Austin Net migration has pushed the metro’s population up to 2 million residents.

AUSTIN, TX—A healthy job market and steadily rising population base will bode well for the Austin apartment market this year as operations improve. During the past year, net migration has pushed the metro’s population up to 2 million residents with approximately one-quarter of those living in the capital city between 20 to 34 years old, typically considered the prime renter cohort. Growth in this age segment has led to healthy renter demand during the past several years, resulting in more than 40% of households in rental housing, above the statewide average, says Marcus & Millichap.

John Chang, first vice president of Marcus & Millichap, tells GlobeSt.com: “Job growth and in-migration trends remain strong, fostering heightened demand for apartments in the metro. On average, more than 160 people are moving to Austin each day, and job growth is elevated at more than 4% annually for the past four years, fueling household formation and apartment demand.”

As apartment demand in the metro kept vacancy below 5%, developers responded with a building spree, expanding rental stock 13% since 2013. Absorption of these units has been steady, with vacancy remaining in the low 4% area, Marcus & Millichap reports. Building will stay elevated in 2016, with approximately half of this year’s scheduled completions delivering in the first quarter, likely causing some short-term softening in select areas. Consistent demand for apartments and a slower pace of supply additions through the remainder of the year will contribute to vacancy reaching its lowest point this business cycle.

Chang tells GlobeSt.com: “Steady economic growth and favorable demographic trends are encouraging builders. Approximately 30,000 apartments have been added to service in the last four years, representing an inventory expansion of 16%. Demand has kept pace, with vacancy retreating 70 basis points during this time to the low 4% area. Developers remain confident in the market’s outlook, and have 13,800 rentals underway.”

A favorable economic outlook and strong demographics are attracting buyers to the Austin apartment market, and interest in area assets will remain intense this year, Marcus & Millichap predicts. The building boom has increased sales activity among institutional funds and REITs this past year, targeting newly constructed properties throughout the area. Sales of these assets dominate transaction velocity, with cap rates ranging from 4.5 to 5.5%, depending on asset location and amenities.

Private high-net-worth individuals, meanwhile, are scouring for value-add deals. Investors are bidding on assets already under renovation, particularly those along East Riverside Drive, east of IH-35. Out-of-state investors, especially those from California and New York, are growing portfolios in the market; however, buyer demand remains unfulfilled amid a shortage of listings. Yet, those who purchased within the last 10 years and now have loans nearing term might consider exiting while prices have appreciated to nearly double initial costs.

Employment: Companies in the Austin metro will create 33,500 positions in 2016, expanding payrolls by 3.4%. Last year, employers added 45,600 jobs, an annual increase of 4.9%.

Construction: Developers will complete 9,000 apartments this year, expanding stock by 4.2%. In 2015, builders completed 8,700 rental units.

Vacancy: Strong demand for apartments will push the vacancy rate down to 3.9% by year end, a dip of 20 basis points from 2015. Last year, the rate declined 50 basis points.

Rents: Average rent growth will slow this year, gaining 5.4% to $1,213 per month. In 2015, the average grew at its strongest annual pace since 2011, rising 6.7%.

Chang tells GlobeSt.com: “On an annual basis, average effective rent advances have remained above 5% since mid-2011 as the addition of thousands of luxury units are added to stock. Though momentum will stay positive, the pace of growth is slowing as competition to attract and retain tenants heats up.”

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