Central Texas Roundup | JLL Multifamily | 1/22/2024

Summary

• Extensions from 2022 and 2023 are burning off in 2024, exacerbating the capital markets crunch caused by the $2.2 trillion of CRE debt maturing by 2027
• With rates and prices remaining elevated, the WSJ predicts that the single-family home market will remain challenged in 2024
• 2024 will deliver over 50% more apartment units than the record-high 440,000 units delivered in 2023
• Veloway Threads purchased eight buildings in St. Elmo last month, indicative of investor interest in the mixed-use node
• Land near The Domain rezoned for high-density development
• New south Austin subdivisions reaching as far as Maxwell, near Lockhart
• Three major announcements for south San Antonio: the location of the $265M JCB manufacturing plant, construction begins on a $500M medical campus, and NRP planning 350 market-rate units

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National and State News

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The Bill Is Coming Due on a Record Amount of Commercial Real Estate Debt (WSJ)

• Why it matters:?Extensions from 2022 and 2023 are burning off in 2024, exacerbating the capital markets crunch caused by the $2.2 trillion of CRE debt maturing by 2027.
• According to data firm Trepp, a record-breaking $541 billion in debt tied to commercial real estate properties, including office buildings, hotels, and apartments, is set to mature in 2023. The trend of increasing commercial debt maturities is expected to continue, with over $2.2 trillion coming due by the end of 2027.
• While many of these loans have been repaid or extended thus far, the expiration of extensions granted in 2022 and 2023 is causing borrowers to face challenges in the current higher interest rate environment, coupled with higher vacancies and weakened cash flows, leading to a decline in property values. Some borrowers and creditors are also dealing with the expiration of agreements made during the early stages of the pandemic to defer payments until after the worst of the health crisis.
• Fitch Ratings anticipates a significant increase in delinquency rates for commercial mortgage loans that have been converted into securities, with a projected rate of 4.5% in 2024 and 4.9% in 2025, more than double the 2.25% rate observed in 2023 as of November.
• As a result, many commercial property borrowers will need to negotiate new agreements with their existing creditors as their loans mature. Lenders may be willing to extend loans if owners agree to contribute additional capital. However, in some cases, parties are unable to reach a mutual agreement, or borrowers may choose to hand over the property keys to creditors rather than invest further funds into a potentially declining asset.

The Economy Is Starting to Look Normal—Housing Isn’t (WSJ)

• Why it matters:?The single-family housing market will continue to be challenged in 2024.
• If you haven't recently attempted to purchase a home, the state of the U.S. economy may appear somewhat normal. However, the housing market continues to be chaotic, and it seems this state of affairs will persist for a considerable period.
• Despite a decline from its late October peak, the average rate for a 30-year mortgage stands at 6.6% in the most recent week according to Freddie Mac. This figure is approximately 3 percentage points higher than pre-pandemic levels. Additionally, housing prices have soared, with the National Association of Realtors reporting a median sale price of $387,000 for existing single-family homes in December, compared to $277,000 in December 2019. When these factors are combined, the affordability of housing has significantly deteriorated.
• Resolving this issue won't happen quickly. Even if mortgage rates decrease in the coming year, it is unlikely they will decline enough to completely reverse the lock-in effect. To cater to entry-level buyers, home builders are constructing more affordable, smaller homes, and larger builders are offering "buydowns" to lower mortgage rates for buyers. However, increasing housing supply is not as simple as flicking a switch.
• Problems will arise from individuals unable to relocate due to the risk of losing their low-rate payments and prospective buyers struggling to find affordable homes. Even if the rest of the economy thrives this year, housing will continue to experience challenges.?.

2024 Apartment Supply Scheduled to Outweigh 2023 (Real Page)

• Why it matters: 2024 will deliver ~150% of the units delivered in the record supply year of 2023. ???
• In 2021 and 2022, when apartment occupancy and rent growth reached record highs nationwide, there was a significant increase in permitting activity for multifamily construction. As a result, in 2023, the market experienced a substantial surge in completed apartment units, with almost 440,000 units delivered, marking a 36-year high. Looking ahead to 2024, there are approximately 670,000 apartments scheduled for completion in the United States, surpassing the previous record volume by about 50%.
• The rental landscape has shifted significantly since the approval of these units, with occupancy and rent growth now stabilizing at more regulated levels. Demand has only recently begun to regain momentum after experiencing a notable decline.
• In the southern region, there are several markets anticipated to deliver over 20,000 units in the coming year: Dallas (38,400 units), Austin (33,800 units), Atlanta (23,100 units), Houston (22,700 units), and Charlotte (21,100 units). It is worth noting that all of these markets were also among the top 10 for apartment deliveries in 2023.

