world. In addition, our competitive advantages (Freedom, Relative Security, Our Own Oil, the American Consumer, Capitalism, Smart People) shine in comparison. These global headwinds are: Global Terrorism, Lower Oil Prices, Bad Government Economic Policies, Cyber Warfare, Government Debt, Communism, and Currency Wars. The worst actors here: China, North Korea, Russia, and Iran. Honorable mentions: Europe (Greece) and Japan.
  • Dr. Dotzour does not buy into the argument that long term, materially higher interest rates are around the corner. Demand for the safety of US Debt is just too strong, and we are a safe haven in a dangerous world. The fed can raise the overnight rate, but the 10 year US Treasury (which drives long term rates and your mortgage rate) is largely driven by the market, not the Fed. I will note that we have been hearing for 8 years that rates are going up, and our experience is that rates have never been lower.
  • I personally do think that, regardless of the US Treasury market, banks will ultimately have to start raising rates to account for increased regulatory and capital requirements mandated by Basel III and the incredible regulatory burdens of Dodd Frank and the CFPB. Ultimately, the consumer loses.
  • In the USA, we may still have some more room to run on this expansion cycle, but eventually, there will be a recession. That is the way capitalism works. Are you preparing your company and family for the next downturn? Make sure you are in a cash position to withstand the next downturn, and that you have not overleveraged yourself or your company. With some planning and plenty of cash, you may even be able to take advantage of some opportunities, as not all of us will be prepared when the music stops.

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