As we round out the second quarter of 2018, many of us are 1) wondering where the first half of the year went, and 2) speculating what the next half will bring. 2018 has proven to be a strong year in the Austin real estate market so far, and most analysts agree that this trend will continue. This month we decided to sit down with Todd LaRue of RCLCO Real Estate Advisors to talk shop and take stock of the current state of the market. As the Managing Director of RCLCO’s Austin office, Todd provides strategic development, investment, and planning advice to developers, landowners, investors, and public sector entities. His work includes consulting for a wide variety of project types, including master planned communities, high rise mixed-use developments, resorts, and commercial developments.

Q: What’s the buzz in the market right now?

There’s obviously a lot going on in the Austin real estate market right now, but two things come to mind in terms of hot topics:

  1. Robinson Ranch – Robinson Ranch is probably the most significant large tract of land within a major city in the United States – and it’s right here in north Austin. The property is in the traditional path of growth, what we call the “favored quarter,” where the bulk of office-using employment and upper income households have grown the past few decades. All Texas metro areas have multiple cores, but Austin really only has two real concentrations – downtown and The Domain, which only recently has become one.  We need more of these cores so that there are more mixed-use job centers closer to where people live, which could help with traffic congestion. Robinson Ranch is well positioned to become another one as it exhibits most of the attributes these places need to be successful. The development of Robinson Ranch also could provide an opportunity to deliver a variety of housing units that are well located relative to existing job centers, as opposed to delivering them in increasingly distant areas and putting additional stress on infrastructure.
  2. Office development – Austin has not traditionally been a large-scale office market, but that is changing. The downtown skyline is dominated by residential towers and hotels (9 of the 10 tallest buildings downtown are residential buildings or hotels), but that landscape is changing with the new delivery of office towers in response to robust demand from technology company consolidations and growth of the professional services sectors. Office rents downtown are among the highest in the country given this demand, which has resulted in tenants looking for alternative, lower cost locations that deliver similar lifestyle elements and amenities critical to attracting and retaining talent.  The Domain has become the alternative and is delivering increasingly tall/dense office buildings to satisfy demand, but rents are escalating there rapidly as well.  This is driving demand to other emerging mixed-use nodes in South Austin, Cedar Park, and elsewhere.

 

Q: How are land prices affecting the market?

A few things are happening related to land prices:

  • The capital that funds development is less inclined to carry expensive land for long periods of time, so they’re looking for smaller, shorter-duration projects. This doesn’t mean large-scale projects aren’t happening, they’re just being financed differently.
  • Land prices are of course driving the cost of housing up, requiring builders and developers to extract more money out of each acre with vertical product (density). Single-family lots are getting smaller and so are homes, in order to keep prices down.  An entry-level home that was once built on a 55’ lot is now getting delivered on a 40’ lot (or smaller in some cases).  In addition, multi-family developments are getting denser, even in suburban locations where parking garages are becoming increasingly common.
  • Land prices have had the positive result of pushing development east, where infrastructure is now in place to support the development. The lower cost of land allows for the delivery of more attainably-priced product that is relatively well located to Central Austin and other key employment corridors.
  • Builder creativity – many builders are getting more creative with product, which is a positive result of the land price condition. Many have realized that half of Austin’s households don’t have children, aren’t as concerned with the number of bedrooms, and thus don’t need as much space – or they want the space they can afford dedicated to things that are important to them, like flexible office spaces, open concept layouts, etc. This is prompting some experimentation in the market that is increasingly persuading apartment-dwellers to purchase.  We’ve been working with builders in the market to help them capitalize on these opportunities by conducting consumer research to help inform the opportunity while mitigating risk.

 

Q: What trends are you seeing in master planned communities?

We are seeing much more density being delivered in MPCs.  This density is in response to 3 things:

  • Pricing – utilizing less land per housing unit allows builders to deliver homes at a lower price, thus making them affordable to a broader portion of the market.
  • Lifestyle preference – some households are looking for a low-maintenance lifestyle in a suburban, planned environment. Traditionally in Texas, you found attached, high-quality, low-maintenance product only in “in-town” areas where either the cost was prohibitively high for many, or the urbanity of the area was undesirable. Builders and developers are figuring this out.  Preferences for these types of products are requiring that developers craft much more sophisticated consumer and product segmentation strategies to maximize sales velocity and market share, which is what we’ve been spending much of our time doing with our Texas clients.
  • Density makes MPCs more interesting by providing nodes that feel more urban, but don’t require a bunch of retail to make them work, and provide a broader set of product types, including rental, that maximize absorption potential.  Many developments are finding that demand for substantial amounts of retail is lacking in certain locations or early in a project’s lifespan, and delivering well-executed, denser products can be a way to create interest and “place” without the risk of having to lease commercial space.

 

RVi: Thanks, Todd for sharing your expertise with us! Many of RVi’s projects and clients have benefited from your unique and valuable insight on the market.

Todd: Thank you for the opportunity to speak with you. We always enjoy working with RVi on a variety of projects across the state. You are great collaborators in solving the complex issues facing the large-scale development projects of today.