Central Texas Roundup | JLL Multifamily | 3/10/25

Summary

• Tariffs often raise interest rates, but their impact is complex and multifaceted.
• Tariffs to increase construction costs significantly nationwide.
• Construction spending dips; manufacturing grows amid uncertainties.
• USMCA-compliant goods exempt from tariffs for month.
• U.S. Added 151,000 Jobs
• New apartment complex breaks ground in Northwest Hills.
• Mixed-use PUD near downtown Austin nears approval.
• Austin apartment vacancies stabilize after prolonged increase.
• Slatt Capital Secures $11.2M Bridge Loan for San Antonio BTR Project
• Texas Biomedical Research Institute Expands West San Antonio Campus
• Trader Joe’s plans on opening third location in San Antonio.

National

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Tariffs and Interest Rates: A Complex Economic Relationship (Kensington Capital Advisors)

• Why it matters: Tariffs typically drive up interest rates through inflation, but their full impact is complex and requires analysis of multiple economic factors.
• The relationship between tariffs and interest rates has become increasingly evident since 2020, with a noticeable correlation between heightened tariffs and rising interest rates across both short and long-term horizons. A prime example of this connection occurred in 2022 when the implementation of a 25% tariff on $200 billion worth of Chinese imports led to a swift increase in the 10-year Treasury yield, jumping from 3.2% to 3.7% within just one month. This rapid market reaction underscores the immediate impact of trade policy shifts on financial markets.
• Tariffs essentially act as a tax on imported goods, which tends to fuel inflationary pressures. In response to these heightened inflation risks, the Federal Reserve typically adjusts its monetary policy by raising interest rates to temper economic growth. This interplay between trade policy and monetary policy decisions illustrates the direct influence that tariffs can exert on interest rate movements.
• The impact of tariff increases has been particularly pronounced in certain sectors, notably manufacturing and technology. Following the 2022 tariff hike, the Philadelphia Fed Manufacturing Index, a key barometer of industrial activity, experienced a significant drop from 30.7 to 22.2, signaling a slowdown in growth. Moreover, during periods of escalating tariffs, the tech-heavy Nasdaq has consistently underperformed compared to the broader S&P 500, highlighting the uneven effects across different industries.
• However, it's important to note that the relationship between tariffs and interest rates is not always straightforward. Various complicating factors can influence this dynamic, including global economic conditions such as the COVID-19 pandemic, potential retaliatory measures from other nations, and the U.S. Treasury Department's debt management strategies. These factors can either amplify or mitigate the impact of tariffs on interest rates, making precise predictions challenging.
• To anticipate future impacts of tariffs on interest rates, it's crucial to monitor several key economic indicators. These include ongoing trade negotiations (particularly with China), Federal Reserve forward guidance, yield curve movements, and inflation data. Special attention should be paid to the Personal Consumption Expenditures (PCE) index, the Fed's preferred measure of inflation. Persistent inflation above the 2% target could prompt more aggressive rate hikes in response to tariff-induced price pressures.

Tariffs will drive up construction costs as much as 8% per project (ABJ)

• Why it matters: The Trump administration's tariffs are expected to increase construction costs by 4% to 8% per project, according to construction market report.
• Tariffs on Chinese imports have been implemented or are imminent, with a 10% levy on all goods and a 25% duty on steel and aluminum. Additionally, a 25% tariff is currently in place for imports from Mexico and Canada.
• The construction industry has experienced significant cost increases in materials over recent years. While there has been a 42% rise in the past five years and a 16% increase in the last three years, the rate of increase has slowed considerably, with only a 3% uptick in the past 12 months.
• A wide range of construction materials are potentially affected by these tariffs. This includes essential components such as HVAC equipment, electrical gear, generators, steel, elevators, curtain wall, finished goods, lumber, drywall, and various fixtures.
• The impact of these cost increases is expected to be most pronounced in private development projects, particularly those financed through conventional banking channels. These projects are likely to bear the brunt of the tariff-induced price hikes, potentially affecting their feasibility and profitability.