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Austin News

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Local firm snatches up lots of space in St. Elmo, plus more deals to know (ABJ)

• Why it matters: Saint Elmo continues to be a highly desirable investment pocket, with both institutional and opportunistic groups converting the old warehouse district to vibrant office, retail, and residential spaces.
• Priscilla Sauceda, Vice President of Operations and Community at Veloway Threads, announced that the Austin-based company has recently purchased eight properties in the district. These properties include The Yard, where businesses such as Icon, Tesla, Still Austin, and St. Elmo Brewing lease space.
• Sauceda further mentioned that over the past year, Veloway Threads has acquired an additional seven properties situated along Willow Springs Road, located behind their popular property, The Yard.
• Sauceda emphasized the company's strong emphasis on adaptive reuse. She clarified that there are no plans to demolish any of the existing buildings and replace them with new commercial spaces. According to Sauceda, the area has several buildings with great potential that can be utilized effectively.

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Land near The Domain green-lighted for high-density development (ABJ)

• Why it matters: Higher density zoning in and around The Domain make it a favorable mid and long-term play for investors, as more renters and businesses enter “Austin’s 2nd downtown”.
• On January 18, the City Council officially granted the requested zoning change for the 121-acre parcel of land. This site is located south and west of The Domain in the North Burnet/Gateway area, and is bordered by MoPac Expressway to the east, U.S. Highway 183 to the west, and Capital of Texas Highway to the north.
• As a result, developers are now permitted to construct buildings with a floor-to-area ratio (FAR) up to 10:1, as well as a maximum building height of 350 feet (roughly equivalent to 35 stories). This allowance is contingent upon developers dedicating a portion of the space to affordable housing as part of the city's developer bonus program, or alternatively, paying a fee to forgo offering residential housing at below-market rates.

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New subdivision set to rise in small community south of Austin (ABJ)

• Why it matters: More communities rising in South Austin (Maxwell) will warrant commercial development to support the influx of residents to come.
• On January 9, Caldwell County commissioners unanimously endorsed a development agreement for a subdivision located in Maxwell. The proposed subdivision is expected to cover over 200 acres and accommodate 831 homes, with street frontages ranging from 35 to 60 feet.
• The development plans also include a commercial area situated in the northeast corner of the site. Although the precise size of this portion is uncertain, it appears to be approximately equivalent to two blocks, each with 30 homes, within the larger development.
• Presently, Maxwell is a small, unincorporated community situated between Lockhart and San Marcos, approximately 40 miles south of Austin.

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San Antonio News

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UK manufacturer JCB eyes South Side site for $265M plant (SABJ)

• Why it matters: JCB will bring $30 billion of economic impact and at least 1,500 jobs to south San Antonio.
• The company is currently evaluating a potential 400-acre site along U.S. Highway 16, located approximately halfway between the Toyota Motor Manufacturing Texas Inc. plant and Texas A&M University San Antonio's campus, as a suitable location for the estimated $265 million plant.
• In October, San Antonio officials announced that JCB, a prominent manufacturer of construction and agricultural equipment, intends to build a 720,000-square-foot structure on a site covering approximately 400 acres.
• While the specific location of the plant was not disclosed by JCB at the time, the company did express plans to employ more than 1,500 individuals at the facility within the first five years.
• The economic impact of JCB's project in San Antonio is projected to reach nearly $30 billion. According to Jenna Saucedo-Herrera, President and CEO of grearter:SATX, this project represents the largest job creation announcement in San Antonio and Bexar County in the last 20 years.

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Construction set for $470M hospital to anchor $500M campus (SABJ)

• Why it matters: Another major win for south San Antonio, construction begins on major medical facilities.
• Construction is set to commence this week on University Health Palo Alto Hospital, a significant project with an estimated cost of $470 million, serving as the cornerstone of a $500 million medical campus.
• The hospital, a comprehensive facility initially equipped with 166 beds and the potential for an additional 120 beds, will be situated on a 68-acre site adjacent to Texas A&M University-San Antonio and in close proximity to the Toyota Motor Manufacturing Texas Inc. campus.
• Last month, University Health began the construction of Vida, a three-story multispecialty center that will connect to the new hospital and serve as the Institute for Public Health. With a budget of $30 million, Vida is expected to open in 2026, offering primary care services, wellness programs, preventive health education initiatives, and collaborative spaces for community partners.
• Anticipated to open in 2027, the forthcoming hospital will feature a 24/7 emergency department and a specialized unit for labor and delivery. Additionally, it will accommodate a neonatal intensive care unit, operating rooms, and essential services such as radiology and laboratory facilities.

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Zoning panel approves $78M mixed-use project from NRP Group, Brooks (SABJ)

• Why it matters: Rounding out the hat trick (manufacturing, medical, and multifamily) for the southside, 350 market-rate apartments announced for the SE corner of Loop 410 near Brooks City Base.
• The Zoning Commission approved a $78.2 million project for approximately 350 market-rate apartments on the northwest side of the Loop 410 and Interstate 37 interchange at the 3500 block of Goliad Road. The project, called "Project Yeager," is a collaboration between the Brooks Development Authority and Cleveland-based NRP Group. Brooks Development Authority acquired the property and will lease 13.93 acres to NRP Group.
• The NRP Group plans to purchase the land for the apartments in the summer, secure financing by the end of 2024, and complete the project by June 2027. Brooks will oversee the development of the commercial side of the project, but a timeline for that aspect is yet to be determined.