Construction spending edges lower, Manufacturing expands (Costar)

• Why it matters: Total U.S. construction spending reached $2.1 trillion in January 2025, declining 0.2% from the previous month but increasing 3.3% year-over-year.
• Residential investment saw a 3.2% increase compared to the previous year. In the single-family sector, project spending experienced a modest 0.6% growth from the previous month, but showed a 0.9% decrease year-over-year. The multifamily segment faced more significant challenges, with spending declining 0.7% month-over-month and a substantial 12% drop compared to the previous year.
• The Associated General Contractors of America has issued a cautionary note regarding the potential negative impact of new trade tariffs on construction spending in the near future. These tariffs, targeting building supplies from Mexico, Canada, and China, could pose challenges to the industry's growth.
• In February, U.S. manufacturing continued its expansion for the second consecutive month, which could potentially boost demand for industrial and retail real estate. However, the situation remains complex, as new orders have entered contraction territory and hiring has slowed down. These indicators suggest a cautious approach among companies, reflecting uncertainty in the current economic climate.

Big Chunk of North American Trade Remains Exposed to Tariffs (WSJ)

• Why it matters: President Trump suspended the 25% tariffs on Mexican and Canadian products for one month, but only for goods that were duty-free under the 2020 USMCA agreement.
• The USMCA's intricate rules governing duty-free entry of products into the U.S. are based on complex origin requirements and various criteria. This complexity poses significant implementation challenges for both businesses and customs officials.
• According to Trade Partnership Worldwide projections for 2024, half of Mexican exports and 45% of Canadian exports entered the U.S. duty-free under USMCA compliance. Interestingly, about 40% of imports from both countries were duty-free regardless of USMCA regulations.
• Industry experts anticipate considerable disruption and legal disputes as businesses and officials navigate the intricacies of the new tariff landscape. This uncertainty is likely to result in delayed orders and postponed investment decisions as stakeholders seek to understand and adapt to the evolving trade environment.

U.S. Added 151,000 Jobs Last Month (WSJ)

• Why it matters: The U.S. continued to generate jobs at a steady pace in February, offering reassurances that the labor market has remained relatively stable since President Trump took office.
• In February, the U.S. job market showed moderate growth with the addition of 151,000 seasonally adjusted jobs. While this figure fell slightly short of the 170,000 jobs predicted by economists surveyed by The Wall Street Journal, it surpassed January's increase of 125,000 jobs.
• The healthcare sector emerged as a significant contributor to February's employment gains, adding 52,000 jobs. Transportation and warehousing industries also saw positive growth, contributing 18,000 new positions. However, not all sectors experienced growth. Retailers experienced a loss of 6,000 jobs, while the leisure and hospitality industries faced a more substantial decline of 16,000 jobs.
• Looking ahead, economists anticipate several factors that may temporarily dampen employment growth in the coming months. These include government job layoffs, reduced government funding, uncertainty surrounding tariffs, and immigration restrictions. The combination of these elements is expected to create a challenging environment for job market expansion in the near term.

Austin

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Apartment complex set to rise in Austin's Northwest Hills neighborhood (ABJ)

• Why it matters: CSW Development broke ground in late February on a 321-unit apartment complex in Austin’s Northwest Hills neighborhood.
• A new five-story residential complex is planned for construction on a four-acre site. The development will offer a diverse range of one-, two-, and three-bedroom units, with an average apartment size of 879 square feet.
• While Austin is currently grappling with an apartment oversupply, as evidenced by the 15.2% vacancy rate at the end of 2024 (a significant increase from 6.5% in 2021), developers remain optimistic. They anticipate that this surplus will be absorbed by the time the project reaches completion in summer 2027.
• The Northwest Hills area presents a unique opportunity, as it hasn't seen new multifamily construction in approximately three decades. Developers believe there is substantial untapped demand in this location, attributing this to the area's vibrant atmosphere, quality educational institutions, and abundant retail amenities. These factors contribute to their confidence in the project's potential success despite the current market conditions.

Proposed PUD near downtown moves a step closer to approval (ABJ)

• Why it matters: A proposed planned unit development (PUD) on a 4-acre site at 200 E. Riverside Drive in Austin's South Central Waterfront area is moving forward; he project could potentially include four 500-foot towers with a mix of condos and apartments.
• Garwald Company holds ownership of the site, but it's subject to a long-term arrangement with Hunt Companies, a national multifamily housing developer based in El Paso. This 99-year ground lease, initiated in 2019, extends through 2118.
• The project has undergone a significant shift in focus. Originally conceived as an office development, it has been reimagined as a predominantly residential complex in response to evolving market demands.
• Strategically positioned, the property sits along the route of a proposed 9.8-mile light rail line, a project spearheaded by the Austin Transit Partnership (ATP). This proximity to future public transit infrastructure enhances the development's potential appeal and accessibility.
• The project has made progress in the regulatory approval process. On February 27, 2025, the City Council granted approval for the Planned Unit Development (PUD) proposal on its second reading, marking a crucial step forward in the development's realization.

Austin, Texas, apartment vacancies plateau, hovering at historic highs (Costar)

• Why it matters: After 13 consecutive quarters of increasing vacancies since Q4 2021, Austin's apartment vacancies are starting to stabilize, with the rate reaching 15.4% at the end of 2024.
• The Austin apartment market is poised for a significant shift in 2025. New unit completions are expected to drop by 65% from the record highs of 2024, with projections indicating about 11,000 new units entering the market. Demand is forecasted to nearly match this supply, with an estimated 10,800 units likely to be absorbed. This alignment could potentially bring supply and demand into balance for the first time in several years.
• The market has been grappling with oversupply in recent years. Over the past three years, an average of 2,500 more units were completed than absorbed each quarter, leading to a substantial increase in vacant units from 16,500 to 49,000 by the end of 2024.
• Despite the anticipated equilibrium in 2025, a significant reduction in vacancies is not expected until 2026. That year is forecast to see new completions drop to their lowest level since 2012, with fewer than 5,500 units projected to come online.
• The current supply glut is particularly pronounced in the luxury segment of the market. Four- and five-star units account for two-thirds of all vacant units, with a vacancy rate of 16%. This rate is notably higher, sitting 100 basis points above the overall market average, indicating a particular challenge in the high-end apartment sector.

San Antonio

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Slatt Capital Secures $11.2M Bridge Loan for San Antonio BTR Project (ConnectCRE)

• Why it matters:?The financing supports the stabilization of a newly constructed Build-to-Rent townhome project, reflecting growing demand for rental housing in San Antonio.
• HHS Residential has successfully completed the Villas at Bella Vista development, delivering 43 spacious townhomes on schedule and within budget in 2024. These residences offer a mix of three- and four-bedroom layouts, with an average size of 1,840 square feet. Each unit boasts the added luxury of a private backyard and a two-car garage, catering to families seeking both space and convenience.
• To facilitate the project's transition from construction to stabilization, a bridge loan of $11.2 million has been secured through Arixa Capital. This financing will be used to pay off the existing construction loan and support the development through its stabilization phase.
• The Villas at Bella Vista enjoys a prime location at 13721 Giovanni's Garden, positioned approximately 20 minutes west of Downtown San Antonio. This strategic setting offers residents the perfect balance of suburban tranquility and easy access to urban amenities, enhancing the development's appeal in the local real estate market.

Texas Biomedical Research Institute Expands West San Antonio Campus (ConnectCRE)

• Why it matters:?The $210 million expansion will enhance the institute's research capabilities, supporting advancements in biomedical science and reinforcing San Antonio's role in the life sciences sector.
• The ongoing expansion project encompasses several significant components. A new 30,000-square-foot high containment structure is being constructed, featuring nearly 4,000 square feet of BSL4 laboratory space. This state-of-the-art facility comes with a price tag of approximately $75 million. In addition, plans are in place for an 18,000-square-foot Animal Health Center, slated for completion by June 2026, with an estimated cost of $20 million.
• The scope of the project extends beyond these main structures. It includes the development of new shipping, receiving, and maintenance facilities, as well as comprehensive infrastructure enhancements. The majority of this expansive undertaking, valued at $160 million, is projected to reach completion by 2028.
• Significant progress has already been made on the project. The initial phase, which included the first part of a new animal care complex and various infrastructure improvements, has been successfully completed. This early progress sets a positive tone for the remainder of the expansion, which promises to substantially enhance the facility's capabilities and capacity.

Trader Joe's planning third grocery store in San Antonio. Here's where. (SAExpress)

• Why it matters: Trader Joe's is planning to open a third store in San Antonio, its first expansion in the city in over a decade, with a 14,500-square-foot space at the Huebner Oaks shopping center on the North Side.
• Work has begun at the site, with the project expected to reach completion in October. However, Trader Joe's has yet to provide official confirmation regarding the new store location.
• At present, Trader Joe's has a limited presence in San Antonio, operating just two stores in the area. This modest footprint translates to a relatively small market share in the local grocery sector. Despite this, the company is pursuing an aggressive expansion strategy across the United States. In 2024 alone, Trader Joe's launched at least 30 new locations nationwide, and the company's growth plans indicate further expansion on the horizon.